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Alaska waits for energy bill State ready to battle over federal tax incentives for natural gas pipeline Larry Persily Petroleum News Juneau Correspondent
As Congress prepares to return to work after Labor Day from its summer recess, Alaska’s congressional delegation and the governor’s office are ready to resume their push to win federal tax incentives for an Alaska natural gas project.
The key is whether Alaska can get hundreds of millions of dollars of tax incentives into the national energy bill so that the major North Slope producers will decide to spend as much as $20 billion on a pipeline to supply the North American natural gas market.
“The message is getting through, at least to my Republican colleagues … that the deal has been hammered out and been worked through and this is probably what it’s going to take to make it happen,” said Alaska Sen. Lisa Murkowski.
Opposition comes from Lower 48 gas producers who say they don’t want the tax-credit-supported competition, from Canadians of the same opinion, and from some fiscally conservative Republicans who say they believe in free markets.
There is also the president to deal with. “The Bush administration sees it in ideological terms and says the marketplace should govern,” said John Katz, director of Alaska Gov. Frank Murkowski’s Washington, D.C. office. Conferees need to be named But before Senate and House members can start debating the merits of the legislation, they need to appoint members to the conference committee assigned the job of resolving differences between the different energy bills passed by each chamber before the summer break.
And even before naming the members, congressional leaders need to decide how many of their colleagues will serve on the committee, Katz said. “They recognize the larger the conference committee, the more agendas that have to be satisfied.”
Last year’s energy bill conference committee totaled 61 House and Senate members, almost one of every nine members of Congress.
“Large conferences take longer,” Katz said, explaining that congressional leaders will ask themselves: “Do we need to include all of the committees that could claim jurisdiction, particularly in the House?” Last year’s committee included 47 House members.
No date has been announced for naming the committee members or starting work on a compromise energy bill covering oil and gas production, nuclear plants, electrical transmission lines and a long list of issues affecting every state in the union — including farm states looking at provisions to expand the use of corn-based ethanol fuels.
For Alaska, however, it’s just oil and gas. While the national press is focused on efforts by President Bush and the state to win congressional approval to open the coastal plain of the Arctic National Wildlife Refuge to oil exploration, much of the industry talk in Alaska is keyed to the gas pipeline provisions.
And among those, federal corporate income tax credits to lessen the market price risk to producers is essential, Katz said. “The crux is the commodity risk provision.”
There is little opposition to provisions in the energy bill requiring expedited review by the Federal Energy Regulation Commission, establishing a federal coordinator to ensure that agencies work quickly on permits, or requirements for expedited and limited judicial review of any challenges to the project’s eventual environmental impact statement. The debate points are about federal tax dollars to help the project.
Not all of Alaska’s wants are included in either the House or Senate versions of the bill, though revisions are possible in the conference committee. The list includes: Loan guarantee Alaska is pushing for a federal loan guarantee covering up to 80 percent of project construction costs, up to $18 billion. The Senate bill includes a $10 billion loan guarantee, though provisions that failed to win passage before the August recess included the full $18 billion guarantee. There is no loan guarantee provision in the House bill.
Senators abandoned the $18 billion loan guarantee among several hundred other possible amendments to the bill this summer and simply passed last year’s unsuccessful bill when it became apparent they were running out of time to move a new bill to conference. Senate leaders say they expect the final conference committee bill will be substantially different than the bill passed in July.
A loan guarantee would not cost the federal treasury any money unless the borrowers defaulted, though Congress would have to set aside some money to back up the loan guarantee if and when the producers ask for the protection. Accelerated depreciation Accelerated depreciation would enable the project owners to write off their investment in seven years instead of the traditional 15 years. Accelerated depreciation would allow the companies to get back their investment sooner through deductions against their corporate income taxes, at an estimated cost to the treasury of about $100 million.
The House version has no depreciation provision. The Senate bill has a limited provision, though the working draft that died before the summer recess included accelerated depreciation for the full pipeline.
Sen. Murkowski lists accelerated depreciation for the full pipeline as one of the key elements of the bill. Gas treatment plant Tax credits for the cost of constructing the gas processing plant at Prudhoe Bay — estimated at $2 billion to $2.5 billion to build — would cost the treasury an estimated $300 million.
The provision, if approved, would be under the section of IRS code for enhanced oil recovery tax credits. By removing carbon dioxide from the gas to clean it for shipment down the pipeline, the treatment plant also would aid oil recovery by supplying the carbon dioxide for use as a miscible injectant to boost production at North Slope fields.
Neither the House nor the Senate bills clearly state that the tax credit would apply to the full cost of the Prudhoe gas plant, and the state is pushing for clarification in the conference committee. Commodity risk provision ¾?m´dthe big political problem in the bill, and also the one provision that could stop the project. “At least two of the producers and Wall Street have said … they need some certainty with respect to the price of the commodity itself,” Katz said.
The two producers supporting the commodity risk provision are BP Exploration (Alaska) and ConocoPhillips. ExxonMobil continues to oppose the provision.
“ExxonMobil does not seek or support subsidies such as recent proposals that would provide a tax credit based on market prices or market prices less transportation,” said Bob Davis, company spokesman in Houston. “Federal subsidies would create winners and losers,” he said, listing non-Alaska gas producers as possible losers.
“We don’t see it as a subsidy,” said Katz. “(It’s) a tax credit that kicks in under certain circumstances.”
The House bill is silent on the issue; the Senate bill includes last year’s price risk provision. Last year’s provision would set a floor of $3.25 per thousand cubic feet for Alaska gas in the pipeline, priced at the AECO hub in Alberta, with an annual inflation escalator. The producers would receive tax credits whenever the price dipped below the floor, but would have to pay back the credits if the price ever reached 50 percent higher than the floor.
There was a lot of opposition to the floor price, and Alaska’s congressional delegation and the governor are instead pushing this year’s commodity risk provision that is linked to the wellhead value for gas on the North Slope instead of the price in Alberta.
If adopted by the conference committee, it would provide a maximum tax credit of 52 cents per thousand cubic feet. The credit would start at 52 cents if the wellhead value was 83 cents an mcf or lower, and would decrease penny for penny as the value of the gas moved higher. At $1.35 an mcf or higher at the wellhead, the tax credit would disappear.
Senators were considering the 52 cent tax credit when they ran out of time and abandoned amendments to the energy bill in July.
Unlike last year’s proposal, the wellhead tax credit does not include a payback provision in times of high prices.
The wellhead price support provision actually is a better deal for the producers if the concern is over the risk of construction cost overruns and high pipeline tariffs to market, whereas the price support pegged to the Alberta hub provides limited assistance if the tariff eats up most of the value of the gas.
The congressional Joint Tax Committee, which “scores” the fiscal cost to the treasury of tax credit legislation, has assigned a zero cost to the wellhead price structure. The committee based its no-cost estimate on federal projections for high natural gas prices over the next decade that would hold back the tax credit from ever going into effect.
“We think it is unlikely that the provision would ever become operative,” Katz said.
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