Alaska pipeline contract would freeze oil, gas taxes

By OGJ editors
HOUSTON, May 12 -- Alaska would implement no tax changes for the three North Slope oil producers for up to 45 years under a draft contract outlining terms for a proposed $20 billion pipeline to carry natural gas to the Lower 48.

Gov. Frank Murkowski told reporters in Juneau that ExxonMobil, BP PLC, and ConocoPhillips sought assurances of a freeze in oil and gas tax rates for decades to help mitigate financial risks for the oil companies.

"I recognize the constitutional question; I recognize the legal question," Murkowski said, calling the inclusion of the tax provisions "just the hard fact associated with the negotiation in this project."

Alaskan House Minority Leader Ethan Berkowitz, a Democrat running for governor, said, "For us to even talk about locking down (taxes) for 45 years is absurd." Berkowitz called a news conference in response to Murkowski's comments.

The proposed contract, which Murkowski made public May 10, also stipulates that the state share the risks.

Draft terms call for the state to take a 20% stake in the project and to take its royalty gas and production tax in-kind, assuming its own shipping and marketing risk, Murkowski said.

"Through this structure, the state maximizes revenues while ensuring that the project moves forward. In nominal dollars, the state would realize a low of $26.5 billion (at a gas price of $2.50/Mcf) and a high of $129 billion (at $8.50/Mcf) in state revenue over the life of the project," Murkowski said on May 10 as the Alaska legislature convened a special session (OGJ Online, May 11, 2006).

Federal involvement
Murkowski reminded state lawmakers that the US Congress passed legislation in 2004 designed to facilitate permitting and construction of a gas pipeline. There also are provisions for a federal loan guarantee and tax credits, he said.

Congress also called for the secretary of energy to study "alternative approaches to the construction and operation" of an Alaska natural gas transportation project unless a pipeline construction application was filed with the US Federal Energy Regulatory Commission within 18 months of the provision's enactment.

The DOE began an early phase of such a study on Apr. 13, Murkowski said.

"I don't think any of us, including the [George W.] Bush administration, wants to see federal ownership of the pipeline," he said. "However, this is a possibility that we may all need to contend with if a contract is not consummated soon."

FERC also is paying close attention to the state's contractual negotiations, Murkowski said. FERC submitted an initial status report to Congress on the pipeline negotiations and plans to continue doing so regularly.

"All of this activity in Congress and the federal agencies leads to the inescapable conclusion that if the state and producers do not soon agree on the terms for commercializing North Slope gas and constructing the pipeline, these issues may be taken away from us," Murkowski said. "At that point, we will lose control of our own destiny."

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