Lingering questions remain about Alaska gas, oil tax

Some wonder if it's necessary now

Posted: Thursday, April 15, 2010

The state Legislature has spent considerable time this session looking at whether to change Alaska's system of taxing oil and gas production together. Despite that, there remains considerable debate over whether it's necessary, with adjournment days away.

Chris Miller / The Associated Press
Chris Miller / The Associated Press

Under the current structure, the state taxes oil and gas together; gas calculations are based on gas' energy value relative to oil. Those who support separating the two - including a leader of the Senate Finance Committee, Bert Stedman - say it will address the potential "dilution effect" on state revenues when oil prices are higher relative to gas.

They fear losing up to perhaps $2 billion a year, and maybe more, once natural gas begins flowing through a major line, with lower price gas creating a drag on higher oil - and the state essentially "giving away" its resource, Stedman told the House Finance Committee Wednesday.

The House panel is considering the issue. It has a bill crafted by House Resources that would separate oil and gas just before the start of an open season for a major gas pipeline. The bill calls for the current system of taxing oil and gas together to kick back into place shortly after the open season begins.

Open season is when producers are courted and shipping commitments are sought for a line. An idea behind the separation is that if the state - under terms of the Alaska Gasline Inducement Act - is locked into a rate at the time of open season, the commodity at issue would be gas alone. Oil, which is considered king and largely responsible for helping cushion state coffers, would not be lumped in.

The system of taxing oil and gas production together would remain in force until gas flows through a line at a certain rate.

Stedman said he's OK with both that version and his committee's bill, which wouldseparate the two without the on-off provisions. The Senate version passed that full chamber with little dissent.

"There are a lot of ways to skin a cat," he said. "I just want to make sure the cat gets skinned."

Rep. Mike Hawker, a House Finance co-chairman, said he hopes to have a substitute for the bill in committee Thursday that is "satisfactory to the sponsor and achieves what the sponsor wants." He noted the urgency - the anticipated May 1 start date for the open season and the Legislature's planned adjournment on Sunday.

The bill may face a tougher go in the House, where despite the time and attention that's been paid to the issue, there remains uncertainty among some members as to whether a change is needed now. House Resources Committee meetings over the weekend ran long, and tempers sometimes ran short, as members sought to craft a bill working off projections that no one can say, for sure, will come to pass.

"There's so much crystal ball," said Rep. Craig Johnson, a resources committee co-chairman.

"Is (action) necessary? Did we have to do this for the future of the state? Maybe not," Johnson said. But the Legislature couldn't afford to "stick its head in the sand, either." Johnson said Wednesday he wasn't sure how he'd vote: "I still have question marks."

Gov. Sean Parnell has already said he doesn't believe this is necessary now, that he expects companies will want to negotiate tax and royalty terms as part of the open season process and sees no need to address tax issues twice. He also doesn't believe the state is legally locked into any tax rate at open season.

Industry representatives say they want to make sure that a bill would not discourage gas exploration by making it tough - if not impossible - to deduct gas-related expenses against current production.

Since gas is a bit player in Alaska now relative to oil, companies looking to develop plays like the Point Thomson natural gas field in the North Slope - which could be critical to pipeline projects and Alaska's hope of raising its gas profile - don't want to eat those costs.

Stedman said the models he has seen point to higher oil and relatively lower gas prices. The Legislature and governor could "roll the dice" that that won't happen - that, instead, there may be greater parity - but he said it would be "absurd" to do that, he said.

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