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West fears Alaska gas Independent producers worry tax credits for gas could hurt their market Larry Persily PN Juneau Correspondent
Alaska usually finds allies among Western states on land-use, environmental and states’ rights issues, but the same unanimity is missing on the subject of federal tax incentives for an Alaska natural gas project.
Some of the strongest opposition to Alaska tax credits in the energy bill on this month’s congressional agenda is coming from Western states.
Federal loan guarantees for the Alaska project are OK, but not federal tax credits to protect Alaska producers against low prices for their gas, said U.S. Sen. Craig Thomas, a Wyoming Republican and member of the Energy and Natural Resources Committee.
Tax credits to serve as any kind of price support would be unfair to Wyoming producers, he said.
Fellow Republican Alaska Sen. Lisa Murkowski understands Thomas’ need to serve his constituency. “Every time I speak he gives me one of those looks, ‘Don’t forget Wyoming gas,’” she said. “He’s in a state where they do have a fair amount of independents.”
It’s the independent gas producers that worry they have the most to lose from a large project bringing Alaska natural gas to the North America pipeline grid. Although ExxonMobil, BP Exploration (Alaska) and ConocoPhillips have gas reserves in Alaska and the Lower 48, it’s the Wyoming, Texas, Louisiana and other independents that fear they have nothing to gain because they have no Alaska gas.
“(Thomas) sees the producers in his state as getting left behind in the dust,” said Murkowski, who serves with the Wyoming senator on the Energy and Natural Resources Committee. Worries over market price The United States last year consumed on average about 64.5 billion cubic feet of natural gas a day, and a 4.5 bcf-per-day line from Alaska would feed an additional 7 percent if it were in today’s market. That much gas has some Lower 48 producers worried about a drop in the market price, at least until new demand takes up the increased supply.
Not to worry, says Alaska. “We think it will have virtually no impact on price,” said John Katz, director of Alaska Gov. Frank Murkowski’s Washington, D.C. office. “This country is so hungry for natural gas right now … that Alaska gas can only help alleviate that appetite.”
Katz was equally emphatic in a briefing paper prepared on federal energy legislation. “Gas supplies from Alaska will not adversely affect small producers in the Lower 48 states or destabilize gas prices,” he stated. “The projected demand for natural gas in the continental United States is of such magnitude that Alaska gas will not ‘flood the market.’”
There are those who see different market conditions.
Cambridge Energy Research Associates sees the possibility of lower prices when Alaska gas enters the pipeline grid. A December 2002 report, taking a 20-year outlook at the North American gas market, said a drop in market prices could last several years. “The likely impact of such a large supply on market price means that in most cases the economics that justify the project will be undermined by its completion.”
The international energy research and advisory firm also published a spring 2003 report on gas prices, making a similar forecast about the effect of Alaska gas on the market: “These volumes would immediately depress market prices once Alaska gas reached market.” Supporters point to demand growth Supporters of the Alaska project disagree with Cambridge Energy and say demand will more than consume all of the gas without a drop in price. They point to demand forecasts from the federal Energy Information Administration that predict a steep growth curve in demand and falling North America production.
Regardless of demand projections, the fear is there among smaller producers, said Ken Thompson, president of Pacific Star Energy, a company he founded to buy a stake in an Alaska gas project.
“It’s Alaska producers vs. the rest of the industry,” said Thompson, a former president of ARCO Alaska Inc. and senior vice president of natural gas marketing for ARCO.
The Texas Independent Producers and Royalty Owners Association is one of those on the other side from Alaska. The group sent a letter last year to South Dakota Democratic Sen. Tom Daschle, complaining about the possibility of tax credits for Alaska gas. Daschle was Senate majority leader at the time, before Republicans took control in the November 2002 elections.
The Texans argued in their letter that investors would flock to a tax-credit-supported Alaska project, leaving other states without money for their own projects.
A. Scott Anderson, executive vice president of the Texas group and author of the letter to Daschle, did not return calls to the Petroleum News for this story.
Texas is home for President George Bush, and Vice President Dick Cheney represented Wyoming in the U.S. House, facts not lost on Sen. Murkowski. “You have to assume that both the president and the vice president — this is the world they’re involved in — you have to assume they get a fair amount of pressure from the independents.”
The Bush administration has stated its opposition to tax credits for an Alaska gas project, arguing the market should dictate which projects come online and when. The type of tax credit matters Sen. Thomas said he would be more agreeable to tax credits for Alaska gas if there were a payback provision during times of high prices.
Last year’s unsuccessful Senate version of the energy bill would have required Alaska producers to pay back the tax credits at high prices, though the state and producers this year are pushing for tax credits based on the wellhead value of the gas — with no payback — instead of last year’s credits based on a market price.
Alaska’s congressional delegation, its governor and two of the three major North Slope oil and gas producers are working hard to convince this month’s House-Senate conference committee on the energy bill to include tax credits for the $20 billion Alaska project. The project is less attractive to producers and potential investors without the credits to lessen the price risk.
This year’s preferred tax credit plan would kick in whenever the wellhead value for North Slope gas dropped below $1.35 per thousand cubic feet. If, for example, the price were a dime below $1.35 for an entire year, the cost to the U.S. treasury of the corporate tax credits would be $165 million.
Unfortunately for project supporters, it’s the tax credits — called the commodity risk provision — that draws opposition from free-market conservatives and gas producing states.
“To the ideologues we say a couple of things,” Katz said. “The United States needs a huge supply source such as North Slope natural gas, and the producers have said that without the commodity risk provision it is unlikely that the pipeline will be built anytime soon.”
“I was disappointed in some of the industry groups in Louisiana and Texas opposing it,” Thompson said of resistance to the Alaska provision in the energy bill. “They say federal support for their gas is OK, but not for Alaska gas.” Lower 48 producers have their own credits Federal tax credits for natural gas produced from Lower 48 coalbed methane fields and marginal wells have totaled billions of dollars since Congress adopted the incentive in 1980. The tax credit, which ran about $1.10 per mcf last year, expired at the end of December 2002, though producers and their industry groups are lobbying hard for this year’s energy bill to extend the credits an additional five to 10 years.
“We would appreciate that,” said John Robitailli, vice president of the Petroleum Association of Wyoming, where coalbed methane production peaked in 2002 at 18 percent of total gas production in the state. Wyoming’s production averaged 4.6 bcf per day last year.
The truth is, Murkowski said, the nation needs gas from Alaska and from Wyoming and other states. The competition isn’t between the states, she explained, but from liquefied natural gas coming to North America from overseas.
Energy companies have proposed new LNG terminals for West Coast, Gulf Coast and East Coast ports, and Murkowski fears it will be hard for domestic producers to take back market share if too many new terminals are opened to accept foreign LNG. She tells her Wyoming colleague that, optimistically, it will take 10 years to bring Alaska gas to market, and meanwhile Wyoming producers and others need to supply the nation to hold off excessive LNG imports.
“Obviously, we don’t like that,” Thomas said of increased LNG imports. “We can do a lot more, and we want to.”
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