Administration, producers reach {Alaska} gas line deal

Gov. Frank Murkowski said the state of Alaska reached final agreement with three North Slope gas producers on a $20 billion natural gas pipeline project.

In a Feb. 21 press conference in Anchorage, Murkowski said the negotiating teams completed work the evening of Feb. 18, and that he met Feb. 20, with senior executives of BP, ConocoPhillips and Exxon Mobil Corp. in Anchorage on the gas contract as well as an agreement for the producers to support a new state net-profits oil tax Murkowski has submitted to the Legislature.

Legislative leaders were also called from Juneau to Anchorage to meet with the company managers, which included BP group managing director and chief executive officer Tony Hayward, ConocoPhillips chairman and chief executive officer Jim Mulva, and Morris Foster, president of Exxon Mobil Production Co.

The gas pipeline deal is contingent on the Legislature's approval of the oil tax revamp as a general law change and its subsequent incorporation into a gas pipeline contract, which will be considered by the Legislature most likely in a special session later this spring.

Once the Legislature gives final approval to the gas contract, the producers have said they will initiate engineering, environmental and design work for the project, which is expected to cost $1 billion. Another hurdle the project must still cross is securing rights-of-way through Canada for sections of the pipeline passing through that nation.

Murkowski's proposal to the Legislature calls for a 20 percent tax on company net Alaska production profits with a 20 percent investment tax credit that can be applied against the tax. The tax credit would be tradable so that a new company exploring in Alaska could convert its investment into a tax credit that can be exchanged. Through this mechanism it would be possible for an independent firm exploring in the state to recover as much as 40 percent of its investment, Murkowski's chief consultant, Pedro van Meurs, said at the press conference. This would occur because an independent would be first be able to declare a loss on the investment and could then, additionally, convert the loss to tax credits which can be sold, van Meurs said.

The governor said BP, ConocoPhillips and Exxon Mobil, the three major North Slope oil and gas producers, agreed to support the tax proposal at the 20 percent rate after initially proposing a 12.5 percent tax rate to the state.

All three of the producing companies affirmed that the gas contract has been finalized.

"We are pleased to have completed the gas portion of the fiscal contract and are working to finalize durable oil contract terms that incorporate the new oil tax structure. This is a significant milestone," said Steve Marshall, president of BP Exploration (Alaska) Inc. "We see merit in a profits-based oil tax system, provided it appropriately balances risk and reward to enable additional investment."

Jim Bowles, president of ConocoPhillips Alaska Inc., said, "ConocoPhillips is pleased that all parties have reached an agreement in principle with the state of Alaska on the base fiscal contract terms for an Alaska gas pipeline project. We also believe that a well-constructed net profits tax could benefit Alaska and provide the fiscal certainty that will support future investment."

Richard Owen, vice president of Exxon Mobil Alaska Production Inc., said, "Oil contract terms consistent with the governor's proposed tax bill would provide the predictability and durability necessary to advance the gas project to the next phase. Exxon Mobil also confirms that we have reached agreement with the governor on the major provisions of the gas fiscal contract."

Consultant van Meurs had suggested a 25 percent tax rate. Murkowski said he agreed to a compromise with the producers at 20 percent to get the three companies to finally agree to the negotiated gas pipeline contact. He said the companies consider the oil tax at its 20 percent rate a "package deal" with the gas pipeline agreement.

If the Legislature enacts a higher tax rate, the governor said the producers might not support it, an inference that this could cause negotiations on the gas deal to be reopened.

Murkowski wants the oil tax change enacted into law before the gas contract is submitted to the Legislature for ratification. For their part, the gas producers want the new oil tax rate, once it is enacted, to be included in the special fiscal contract being negotiated with the state on the gas project.

A 20 percent net profits tax would bring Alaska an additional $1 billion per year at current oil prices, van Meurs said at the press conference. If the Legislature decides to increase the rate to 25 percent it would bring Alaska another $300 million at current prices, van Meurs said.

Alaska will earn about $4 billion this year in revenues from oil taxes and royalties, but Murkowski maintains the current oil tax is obsolete under present market conditions and needs to be replaced. Van Meurs said most major oil producing regions in the world have switched to a net profits-share tax system.

