Study shows high risk in approving reserves tax

University of Alaska says Measure 2 may discourage investors

Posted: Wednesday, October 25, 2006

ANCHORAGE - A natural gas reserves tax would create only a small incentive for Alaska's big three oil producers to speed up a pipeline project, according to a new study by the University of Alaska Anchorage.

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At the same time, it would drive up the project's cost and could discourage new investment on the North Slope, according to the study.

"It's a pretty risky proposition for a very uncertain outcome," said Scott Goldsmith of the UAA Institute of Social and Economic Research.

A reserves tax is proposed in Ballot Measure 2, the "Alaska Gas Line Now Initiative." It will ask voters Nov. 7 to approve taxing large North Slope gas reserves every year until a pipeline is built to carry the gas to the Lower 48.

Supporters assert that the tax would spur BP, Conoco Phillips and Exxon Mobil to finally build a multibillion-dollar pipeline by making it costly to delay it.

Opponents say it will have the opposite effect, adding cost to the project and likely producing a drawn-out legal challenge.

Gregg Erickson, an economist and longtime reporter covering Alaska oil and gas issues, supports the tax and said Goldsmith drew his conclusions based on flawed assumptions.

"A tax on land or reserves in place does not discourage their development. It encourages it," Erickson said. "That's been black letter economics for years."

Goldsmith has more than two decades of research on how taxes and government spending influence job creation and wealth.

He said he sought comment from Erickson and others on both sides of the issue. He was frustrated by their conflicting interpretations of the how the proposed tax would work, he said.

Besides taxing the North Slope oil companies until a pipeline is built, the proposal would offer them an incentive to speed up the project by letting them recover some of their tax payments.

If the reserves tax passes, the producers would have to pay 3 cents per thousand cubic feet of gas in the ground in the North Slope's two largest gas fields, Prudhoe Bay and Point Thomson, estimated to contain some 31 trillion cubic feet of gas.

The companies also could choose to return their leases to the state to avoid paying the tax.

Goldsmith said he faced a challenge in determining what would happen if the tax passes because of uncertainty about how the oil industry would respond, how the language in the initiative might be interpreted, potential legal issues and other factors that would not emerge until after the tax was passed.

By Goldsmith's estimate, the annual tax could amount to as little as $400 million to as much as $800 million. The amount would depend on how much of the tax the companies write off against other taxes.

His report also finds that the tax would add cost to a pipeline project, and that cost could range from $1 billion to more than $4 billion, depending on including when gas might start flowing and its price.

Though the prospect of added cost could speed pipeline development, the gain in time would be small, he concluded. The producers have limited ability to control the development timetable because the project would require cooperation from the state, numerous federal agencies, Canadian governments, financiers and others, Goldsmith's report said.

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