House panel reverts to gas tax 'holiday'

Producers say pipeline not economical

Posted: Tuesday, April 30, 2002

A proposed tax break for a natural gas pipeline is again a "holiday," rather than a deferral, with a reversal Monday by the state House Finance Committee.

The bill, passed by the committee 9-2, again guarantees a state and local property tax exemption during pipeline construction and for the first two years of operation, worth an estimated $760 million.

On Friday, over the angry objections of Co-Chairman Eldon Mulder, an Anchorage Republican, the committee voted 6-4 to allow the state ultimately to negotiate with developers on repayment.

The committee, at Mulder's urging, reversed itself 6-5. Co-Chairman Bill Williams, a Saxman Republican who missed Friday's meeting, voted to remove the amendment for a tax deferral.

The swing vote was Unalaska Rep. Carl Moses, a Democrat who has major legislation pending for a "municipal dividend" from permanent fund earnings, as well as potential interest in capital projects legislation being developed by the Republican majority.

Moses said he hadn't changed his mind on the issue. "I intended to vote that way Friday," but got confused, he said.

The vote followed testimony from the three major North Slope producers that a gas line project isn't economically feasible right now. That was challenged by Sen. John Torgerson, a Kasilof Republican who is chairman of a joint legislative committee on natural gas pipelines.

Representatives of Phillips Petroleum, BP and ExxonMobil said they spent $125 million and more than 1 million staff hours studying the feasibility of a natural gas pipeline and concluded it presented more risks than rewards.

Estimated capital costs of nearly $20 billion have a 20 percent degree of uncertainty, according to the producers' analysis.

"Any overruns in this project would be immediately reflected in those tariffs," making the producers the ones who bear the risk, said Joe Marushack of Phillips.

The project that was studied would be a pipeline with a daily carrying capacity of 4.5 billion cubic feet running 1,800 to 2,100 miles from the North Slope to Alberta, Canada, either down through the Mackenzie Valley in the Northwest Territories or by way of the Alaska Highway, respectively.

Based upon 35 trillion cubic feet of known reserves and an additional 16 trillion cubic feet of suspected gas, the project would have a 30-year life and make $50 billion for the state of Alaska, the producers say.

With the same scenario, the Department of Revenue projected $28 billion for the state, Deputy Commissioner Larry Persily said in an interview. "Maybe they're projecting a higher price."

The scant data the producers provided irked Torgerson. "Eight numbers," he grumbled. "My only point is, I don't know anything."

"We're pretty much being told, 'Trust me,' " said Rep. Bill Hudson, a Juneau Republican.

In the end, if necessary, Torgerson said he favors offering incentives to pipeline developers. But he said he estimates the rate of return on the pipeline project would be 15 to 18 percent.

"Why aren't the bulldozers starting up?" asked Rep. Con Bunde, an Anchorage Republican.

Torgerson said the producers are waiting on federal legislation that would give them a price floor, so that they would get tax credits if the market price drops. Also, the rate of return is compared with other potential projects, he said. "All of these companies have their internal hurdle rates."

Marushack of Phillips Petroleum said the federal legislation, along with state "fiscal certainty," are required to move the project forward. The federal energy bill, now in a House-Senate conference committee, could put a floor under the risk, while the state property-tax holiday would improve the economics of the project, he said.

"Phillips' position is this is one of several building blocks we're very interested in that would help make the project viable," he said.

"I don't think we can ever point to any one thing that's going to be the magic bullet," said Ken Konrad of BP.

But Robbie Schilhab said ExxonMobil isn't interested.

"We don't seek nor do we support incentives or subsidies," Schilhab said.

Mulder said Alaska needs to be aggressive to break into the North American gas market. The proposed tax holiday would be offset eventually by a higher wellhead price that would boost state revenue, he said. "Over time, we recoup it all."

Persily of Revenue was skeptical. When factoring in the loss of dollar value due to 30 years of inflation, "It's going to be substantially less than half."

After the hearing, Mulder said he might have been too emotional Friday with Rep. Jim Whitaker, a Fairbanks Republican who said Mulder threatened to scuttle a long-range fiscal plan and access to gas for Fairbanks because of Whitaker's amendment for a tax deferral.

"He didn't hear things accurately, and I may have growled at him incorrectly or inappropriately," Mulder said. "So two bad decisions were made."

Bill McAllister can be reached at

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