Walker’s gas tax raises more questions

  • Alaska U.S. Rep. Don Young listens as Alaska Gov. Bill Walker speaks to reporters at the Alaska Federation of Natives conference on Oct. 16 after Interior Secretary Sally Jewell said her agency was canceling future lease sales and will not extend current drilling leases in Arctic waters off Alaska’s northern coast (see story, page 9). Walker is calling the Legislature into special session beginning Oct. 24 to consider a gas reserves tax he describes as an “incentive” to producers to commit gas to the Alaska LNG Project. Photo/Mark Thiessen/AP

Gov. Bill Walker has offered his first explanation of his proposed tax on natural gas reserves in advance of a special session of the Legislature due to convene Oct. 24.

But the letter written by the governor to legislators Oct. 19 seems to raise more questions than it answers, and if the tax was actually passed by the Legislature, which is doubtful, it would prompt lawsuits that would entangle and delay the planned Alaska LNG Project.

Walker describes the proposal as an “incentive,” to get North Slope gas producers to agree to produce gas and commit it to the LNG project.

“The property tax is not designed to be punitive,” the governor wrote in his letter.

The letter describes the reserves tax in terms of the “lifting of a tax holiday” on property taxation of the value of state oil and gas reserves.

Years ago the Legislature exempted unproduced oil and gas reserves from property taxes because the state also imposed a production, or severance tax, the governor explained in his letter.

The new proposal is to change the law and make the reserves subject to property tax, but with exemptions if producers agree to commit gas to the LNG project, according to the letter.

“Built into this legislation are several exemptions. Should the taxpayers qualify for any one of the exemptions, the property tax would not apply,” according to the letter.

The proposed statutory language of how the tax would actually be structured will be in the bill to be introduced in the special session Oct. 24, but copies of the draft legislation were not made available.

Among several questions not answered by the letter is who would impose the property tax: municipalities or the state? Walker’s letter described property taxes as traditionally a municipal function in Alaska, although the state does impose its only state property tax on the value of oil and gas industry surface facilities, including pipelines.

The governor may have in mind amending the state oil facilities tax to include the value of unproduced underground gas reserves, but if that is not done the taxation would be done by local governments under their current tax authority.

For the North Slope, that would be the North Slope Borough.

Another uncertainty in the proposal, as it has been described in concept, is whether the state or municipal appraisals of underground reserves would include crude oil as well as natural gas, or if just gas, as the governor has described it, how the gas fluids can be appraised separately from oil fluids.

Below ground gas and oil are often mingled, as is the case at the Prudhoe Bay field on the North Slope, and also typically exist in liquid form in the reservoir rock. What is considered natural gas, the lighter molecules of hydrocarbons, become gaseous when they are produced up a well and the pressure drops, allowing them to shift from a liquid to a gas.

Sorting out the value of underground gas as separate from oil is an area ripe for conflict and litigation.

Three other matters are being put on the Legislature’s special session agenda by the governor. One is a request for an appropriation to compensate TransCanada Corp. for its investments to date in the gas project and for the state to acquire TransCanada’s share of the project.

“TransCanada has been a valuable partner (for the state) and I appreciate its efforts and contributions in progressing the pre-FEED (preliminary engineering) work on this project. However, at this point the state through AGDC (the state-owned Alaska Gas Development Corp.) should take a direct investment in the entire project to lower annual gas transportation costs after the project begins operations,” Walker wrote.

“While this will mean that the state must make the project (engineering) and construction payments that TransCanada would have otherwise made, the state is better off in the long term.”

Other items on the special session agenda include appropriations for the state to make required cash contributions to complete the preliminary engineering work on the Alaska LNG Project that is now underway, and funding for state agencies to continue in negotiations on needed agreements for the project.

Overall, the governor described in the letter his frustration that the project agreements are not yet in place.

“We are at a critical juncture,” Walker wrote. “The process we are currently working under has failed to produce any project-enabling agreements on the timeline that Alaska requested and that the state’s (industry) partners indicated was possible,” the letter said. “Unfortunately, instead of introducing project-enabling agreements to you in this special session, as was the goal of all the parties involved, I must instead ask you for measures necessary to advance the process with assurances it will not see similar delay in the future or actual process failure caused by the reluctance of one or more parties to move forward.”

One other point not explained in the governor’s letter was that the reserves tax is not really an incentive for producers to commit gas to a project but to sell gas to a buyer at the other end of the pipeline and LNG project.

The project itself does not purchase gas, but only transports it for a fee like a railroad does with freight. In reality, the tax would impose a penalty (the tax) if a producer, for example, fails to agree on an acceptable price for its gas from a buyer.

This is one other area ripe for dispute and lawsuits because the state or municipal appraisers would in effect substitute their judgment of an acceptable price for that of the producing company in deciding to impose the penalty.

Updated: 
11/24/2016 - 3:15pm

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