A Citizen’s Guide

Part 2 of 3

What might legislators be gambling on if in the next few days they approve, without adequate knowledge, a new oil taxation system?

What might they be gambling on if this summer they approve, without sufficient knowledge, a contract between the state and BP, Exxon Mobil and ConocoPhillips on fiscal terms for construction of a natural gas pipeline?

Quite a bit.

Alaskans should not be ignorant of this and the unknowns that confront their senators and representatives in the oil and gas debate, because those unknowns present a risk to Alaska. That’s why Alaskans should insist that their legislators make decisions about oil and gas with as much confidence as possible.

And confidence comes with taking the necessary time to understand the issues, which for many legislators and most of the public are incredibly foreign and complex.

The risk and the unknowns cannot all be eliminated, however. Risk is inherent on matters of this magnitude and that are subject to the influences of global political and economic events.

But legislators can work to reduce the uncertainty to a level that raises confidence that the hoped-for outcome of these major decisions will, in fact, occur.

The list of question marks is a long one and has direct bearing on what expectation—some would say pressure—Alaskans should allow to be placed on their legislators to act quickly on the oil tax and the gas pipeline agreement, once they receive that agreement from Gov. Frank Murkowski.

The governor, at a news conference last week, said he believes legislators don’t need any more information to act on the oil tax legislation, which he proposed back in February and which has been modified several times by the Legislature’s various committees.

“We’ve provided the Legislature with an abundance of material supporting the [oil tax] proposal, and saying the Legislature does not have enough information to vote, I think, is incorrect, especially in light of the weeks that the Legislature has devoted to educating themselves about this process.”

The list of unknowns facing legislators shows, however, that they should not feel pressed for time, even with Tuesday’s scheduled end of the regular legislative session just days away. The oil tax debate, which is at the forefront now, should be carried into a special session.

So what are these unknowns that legislators will be gambling on if they don’t have the requisite knowledge and comfort level?

They will be gambling that the tax rate and incentive system they agree to for oil and gas is the one that meets the mandate of Article VIII, Section 2 of the Alaska Constitution that requires that legislators provide for the development of the state’s resources “for the maximum benefit of its people.”

They will be gambling that whatever combination of tax rates, credits and deductions they come up with for oil won’t, in trying to achieve that constitutionally mandated maximum benefit, actually reduce the industry’s level of investment in the state and thereby harm the state’s overall oil revenue picture.

They will be gambling that they are setting the “right” tax rate on oil without having seen how it relates to the gas pipeline contract, which the governor will not provide them until after they approve an oil tax.

They will be gambling that they can find, after approving a new oil tax plan, the political strength to raise the oil tax rate a second time if upon seeing the gas line agreement they decide that the previously approved oil rate is not high enough. This is the “second bite of the apple” that the governor and his people so often say the Legislature will have prior to locking the new oil tax system into the gas line contract for 30 years.

They will be gambling that the state does not need to set a minimum tax rate to guard against the potential situation, outlined by consultants, of the new tax system generating less revenue than the existing system if the price of oil were to plummet. At prices of just above $20 per barrel, the governor’s original proposal and the one approved by the Senate bring the state zero tax revenue. The current system, which has been in place for many years, would bring Alaska about $256 million at that price. It’s true that few believe the world will ever see prices of $20 per barrel again, but it’s a gamble nonetheless.

They will be gambling that the chosen combination of rates and incentives is of the right blend to keep BP, Exxon Mobil and ConocoPhillips willing to sign a fiscal contract for construction of a North Slope natural gas pipeline.

They will be gambling that events won’t occur that will make them regret agreeing with the governor to lock the new oil tax system into the gas pipeline contract for 30 years without a provision allowing the state to reopen the contract on its own under certain circumstances.

They will be gambling that the oil companies will actually build the gas pipeline once they receive the stable and unchangeable oil and gas tax system they have been seeking. The oil companies, after all, will always have the final say on whether they want to build the pipeline.

They will be gambling that the gas tax rate they choose is the correct rate since there has been little discussion and analysis of it to date.

They will be gambling that the new taxation system will work as described and deliver Alaska the projected revenue year after year and won’t fall prey to lawsuits successfully challenging, at potentially great cost to the state, the regulations that are written to implement that new tax system.

They will be gambling that they are making the correct determination on a fundamental matter: that the natural gas of the North Slope is actually economically stranded, a classification that, if correct, is what allows the oil companies—or any other qualified entity—to seek special fiscal terms from the state under the Stranded Gas Development Act. Legislators who favor the oil tax proposal supported by the governor and BP, Exxon Mobil and ConocoPhillips because they fear losing the interest of those companies in building the gas pipeline have—and they may not realize this—essentially agreed with the contention that the gas is indeed stranded. But some argue the gas is not stranded, that the gas is quite marketable now without state assistance of the Stranded Gas Act, and that BP, Exxon Mobil and ConocoPhillips should be forced to market or develop the gas, depending on the situation, or relinquish their leases so that others can have the opportunity.

The list is long and most likely not comprehensive.

On issues in which “certainty” is a word tossed about with regularity, the uncertain nature of many parts of the debate about oil taxes and the proposed natural gas pipeline is one of the few sure things. Alaskans must not lose sight of that fact and must demand that their legislators take the time to ensure public confidence in their decisions.