A Citizen’s Guide

JUNEAU—A proposal to tax natural gas at a third the rate of oil is being called a “train wreck” by some House Finance Committee members.

The committee on Saturday heard from petroleum consultants on a net-profits tax bill meant to replace the state’s current production tax.

The provision that got the attention of most of the lawmakers was a provision inserted into the bill by the Senate Finance Committee in which just $1 out of every $3 in gas revenue would be taxed at the proposed 22.5 percent tax rate.

Legislative consultants Econ One Research Inc. presented to lawmakers models of the effect of that reduction on potential gas developments.

The result was that with the proposed changes, the state would receive much less revenue than Gov. Frank Murkowski’s original bill would take, and less than even the current tax system for all fields but Prudhoe Bay.

Murkowski introduced a net-profits tax bill in February that did not include the gas revenue exclusion and called for a flat 20 percent tax rate.

For prospects in Point Thomson, an undeveloped North Slope field with an estimated 9 trillion cubic feet of gas reserves, the Senate bill’s effective tax rate would be 4.1 percent when gas is $6 per thousand cubic feet.

That’s compared to a 9 percent tax rate with the current production tax and 17 percent in the governor’s bill.

The Senate bill would tax potential gas developments such as one within the National Petroleum Reserve-Alaska at an effective rate of .9 percent at $6 per thousand cubic feet, according to Econ One’s estimates.

That’s compared to 14.4 percent in the governor’s bill and 7 percent under the current system.

The result for Prudhoe Bay was an effective tax rate slightly higher than the current production tax system but much lower than the governor’s bill. Rep. Mike Kelly, R-Fairbanks, called the provision a train wreck. Rep. Beth Kerttula, D-Juneau, echoed that thought moments later.

“This is a big problem,” Kelly said.

Tony Finizza of Econ One said the first time he heard the one-third number, he thought somebody had meant to say two-thirds. He wondered what the state was trying to accomplish by including the provision.

“I don’t think a third is workable,” he said.

Some lawmakers believe that the one-third rate may be similar to what is being offered the state’s three largest producers in a North Slope stranded gas contract that Murkowski says he plans to release May 10. That contract is meant to lead to a $25 billion gas pipeline to Canada and markets in the Midwest.

“There’s a lot of speculation now that this is going to be close if not the same as the contract,” said Sen. Gene Therriault, R-North Pole.

All the models the Legislature had run before had been on oil, which the net-profits tax originally dealt with. When this provision appeared in the Senate Finance Committee, it became apparent that gas was being added to the profits tax, Therriault said.

He said lawmakers wanted to make sure they knew the potential impact, which is why the Econ One models were requested.

Murkowski’s lead petroleum consultant, Pedro van Meurs, said the different value for gas was in line with what other oil-producing countries were doing. He would not say whether he thought the one-third rate was a good idea, but he agreed with the concept.

Therriault said the value of gas is two-thirds that of oil in the state’s severance tax now. That makes more sense, he said.

Senate President Ben Stevens, R-Anchorage, said the provision was added with Cook Inlet gas in mind, not the North Slope.

But the tax would apply statewide, Therriault said.