The gas pipeline contract would require Alaska to invest approximately $4 billion for a 20 percent share of the $20 billion project. It also includes the state taking its royalty and tax interest in gas production in the form of gas which it will market independently. This could effectively give Alaska control of marketing about 800 million cubic feet of gas daily in U.S. markets.

The state now has the option of taking its 12.5 percent royalty share in kind and does so with the oil production royalty, but taking the tax share in gas in addition to the royalty would be a new idea, Murkowski administration spokesman Chuck Logsdon said.

In Washington, D.C., Federal Energy Regulatory Commission chairman Joseph T. Kelliher praised the agreement. "The announcement of an agreement between the state of Alaska and producers is a highly encouraging step toward building a pipeline to bring Alaska gas to the Lower 48 states," he said.

"Building this pipeline is a key part of our national effort to secure abundant and affordable supplies of this environmentally friendly fuel. The Federal Energy Regulatory Commission stands ready to expeditiously carry out its regulatory responsibilities once this agreement is consummated and we have proposals before us," Kelliher said in a prepared statement.

In a Feb. 1 briefing to the House and Senate Finance committees, Department of Revenue economist Roger Marks said that at current high oil prices, the new tax could bring $1 billion in additional state revenues, depending on the tax rates selected.

"This is equal to the amount of revenue the state would receive from a natural gas pipeline with a $5 per million Btu price at Chicago," Marks said. "You'd be getting the gas line revenues now, without the gas line."

The new tax would be a percentage of an oil producing company's net income in Alaska less any of the investment tax credit that will also be proposed. Van Meurs said the tax will apply to a company's total Alaska income and would not relate to specific fields, as is done with the current tax. Net income is defined by first determining the average gross "wellhead" value of the oil on the North Slope by subtracting tanker and pipeline costs from sales revenues. A similar calculation is done to establish the gross value under the current production tax.

Where the net profits tax departs from the current tax is that operating and capital costs are deducted from the gross revenues to arrive at a net revenue total.

The investment tax credit would be based on a percentage of the amount invested. Under the governor's proposal of a 20 percent tax credit, if a developer invests $1 million, up to $200,000 could be taken as a tax credit. Losses in any year, in the event that investments are more than revenues, can be converted to tax credits by multiplying the amount of the loss by the tax rate, in this case 290 percent. Tax credits can also be transferred and traded.

"This will allow explorers and independents to monetize part of their investments immediately, thereby strongly encouraging exploration," van Meurs told the legislators.

There will also be features in the tax to ensure that there is no tax on low levels of production. The first $73 million of net income would be tax-exempt. A company would use all income exceeding $73 million as its base net income to which the tax would apply, according to administration spokesman Logsdon.

No special treatment was given to heavy oil production, however. "We looked long and hard at this and decided that the structure of the new tax proposal will provide sufficient incentives for viscous and heavy oil," Logsdon said.

"It is our intention that these enhanced incentives to invest in exploration and development, as well as the gas line investment, will create a new investment environment in Alaska. Our goal is that Alaska would become a new core area for petroleum investment and increased oil and gas production for the industry," van Meurs said.

At the Feb. 1 presentation to the Legislature, Department of Revenue economist Marks laid out potential revenues that could be generated under five scenarios of tax and tax credit rates, ranging from tax rates of 25 percent, 20 percent and 17.5 percent in different combinations of tax credit rates of 15 percent and 20 percent. The scenarios themselves had been given to the department by the Legislature.

Two different oil production volume scenarios were also considered, one being a "status quo" that assumes no significant new discoveries and no natural gas pipeline. In this case, the oil fields and the pipeline would shut down in 2030. This scenario assumed the production of an additional 6.5 billion barrels of oil.

A second case was an "enhanced" production scenario that assumes discovery of a new Alpine-size field every five years, as well as construction of a gas pipeline. The existence of a gas pipeline would stimulate more exploration for gas, which would also result in discovery of some additional oil when gas was found. For the purposes of the enhanced scenario it was assumed the oil pipeline would operate until 2050, and would produce an additional 10.5 billion barrels of oil.

On the cost side, the assumptions also included a company spending $100 million a year in exploration, $1 per barrel in capital costs related to producing fields, $4 per barrel in capital costs related to new development in producing fields, $4 per barrel in development of new fields, and $4 per barrel in operating costs. These expenses would qualify for the investment tax credit under both of the scenarios presented.

