Condon: No to gas reserves tax

Kay Cashman

PNA Publisher

The state’s commissioner of revenue says imposing a gas reserves tax on the big three North Slope gas owners — BP Exploration (Alaska) Inc., Exxon Mobil Corp. and Phillips Alaska Inc. — would be changing the rules in the middle of the game.

“If you make a deal like that up front, then that’s the deal. But that, a gas tax, is not the deal we made,” Commissioner Wil Condon told PNA March 12 when asked if he supported former ARCO executive Ken Thompson’s proposal to institute a reimbursable gas reserves tax. The tax would go into effect Jan. 1, 2009, if the North Slope producers have not approved a gas project by the end of 2003 that will have gas flowing by the end of 2008. (See related story on page 1 of this issue and page 1 of PNA’s Feb. 24 issue.)

“As a general philosophical matter we don’t think it’s really appropriate for a sovereign state to use its taxing power — which is enormous — to try to compel people to engage in some kind of entrepreneurial activity. … Private businesses might go around and beat up on each other to try to get their partners to cooperate, but we don’t think it’s appropriate for the state,” Condon said.

If the state wants to see a certain development happen, then it’s important, he said, for the state to “adopt a strategy that is best designed to achieve that development. If it can be done and someone can make an appropriate profit out of it, then it will get done,” Condon said.

Thompson said the state had offered incentives such as railroad bond financing, so it should also offer disincentives, or penalties, for not doing the project. He said there might be alternatives to a reimbursable gas tax.

But Condon said he thought it inappropriate for the state to offer any disincentives unless they were part of its original agreements with the leaseholders.

Gas tax sends wrong message

Patience, who worked for Thompson when he was president of ARCO Alaska Inc., said she was surprised by his comments but acknowledged, “He’s entitled to his opinion.

“A gas reserves tax sends a negative message. … It says Alaska doesn’t have a stable fiscal environment. … The state of Alaska has worked very hard to create the image of a stable fiscal environment.” A tax on unproduced North Slope gas would change that image, she said.

Tax won’t make project competitive

“A gas reserves tax wouldn’t make a North Slope gas project competitive or economic. You can’t tax a $20 billion project into existence,” he said.

The same logic applies to the fishing industry, Chappell said. “You can’t enhance the value of Alaska’s fisheries by imposing a tax on fish when fishermen choose not to fish because the prices of fish are low. The world just doesn’t work that way.

“The other thing a gas tax would do would be to discourage contingent investment in the oil cap. The idea you can add to the industry burden in Alaska and not impact industry’s investment is mistaken,” he said. “A tax is a tax is a tax.”

Chappell believes Alaska’s policy makers are “smart enough” to understand a gas reserves tax would negatively impact both short term and long term investment in the state.

“We’re encouraged that Gov. Knowles and others are focused on positive advancements that will help make an economic, viable project that will attract investors,” he said.

All eyes on Washington, D.C.

The North Slope gas owners have said the legislation must include a means to expedite permitting, including an 18-month time limit on the EIS process, and creation of an office of pipeline inspector.

Phillips also wants a tax credit system that would kick in if the price of natural gas at the wellhead fell below $1.25.

“There’s a tremendous amount of risk in the line right now. … In our case, we’re not a 210, 220 billion dollar company and when you start taking an equity position in a project with this risk and of this size, you’re putting a lot of your equity on the line,” Phillips Petroleum Co.’s “main man in D.C.,” company lobbyist Don Duncan, told attendees at the Meet Alaska conference Jan. 25.

Project estimates climb

Petroleum News Alaska Staff

That number is larger than the $17.2 billion estimate the gas owners’ study team gave to the governor’s gas policy council in September.

BP and Phillips have also been quoting higher costs for the gasline since the September presentation.

While ExxonMobil was not willing to comment until the producers release their analysis of the North Slope producers’ gas study team report at the end of the month, Phillips’ spokeswoman Dawn Patience told PNA that the final project estimates will likely fall in the $19 billion to $20 billion range.

“It’s an all inclusive number that we used in testimony to Congress in October,” she said.

The project cost estimates the gas owners gave to the governor’s gas policy council did not include all the costs the gas owners would incur, Patience said.

Another factor in the increased estimates, she said, was that the companies have learned more about the project as the producers’ gas team conducted its study.

BP spokesman Ronnie Chappell agreed.

“No one knows what this project will cost. What we have now are estimates of project costs around which there is a broad margin of error. As a result it is impossible to predict today whether this project is economic or whether or not it will provide a reasonable return to investors — a single digit return or one that exceeds 10 percent,” he said.

“We do not have an economic project yet and we’ve seen no evidence that anyone else has,” he said.