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Time running out for gas tax review

Rena Delbridge

political-animal-logoUnless changes are made to Alaska's natural gas tax by May 1, the state could lose out on lots of revenue during the first 10 years of a large diameter natural gas pipeline's life -- and could lose crude oil revenue as well.

Oil and gas producers who make a bid on pipeline space during an open season this year can lock in the state's tax on gas for the first 10 years of pipeline flow, and as it sits, that tax isn't one to which lawmakers gave much thought when approving it as part of the ACES oil tax a couple years ago. They figured there'd be time down the road to address a gas tax to secure solid revenue for Alaska, but now an initial open season on a proposed gas pipeline is only months away.

That's Sen. Bert Stedman's concern, and he's planning to raise it within the next couple of weeks among members of the Finance Committee that he co-chairs. The Sitka Republican has advocated for a year for attention to the state's gas tax.

Open seasons for two proposed gas pipelines are expected this year. One, for a state-sponsored project offered by TransCanada Corp. in partnership with Exxon Mobil, starts May 1. While many doubt that this initial open season will be a success, others are taking a "wait and see" stance. If the open season is a flop, companies will miss out on concessions that include locking in the state's gas tax as it sits May 1 for the first 10 years of flow through the big pipeline.

"We're in a position where we'll have potentially no revenue from gas, and oil revenue will decline," Stedman said. Using mid-range price forecasts submitted by TransCanada, he said the state could miss out on roughly $1.2 billion in gas taxes and almost $800 million in oil taxes unless a new system is devised.

Bids on space during an open season are likely to involve conditions the producers, the state and TransCanada will try to resolve, including tax matters. If they can, the bids evolve into precedent agreements, something TransCanada Alaska vice president Tony Palmer said could take until the end of this year.

And if so, Stedman figures Alaska could lose out.

State Revenue Commissioner Pat Galvin agreed that lawmakers need to look closely at gas taxes within the next few weeks, so they're headed into an open season with open eyes. But he wouldn't rush to say what, if any, changes might be needed to the current system. First, he said, comes a comprehensive analysis of how the tax picture plays out under different scenarios.

"We've got this (legislative) session to deal with it at a certain level, to make sure we're comfortable going into an open season ... that we're comfortable with somebody potentially locking us in," Galvin said.

Under the current system, gas is taxed as an energy equivalent of oil, using a 6 to 1 ratio. If gas is valued at $5, it's taxed as if it were $30 per barrel oil. In part, that helps producers who go after gas, as it lowers their taxes on oil. But it also can dilute the effects of progressivity, a tax structure under which Alaska gets more money when oil is selling for higher prices, and less when it sells for lower amounts. Adding an influx of $5 gas into $80 or $100 per barrel oil brings the overall oil values down as the state calculates its share.

Stedman wants to break apart gas from oil and develop a separate structure. Galvin, on the other hand, said the linkage is an incentive to producers to go after gas, in order to drop industry's tax burden on oil.

"You'll create by reverse a disincentive from the current system toward a major gas sale," Galvin said. "You would drive more of the tax flow to the state and reduce the attractiveness of the project to the producers. And that's not the direction we're looking to go."

But Stedman said the Legislature never intended to incentivize gas.

"It's one thing to give it away, and another to pay them to take it," Stedman said. "To me, it's unacceptable."

With higher gas prices and lower oil prices than TransCanada used in its estimates, Alaska could net a decent return on both resources, and encourage companies to keep developing both.

For Stedman, it's less about the actual numbers than the value of oil compared to gas.

"The global trend appears to be that oil is becoming more valuable in dollars, because there's less of it, and gas is becoming less valuable, because there's more of it," he said. "We're on the precipice of making a monumental policy error that is just unconscionable."

Rep. Les Gara, D-Anchorage, said lawmakers would be seriously remiss not to make sure they like a tax rate that could be locked in a decade, and that it's up to the administration to show whether the existing tax will work.

"I'm not one of those people who believes the gasline is going to fail," Gara said. "I believe the gasline is going to succeed. But it would be silly for any of us to stick our heads in the sand (on taxes)."

Whether they'll make changes is an open question. Doing so could take a long time, beyond the roughly 10 weeks left in this 90-day legislative session.

"Can we do it before May 1?" Gara wondered. "Well, we would have to; it's the state's future."

Plenty of lawmakers seem confident taking a gamble that an initial open season is going to be a bust, leaving plenty more time for a deep debate on gas taxes.

Stedman isn't willing to take that risk, especially as the state's three big oil and gas producers are well aware of the way gas could dilute their taxes on oil.

"It's important for the Legislature, the elected officials, to realize the magnitude of this impact," he said. "If collectively we can address it, which I'd like to, fine. If not, they need to be accountable."

Contact Rena Delbridge at rena(at)alaskadispatch.com.