The estimate of $1 billion to $2 billion in additional revenues per year assumed no enhanced production and no gas pipeline, but it was based on a crude oil price of $60 per barrel, Marks said in his presentation. If oil prices decline to $40 per barrel, the additional revenues would drop to $400 million to $600 million, he said. At $20 per barrel oil prices, however, the state would lose $150 million to $200 million compared with what the present tax would bring in.

The "crossover" point, the price at which the new tax would result in losses rather than gains, is about $25 per barrel, Marks said. However, what is important is that the "slope" of increasing revenues is very steep when the price is more than $25 per barrel. At $40 per barrel, for example, the state is making four times per year what it would lose at $20 per barrel, he said. The point is that even if there is a temporary slump in oil markets, any lost revenues would be quickly regained when prices improved.

Under the "enhanced" production scenario, the revenue gain is more dramatic because there would be more oil production in any given year. In this case, if oil prices were $20 per barrel the state would still lose $150 million to $200 million per year, but if prices were $40 the revenue gain would be $1.6 billion to $2 billion. At $60 per barrel the increased revenue would be $1.5 billion to $2.5 billion per year.

Over the long term, the effect of the new tax would be to enhance state revenues at the expense of corporate profits and revenues to the federal treasury. In materials released Feb. 21, the state's overall share of oil revenues, including royalty income, would increase from 23 percent to 29 percent. The federal government share would decrease from 25 percent to 23 percent. Industry's share would decrease from 46 percent to 42 percent under the new proposed tax.

Web posted Sunday, February 26, 2006

Staggering number of workers, equipment needed for gas line
http://www.alaskajournal.com/stories/022606/hom_20060226008.shtml

By Tim Bradner
Alaska Journal of Commerce

If an agreement comes together for an Alaska Highway natural gas pipeline, the North Slope producers' plan for a 52-inch pipeline would not only require the first building and use of 52-inch, high-strength steel pipe, but also the manufacture all of the equipment to construct such a pipeline, according to a U.S. Bureau of Land Management official involved in planning for the possible $20 billion-plus project.

Not only has pipe of that size and weight never been made, but the sideboom tractors needed to lay the large-diameter pipe in the trench don't yet exist, said Debbie Hollen, BLM's special projects manager for Alaska. Hollen spoke to the Alaska Support Industry Alliance in Anchorage Feb. 9.

Also, 52-inch valves, which would weigh 32 tons each, don't exist, Hollen said. Information BLM has obtained indicates that 440 of the new large sidebooms would be needed, along with 150 to 200 of the 52-inch valves, she said.

The steel requirement for the pipe is mind-boggling. "This would be 5 (million) to 6 million tons of steel. That's enough to build 4 million automobiles or 85 aircraft carriers," Hollen told the Alliance. There would be a host of other equipment needed, including 1,300 pickup trucks and 230 buses for moving workers to and from the job-sites.

Hollen said that, according to information provided to BLM, the Alaska portion of the pipeline would be built in three "spreads," or construction units, of about 238 miles each. Canadian segments of the pipeline would require six spreads. About 15 construction camps would be needed in Alaska, she said. Ten or 11 of these can be located at sites of former trans-Alaska pipeline system construction camps, but there is not much left at these sites except gravel pads, she said. The camps would have to be completely rebuilt.

Availability of gravel for the Alaska part of the project is an issue, Hollen said. Some sixty million cubic yards of gravel will be needed, and while 65 potential material sites have been identified so far, the owners of these sites will not want gravel resources there to be entirely depleted, she said.

"By way of comparison, 70 million cubic yards of gravel were needed for the TAPS oil pipeline construction in the 1970s, but this included the gravel used to build the Dalton Highway," the road from Livengood to the North Slope, Hollen said.

Tim Bradner can be reached at

tim.bradner@alaskajournal.com.

An industrial-sized shopping list

Equipment needed for an Alaska Highway route gas pipeline construction:

• 134 loaders

• 275 automatic welders

• 440 "594" sideboom tractors

• 225 other sideboom tractors

• 18 trenchers

• 250 backhoes

• 225 large bulldozers (D-8 plus)

• 125 stringer tractors

• 1,300 pickup trucks

• 230 buses

Source: U.S. Bureau of Land Management

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