Senators Seek Change in Alaska's O&G Structure

A two-week study of Alaska's oil and gas tax structure has convinced some state senators that the Legislature needs to act fast to change the system or risk the plundering of state riches.

The cost of doing nothing is "colossal," up to $2 billion in lost revenue a year under some scenarios, says Sen. Bert Stedman, a Republican from Sitka who co-chairs the Senate Finance Committee. He's been holding hearings for two weeks on Alaska's oil and gas tax system, and on Friday said he's preparing legislation to settle the issue before the session ends in April.

Some, including Gov. Sean Parnell, don't have the same sense of urgency. But overall, Stedman's concerns seem to be gaining traction in the Legislature.

According to models created by the state Revenue Department and consultants to the Legislature, the hit to the treasury comes when oil prices are high and natural gas prices are relatively low. The state's complicated tax formula links the two values -- "a substantial flaw," according to Stedman.

Stedman says his committee will soon take up a bill to separate the oil and gas taxes, so that low gas prices don't effectively drive down the taxable value of high-priced oil.

Sen. Joe Paskvan is a Democrat from Fairbanks who sat in on the Senate Finance Committee hearings over the last two weeks at Stedman's request. "I believe now that the law as it currently exists puts Alaska at risk of being plundered," Paskvan told reporters. "Without changes before May 1, 2010, my belief is that essentially we have a Third World resource extraction model that will end up being a plunder of Alaska's resources."

That May 1 date is significant, the senators said. Under state law, the tax structure in place then could be locked in for the first 10 years that natural gas flows if a big gas pipeline is ever built.

Alaska depends on oil revenue for nearly 90 percent of its general fund revenue, but production is declining.


Legislators haven't focused on the gas tax issue before now because without a mega-gas pipeline from the North Slope, there hasn't been much Alaska gas to tax.

But this year two competing pipeline projects intend to seek commitments from producers for shipping natural gas, if and when a pipeline is ever built. The period when companies trying to build and run a pipeline can secure those agreements for shipping deals is called "open season," and it's supposed to begin May 1.

The state has agreed to put up to $500 million into a project being led by TransCanada Corp., joined by Exxon Mobil. A separate project, Denali, involves BP and Conoco Phillips.

Stedman said his proposed fast-track legislation doesn't change the rates of oil and gas taxes or the amount of tax credits; that can come later or through other bills already before the Legislature.

"This is a risk-control defensive measure that the state needs to take to protect the treasury," the senator said.

Time will be pinched. The Legislature shuts down much of next week while a big contingent of state legislators travels to Washington, D.C., for an annual energy conference, and when they reconvene March 8, the 90-day session will be more than half over.

If legislators end the session April 18 without addressing the issue, Stedman said, "that would be disgusting."


State Sen. Lesil McGuire, an Anchorage Republican who co-chairs the Senate Resources Committee, said she thinks Stedman's concerns are valid. She also wants any oil and gas tax legislation to be aired in her committee as well as Finance, though each stop can slow a bill down or kill it.

When the Legislature set up the tax system in 2007, lawmakers were focused on oil, she said.

"Many of us do feel it was made clear on the record that we would come back and look at gas at a later date," McGuire said.

Her counterpart in the House agreed.

"I think it's something that has to be done. And I think we always knew that," said Rep. Craig Johnson, an Anchorage Republican who co-chairs the House Resources Committee.

Stedman's idea to separate the resources for tax purposes seems right, but it'll come down to details, Johnson said. "How, I don't know. When, I don't know."

"We'll take it seriously because we think there is an issue there," said House Speaker Mike Chenault, a Republican from Nikiski who has listened to some of the Senate testimony. "We're going to have to find out what the fix is, and I don't think it's a simple fix."


Parnell is pushing his own legislation to increase tax credits for oil exploration and expand tax credits to all drilling and well work. He said he is asking the Legislature to take up his bills, which haven't yet had a hearing.

Parnell said he's willing to listen but doesn't believe the state is locked in to an unfavorable tax system if something doesn't happen by May 1.

If oil producers make commitments to ship natural gas, they'll do so seeking changes in tax rates and long-term assurances of financial terms, the governor told reporters Friday.

"You don't want to open up gas taxes now and then have to open them up again," Parnell said.

The current combined oil-gas tax structure was intended to be an incentive to launch the long-dreamed-about gas pipeline, he said. Separating the two could hurt the project.

"They are going to have to take into account whether that impacts the economics of a gas line because frankly, it very well could," Parnell said.

The governor said the example of a $2 billion hit is based on a "mythological figure."

Not exactly, Stedman said. A legislative consultant analyzed what the state's tax haul would have been in the 2008 budget year if there had been an operating gas pipeline. The rate would have been $1.8 billion less under the combined system than if oil and gas were taxed separately, according to the analysis by London economist David Wood.

Tony Palmer, TransCanada vice president, said by phone Friday that producers have been upfront in their desire for tax changes, though none have yet made public what they will be seeking. TransCanada expects to hold its open season courting customers May through July, he said.

BP Alaska (Exploration) Inc. is a potential shipper of gas in a new pipeline. It's too soon to assess the impact of Stedman's proposal, spokesman Steve Rinehart said.

"Our base position remains that there is going to need to be stability and predictability in the fiscal terms for a gas line project to move forward," Rinehart said.

That should happen, Stedman said.

Copyright (c) 2010, Anchorage Daily News, Alaska. Distributed by McClatchy-Tribune Information Services.