WASHINGTON, DC, Feb. 23 -- Alaska and all three North Slope producers have agreed on a natural gas pipeline contract, said Gov. Frank H. Murkowski, who will propose related legislation to reform Alaska's oil production tax.
Alaskan subsidiaries of BP PLC and ExxonMobil Corp. joined ConocoPhillips, which reached an accord with the state earlier, in the agreement to build a gas pipeline from the North Slope to the Lower 48.
Murkowski said technical issues connected with the contract and oil fiscal stability terms still need to be addressed. He proposes to base oil taxation on net profits rather than production value.
Once Alaska's legislature approves the contract, the producer group could begin to make plans and seek permits. The project also will need permits and a right of way through Canada.
In a Feb. 9 report to state lawmakers on gas pipeline negotiations, Murkowski estimated that the Federal Energy Regulatory Commission's open season would take place in 2007, that construction would begin in 2009 or 2010, and that the pipeline could be in operation by 2014.
"Completion of the contract represents a major milestone in securing a natural gas pipeline which will provide hope and opportunity for Alaska's future," Murkowski said as he announced the agreement on Feb. 21. "Modernizing our oil tax system will provide Alaskans with revenue today. These are two historic events that will define the state's economy for decades to come."
In Washington on Feb. 22, US Energy Sec. Samuel W. Bodman called the agreement "an encouraging step in the process."
He said the Department of Energy would work as interim federal project coordinator and administer the loan guarantee program that Congress authorized for the project in late 2004.
He called Alaskan gas "vital to our ability to meet the growing demand for gas in the Lower 48 states."
Representatives of the three North Slope producers linked the gas pipeline project to reforming the state's oil tax regime.
"Oil contract terms consistent with the governor's proposed tax bill would provide the predictability and durability necessary to advance the gas project to the next phase," said Richard Owen, vice-president of ExxonMobil Alaska Production Inc.
BP Alaska Pres. Steve Marshall said the company was working to complete durable contract terms to incorporate a new oil tax structure now that it has completed the gas portion of the fiscal contract.
"This is a significant milestone," he said. "We see merit in a profits-based oil tax system, provided it appropriately balances risk and reward to enable additional investment."
Jim Bowles, president of ConocoPhillips Alaska, said his company also was pleased that an agreement had been reached on the gas pipeline project's base fiscal contract terms.
"We also believe that a well-constructed net profits tax could benefit Alaska and provide the fiscal certainty that will support future investment," he said.
Striking a balance
Murkowski said his oil tax reform legislation tries to strike a balance.
Alaska's current oil production tax is based on a percentage of the production's gross value and is driven by an economic limit factor, which no longer works, he explained.
Under it, production from Kuparuk oil field, the nation's second largest, would no longer be taxed this year, and levies on Prudhoe Bay production would drop to zero in 12-14 years, Murkowski said.
His legislation would deliver an additional $1 billion in oil tax revenue at current oil prices.
The new tax would be structured around a 20% tax on net profit—defined as revenue minus capital and operating outlays—and a 20% tradable tax credit. The result, Murkowski said, would be that tax revenue to Alaska would be lower when producers made initial large capital investments and higher as production increased.
The proposed oil production tax also would contain a $73 million annual standard tax deduction to provide an exploration incentive for small independent producers, he said.
"Alaskans deserve a fair share of revenues from our oil wealth, particularly at this time of higher oil prices," Murkowski said. "With the producers seeking greater fiscal stability in return for a commitment to move forward on a natural gas pipeline, this is the appropriate time to reform our ineffective and inadequate tax system."
Contact Nick Snow at [email protected].