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Alaska LNG backers propose reserves tax Campaign calls for tax on North Slope reserves if producers do not cooperate Larry Persily Petroleum News Juneau Correspondent
Some members of the group that battled against the BP-ARCO merger four years ago are getting ready for another fight with major North Slope producers, this time calling for a state tax on natural gas reserves if the producers don’t cooperate with efforts to export liquefied natural gas from Alaska.
The majority leader of the Alaska Senate called the campaign “blackmail against the industry,” and major North Slope producers said the tax proposal would hurt, not help, development of Alaska’s gas reserves.
The group, called Backbone II, took out a full-page ad in the Sept. 26 Anchorage Daily News and Sept. 29 Fairbanks Daily News-Miner, calling on the producers to accept “Option A,” selling up to 2 billion cubic feet per day of North Slope gas to fill a pipeline to tidewater and a fleet of LNG tankers for shipment to a proposed Sempra Energy receiving terminal on the U.S. West Coast.
If the producers don’t sell their gas for the project and instead ever bring LNG into anywhere in the country from overseas, the ad said, “Option B” should be a state reserves tax on the companies’ North Slope gas, estimated to generate between $500 million and $1 billion a year in new revenue for the state.
The ad said the tax is intended to replace what the state might make from an LNG project. Anchorage attorney leads campaign “I’m sure I haven’t made any friends with the producers,” said Bill Walker, an Anchorage attorney who said he paid for the ad himself. He is listed in the ad as chairman of Backbone II.
“I’m not trying to promote a reserves tax,” Walker said, adding he is only trying to promote an Alaska LNG project. “I’ve been trying to think of how to get the message across.”
It’s not a good message, said Sen. Ben Stevens of Anchorage, Republican majority leader. “This Backbone proposal is in my opinion legislative and public opinion blackmail against the industry.”
The ad leaves out several key issues, Stevens said. “Who do you sell the gas to, and who pays to build the line?”
Sempra, which does not want to build the pipeline, has said it is interested in buying Alaska LNG for its proposed receiving terminal but also is talking with other potential suppliers, including Indonesia and Bolivia, neither of which need to build an 800-mile pipeline through the Arctic to move their gas to tidewater.
And if the intent is for the state to build the project, Stevens said, the ad is misleading in that it says nothing about possibly using Permanent Fund money to pay for the project, adding he believes the state has no other source of available cash for investing in such an undertaking. Political debate heats up The emergence of Backbone II adds to the increasing political battle in Alaska between supporters of a publicly owned LNG project to export Alaska gas to the U.S. West Coast and/or the Far East vs. the producers’ efforts to build a pipeline to feed Alaska gas into the North American pipeline grid. Democrats have called for a special legislative session to discuss the state’s support for an LNG project, but the majority Republicans are expected to reject that call.
“Politics in this business is going to screw up the economics every time,” said Jim Jensen, a Massachusetts-based consultant with 30 years experience in LNG who has followed Alaska natural gas issues.
Walker, who serves under contract as city attorney to Valdez, said the city was not involved in his newspaper ad. Valdez has long pushed for an LNG project and terminal in the community. The city is part of the Alaska Gasline Port Authority, established in 1999 by Valdez, the North Slope Borough and Fairbanks North Star Borough to promote and possibly finance or build a natural gas pipeline from the slope and an LNG export terminal in Valdez.
Walker also was a member of the original Backbone group, which worked in 1999-2000 to oppose BP’s takeover of ARCO’s Alaska assets, arguing that the state’s interests would be better served by more, not fewer, companies competing for development on the North Slope.
Original Backbone will help later Though the original Backbone group did not sponsor the reserves tax ads, Walker said he discussed the issue with members of the group and they agreed he could use the name. They also offered to provide help and funding at a later date. Walker declined to name the people he has talked with.
The ad includes a coupon for readers to cut out and mail to Alaska Gov. Frank Murkowski and legislators, stating that elected officials have the ability to adopt a reserves tax if producers refuse to sell their gas for an LNG project.
It’s premature to say whether he would actively campaign for legislation to impose such a tax, Walker said. “At this point I’m just trying to raise the awareness of what else is going on in the world.” The ad includes news headlines of ConocoPhillips and ExxonMobil pursuing deals to bring LNG into the United States from Qatar and possibly even Russia.
The ad sets out Option B: “Should any of the North Slope producers enter into a binding contract to bring LNG into the U.S. market from anywhere other than Alaska, a reserves tax on North Slope gas would immediately be adopted.” The ad does not say how the tax would be calculated.
Option B also says the producers could reduce their reserve tax payments by an amount equal to whatever they pay the state in taxes if they build a pipeline from Alaska to the North America gas line grid in Canada. BP Exploration (Alaska) and ConocoPhillips have spent the past two years pushing hard to win federal tax incentives to build a pipeline from Alaska through Canada to the Lower 48.
Stevens says wait for Congress Stevens said Alaska needs to wait for Congress to finish work later this month on the national energy bill and its Alaska gas project incentives before taking up the LNG debate.
Pushing hard for an LNG project have been the Alaska Gasline Port Authority, the Alaska Natural Gas Development Authority and Yukon Pacific Corp. Voters created the state gas authority by approving a citizens initiative in November 2002. The state authority has the legal ability to build, own and operate an LNG export project, but would need to buy gas from the producers, find financing for the project and sign up buyers for the LNG.
Yukon Pacific, which tried for 20 years to put together an LNG project, had the same problem of needing to convince the producers to sell their gas and securing financing.
Ads help educate public The newspaper ads were bold, but not necessarily bad, said Harold Heinze, chief executive officer of the state gas authority. “Anything that gets information out to the public … is helpful to anybody working on this gas thing.”
And if the producers don’t want to build an LNG project, Heinze said, “Fine, if you’re not, we are.”
Walker said the producers could avoid the reserves tax by selling their gas to either the state gas authority or the port authority, or even Yukon Pacific.
The producers, however, said they have spent tens of millions of dollars studying the economics of an LNG project, and they just don’t see it as a good business venture. “We’re focused on a pipeline through Alaska to the Lower 48,” said ConocoPhillips spokeswoman Dawn Patience.
No matter how much Alaska wants an LNG project, Patience said, “It is not going to be able to tax it into economic existence.” Company calls tax a ‘disincentive’ BP is of the same opinion. “Employing a reserves tax in an attempt to force a non-economic project to move forward would in fact create massive uncertainty for investors and potential investors. That is not in the interest of Alaskans,” said company spokesman Dave MacDowell.
ExxonMobil was equally critical. “A gas reserves tax is inherently unfair and without merit since it punishes the gas owners for not pursuing an uneconomic project,” said company spokesman Bob Davis of Houston.
“Alaska states that it wants to encourage the exploration and production of additional oil and gas, however, the imposition of a gas reserves tax is not only inconsistent with this message but such a tax would be a disincentive for companies to explore for new oil and gas discoveries since they could be faced with a punitive tax if their finds were not commercialized at a pace deemed appropriate by the state.”
Not so, said Walker. “It’s only a disincentive if you don’t develop the gas.”
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