A Citizen’s Guide

JUNEAU–State lawmakers Wednesday took up one of the most controversial parts of the proposed pipeline deal, the agreement to keep oil and gas taxes the same for decades.

In a meeting of the lead committee on natural gas development, administration officials claimed that offering fiscal certainty was common around the world and a critical component of the proposed contract.

“This project has an immensely unusual risk profile,” said Pedro van Meurs, Gov. Frank Murkowski’s lead adviser on oil and gas.

Lawmakers voiced concerns about locking in the taxes, demanded to know what the state got in return, and questioned whether the current provisions were necessary.

“It appears to me that the public is rejecting the original notion of certainty,” said Sen. Con Bunde, R-Anchorage.

Legislators are in Juneau considering changes to the state’s oil production tax, the proposed gas pipeline contract, and related legislation during the summer’s second special session.

At the meeting, van Meurs argued that because the project to develop North Slope gas reserves is so large and so risky–in part because of the uncertainty of long-term gas prices and cost overruns–that the project needs to offer great benefits to investors if things go well.

“If costs are high and prices are low,” he said, “this project would be the worst project in the world.” The impact would put a significant dent in the corporate performance of the three oil companies, BP, ConocoPhillips and Exxon Mobil.

If the pipeline is built on budget and gas prices stay high, it would be the most profitable project in the world, he claimed.

“And you really don’t know what will come,” he said.

The only way to attract investors to the project is to eliminate the risk that if things turn out well, the state will not eat into the companies’ profits by changing its tax laws, he argued. Without fiscal stability, the project is not attractive.

Van Meurs said it was “normal practice” around the world to grant fiscal certainty on oil and gas together and claimed that a 30-year lock-in on oil was not an “unusual period of time.”

The proposed contract would also freeze gas taxes for 45 years.

Sen. