A spill...an upset...and a raid
It has been an almost-surreal series of events.
In a matter of weeks, Prudhoe Bay pipelines spring leaks and the field is shut down, at least partially. An incumbent governor, one of the state’s political veterans, is trounced by an inexperienced newcomer. Federal Bureau of Investigation agents raid legislators’ offices looking for evidence of wrongdoing.
The FBI raids are apparently the last nail in the coffin for the proposed Stranded Gas Act contract proposed by Gov. Frank Murkowski. House Speaker John Harris has told the governor there are not enough votes in the House for the contract to make a special session worth calling to consider it. The contract cannot now win approval before the November elections.
Murkowski chief of staff Jim Clark conceded that the FBI investigation into political activities by VECO Corp., a major oil field contractor, has greatly complicated things.
Clark said his greatest concern, if the contract is not acted on by November, is that a ballot proposition imposing a gas reserves tax on North Slope producers will pass, prompting lawsuits from the industry and further delay on the gas pipeline.
The reserves tax will fundamentally change the state’s relationship with the industry on the gas pipeline from one of cooperation and negotiation to one of litigation, Clark said.
Although the law created by the ballot proposition would allow taxes paid before production begins to be recouped from other tax payments until, in reality, not all of the tax payments can be recovered, Department of Revenue economist Roger Marks said.
Pedro van Meurs, the state administration’s chief negotiator on the gas line contract, said the reserves tax will effectively add $10 billion to the $20 billion-plus cost of the pipeline and will make the project uneconomic.
Clark said the reserves tax greatly complicates things for a new governor, either Republican Sarah Palin or Democrat Tony Knowles, because Knowles or Palin will have to not only sort out a new effort on the gas pipeline contract, but will also have to deal with the reserves tax litigation and find some way to end the tax if the project is to go forward.
For example, a state minimum wage hike created by a voter initiative ballot proposition was amended by lawmakers to remove a cost-of-living escalator. The change withstood a court challenge.
While it appears that Murkowski’s initiative on the gas pipeline may be put on the shelf, much was actually accomplished during the two years of negotiations on the contract and the Legislature’s deliberations during the last part of the regular session and two special sessions.
The contract itself, though still in draft form, laid out the framework of a fiscal relationship between the state and producers. Under the contract, the state would become a partner in the project to reduce risks for the companies and also to enhance its own benefits, such as more control over state-owned royalty gas.
One big accomplishment of the governor and the Legislature this summer was a new oil and gas production tax that was enacted as general law separately from the contract. It was part of the overall deal on the contract.
The contract itself, however, was reviewed in public meetings around the state, and while a number of serious concerns were raised in the meetings, most comments were favorable and polls indicated that most Alaskans wanted the Legislature to approve the contract and get on with the pipeline project.
While the public review process was underway, the Legislature was also reviewing the contract. While much of lawmakers’ time was taken up with the petroleum production tax change, some attention was paid to the gas contract, particularly in the Senate’s special gas committee. There, a number of concerns were identified.
One was that the proposed long-term freeze on oil and gas taxes was too long. The contract proposed a freeze on gas taxes for 45 years, the term of the contract, and 30 years for oil production.
The Senate committee proposed an amendment, which was never adopted, that would shorten the period of a tax freeze. It also provided a basis for changes in fiscal terms even after the freeze ended in ways that would give assurance to the industry investors.
Among other changes, the Senate committee also proposed a strengthening of the Alaska-hire provisions in the contract through a form of Project Labor Agreement that would cover union as well as nonunion contractors.
The administration had earlier opposed a PLA in the fiscal contract, arguing that a labor agreement would be needed eventually, but that it should be negotiated with the entity formed to build the pipeline, and not be in the fiscal contract.
However, chief of staff Clark said the administration was acknowledging the Legislature’s concerns in these areas and even though the Senate amendments weren’t adopted, the administration was including the tax-freeze terms, labor agreement and other concerns raised by legislators in the new round of negotiations with the producers.