Politics

Producers agree to pay $16.5 billion in gas line property taxes

JUNEAU -- The big oil companies that plan to produce and ship North Slope natural gas have agreed to pay $16.5 billion in property taxes on the huge project, but they'll pay them to the state instead of local governments, Revenue Commissioner Randy Hoffbeck said Wednesday.

That payment, structured as payment in lieu of taxes, or PILT, will include $800 million in "impact" payments, mostly for communities along the pipeline route. The payments will be applied to costs before the $55 billion project begins producing liquefied natural gas for export from Cook Inlet.

Reaching agreement on the property tax issue will make it easier to get a deal on a project and prevent future conflicts, Hoffbeck said.

"In order to do the fiscal modeling for this project we needed to lock down some of these large-dollar issues," Hoffbeck said.

Hoffbeck was speaking Wednesday in Fairbanks before the Municipal Advisory Gas Project Review Board, which advises the state on property tax issues and includes representatives from local governments, mostly from along the pipeline route.

The local representatives appeared to react favorably to the agreement, but will meet later after consulting with their local assemblies before weighing in formally on the property tax deal. It will take legislative action to finalize the PILT agreement.

A key part of the PILT deal is the impact fund, which Hoffbeck said is designed to cover the costs that towns and cities touched by pipeline construction will likely have to bear.

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That $800 million fund will have to be stretched over five or six years of construction. "That's why the state will have to manage this fund prudently and appropriately to make sure it lasts," Hoffbeck said.

That exposes the state and municipalities to the danger of the money running out if there are construction delays, he acknowledged to the group of mayors and other municipal representatives.

"Everybody takes a little risk when you do that," he said.

The use of the PILT impact fund instead of standard property tax assessment also provides some subsidy in the project's crucial early days, he said. That's a time when holding down project costs is important because there won't be any revenue coming in then, he said.

The PILT payments for the construction period are estimated at one-third to one-half the value of standard property taxes, he said.

But Hoffbeck said it's also important for the impact fund payments to the local governments to be generous enough that their costs are covered and not force them into finding other ways to tax or charge the project. That could mean unanticipated project costs and threaten its viability, he said.

Once the pipeline is in operation, the PILT payments will be linked to the anticipated value of the pipeline over its projected 25-year life, a number that Hoffbeck said the state reached agreement on with the producers, including ConocoPhillips, BP and Exxon Mobil.

To get to that number, they used expected construction costs and factored in depreciation and other elements, and then used existing property tax rates to figure out what rate would be paid.

That number came out to $15.7 billion, but the pipeline owners won't pay their PILT payments based on the value each year, but instead will divide that amount by how much natural gas is moving through the pipeline. That will link each annual payment to the value the pipeline is producing, Hoffbeck said.

Each annual payment will be based on a rolling five-year average of flow rate. That will give the pipeline a bit of a break in its first couple of years, but will also protect the state if there is some later halt in flow.

"There's always the possibility of some kind of major interruption that's not anticipated," he said.

Those calculations would mean an annual property tax PILT payment to the state beginning at about $550 million and ranging up to about $700 million, more than the state's current property taxes on the state's oil infrastructure, including the trans-Alaska pipeline.

More throughput than anticipated could result in PILT payments of more than $15.7 billion, he said.

If some parts aren't taxable because they're government-owned the amount could be less, he said.

The existing oil pipeline has been the focus of bitter battles between its owners and local governments that tax it by value, and Hoffbeck has said the goal of the PILT process is to avoid those battles over the gas line and let the companies making investment decisions know what their future costs will be.

Comments and questions from MAGP board members Wednesday appeared to indicate support for that system.

"I think it's a reasonable number and approach," said Mike Navarre, mayor of the Kenai Peninsula Borough.

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What has yet to be decided is how the PILT payments will be apportioned after the state receives them.

Hoffbeck said the producers didn't need to know that in order to advance work on the gas line -- just the amount they'd be paying.

The review board will be asked its views on how that PILT money should be spent, but won't get to make the decision, he said.

"I'd hope this group would come up with a good proposal to take to the Legislature, but ultimately it's a political decision," Hoffbeck said.

Navarre said Kenai understands that much of that revenue would go to the state and the borough doesn't need all of it. Revenue, he said, should be shared with municipalities that don't have pipeline infrastructure in their boundaries.

Hoffbeck said the deal may need some additional certainty built in so that the pipeline owners don't need to worry about the possibility of a town or city feeling it should get more than the PILT agreement calls for and filing a lawsuit.

That, too, will be up to the Legislature to decide, he said.

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