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Vol. 11, No. 9 Week of February 26, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Moving right along

Governor announces gas line agreement; 20-20 oil tax goes to lawmakers

By Kristen Nelson

Petroleum News

Alaska Gov. Frank Murkowski announced Feb. 21 that the administration has reached agreement with the North Slope producers on a gas pipeline fiscal contract and on a 20 percent production profits tax.

While details of the gas contract are still being worked out, and that is not ready to be released to the public or the Legislature, the Legislature did receive the oil tax bill that same day.

The governor told a Feb. 21 press conference: “as of late yesterday we were able to conclude a contract agreement with the three principals — ExxonMobil, ConocoPhillips and British Petroleum.” The governor said the agreement covered both the natural gas pipeline and a change in oil taxes.

“This is basically what I came back from the United States Senate to accomplish in Alaska, to get the economy moving, and a significant portion of that was the dream of marketing our gas,” the governor said.

Technical issues connected to the gas contract must still be addressed, along with oil fiscal stability terms, the governor said.

Legislative leaders met with the companies Feb. 20. The governor called it “a very, very healthy dialogue where the legislative leadership got an opportunity to ask questions and get, I think, reassuring answers.”

Legislators began hearings on the bill Feb. 22 in House and Senate Resources committees.

In House Resources the schedule looks like this: The administration has three days to present the bill, followed by public comment. The majors are scheduled the week of Feb. 27 followed by explorers and concluding with legislative consultants.

Companies met in Anchorage

Company officials in Anchorage for the Feb. 20 meeting included Tony Hayward, BP’s group managing director and chief executive officer of exploration and production, Jim Mulva, chairman of the board of ConocoPhillips and Morris Foster, president of ExxonMobil Production Co.

The company’s Alaska officials were quoted in a press release:

“We are pleased to have completed the gas portion of the fiscal contract and are working to finalize durable oil contract terms that incorporate the new oil tax structure,” said Steve Marshall, president of BP Exploration (Alaska) Inc. “This is a significant milestone. We see the merit in a profits-based oil tax system, provided it appropriately balances risk and reward to enable additional investment.”

“ConocoPhillips is pleased that all parties have reached an agreement in principle with the State of Alaska on the base fiscal contract terms for an Alaska gas pipeline project,” said Jim Bowles, president of ConocoPhillips Alaska. “We also believe that a well-constructed net profits tax could benefit Alaska and provide the fiscal certainty that will support future investment.”

Richard Owen, vice president of ExxonMobil Alaska Production Inc., said: “Oil contract terms consistent with the governor’s proposed tax bill would provide the predictability and durability necessary to advance the gas project to the next phase. ExxonMobil also confirms that we have reached agreement with the governor on the major provisions of the gas fiscal contract. We look forward to working with the administration to finalize the materials and initiate the public comment period.”

Gas contract needs finalizing

Jim Clark, the governor’s chief of staff, said it was “one of the happiest moments of my life ... when after seven months, we got all of the gas contract done in terms of all the major articles.”

He said among the things that need to be done are two exhibits that need to be completed. And because the state has a contract with ConocoPhillips, all the contracts have to be reviewed to make sure the language meshes, “to see where there might be any wording differences or any misunderstandings to level out.”

The contracts will then be reviewed by attorneys for both sides who haven’t seen them before “to make sure it makes sense as they read it.”

Clark said it had been the administration’s intent to focus on the gas pipeline fiscal contract this year, but ExxonMobil and BP, he said, “were very anxious that ... things not happen to them as they had happened to them” with TAPS, when after the agreement was made to construct the oil line the Alaska Legislature changed the taxes. The issue the companies raised was, “if we’re going to go forward with this gas line, we want to make sure you don’t change our gas economics by coming in with a brand new oil tax structure.”

The producers had a plan, but Clark said it “just wasn’t acceptable to the governor.” The governor said “if we’re going to look at this, we’re going to go through three steps.”

First would be a law of general application, the net profits tax.

Down the road, probably in a special session, the administration will introduce “an omnibus package of amendments under the stranded gas act,” Clark said. These amendments to the act will be things that occurred as the state negotiated “this commercial deal, this 42-article contract” and were not included in the stranded gas act.

“So we are going to ask ... the Legislature, by approving this package of omnibus amendments, to allow ... these items that have been negotiated to stay in the contract.” The Legislature would receive the proposed contract at the same time it receives the omnibus package, and will be able to look at them side by side in a special session, he said.

The stranded gas act amendments would need to be passed, Clark said, before the Legislature has an up or down ratification vote on the contract. “Among the items that will be in that package of amendments ... will be a request to allow fiscal certainty on oil to be in the contract,” he said. “So we will put a provision that has fiscal certainty on oil in the contract.”

Governor recommends 20-20 tax and tax credit

The governor said the oil tax change that went to the Legislature increases the state’s share of the value of oil from 29 percent under the present system to 35 percent under the profit-share tax. In a diagram showing the corporate, state and federal share and including production tax, royalties, corporate income tax and property, the state now gets 29 percent, the federal government 25 percent and corporations 46 percent.

Under the profit-sharing system the state would get 35 percent, the federal government 23 percent and corporations 42 percent. At current oil prices the state estimates that for 2007-12 it would take in an additional $2.6 billion under the proposed tax.

The governor said that he was looking for a balance between revenues to the state and incentives. He said his choice of a 20 percent tax rate and a 20 percent credit rate in the bill was tilting the balance “a bit ... in favor of creating new incentives” because the state has been told that, aside from ANWR, “we’re unlikely to find major discoveries of the Prudhoe Bay size.” The fields most likely to be found on the North Slope are in the 50 million to 150 million barrel range, Murkowski said, and companies “will need new incentives to find and develop these expensive smaller fields.”

Van Meurs recommended 25 percent

Pedro van Meurs spoke to the press conference from Algeria where it is said he is helping the oil minister implement a tax similar to that proposed for Alaska. He said he recommended a 25 percent tax rate and a 20 percent tax credit because “as a consultant you always recommend ... the best you can recommend.”

Van Meurs said he had discussed “an entire range of options” in a presentation to the Legislature.

“I’m actually extremely pleased ... that the companies came onboard on” figures in the reasonable range, he said.

Asked about his decision to go with a 20 percent rate, Murkowski said there was a range of recommendations from consultants and the producers had proposed a 12.5 percent tax rate with a 25 percent tax credit.

The governor said his decision to go with a 20 percent tax rate was to provide an incentive for “smaller producers, because I think that’s the future of the energy reserves in Alaska.” The majors have done a “good job,” he said, but the state wants an environment that will encourage smaller producers.

Eliminates ELF

In his letter of transmittal to the House, Murkowski said the proposed legislation (House Bill 488 and Senate Bill 305) would eliminate the economic limit factor in determining production and “replace it with a more progressive and investment-friendly tax system.”

The bill would amend the state’s current oil and gas production tax by basing the tax on the net value of the oil and gas, Revenue said in a fiscal note. The net value is the wellhead value (net of royalty) less all qualified lease expenditures, including capital and operating costs, property taxes and an additional $73 million per year allowance for each producer.

The allowance, however, can be no greater than the net value before the allowance.

Net income would be subject to 20 percent tax, less a credit of 20 percent which applies to capital costs upstream of the point of production. There would also be a deduction for capital costs incurred over the previous five years, which can be realized over the next six years, but only in years where the ANS price is more than $40.

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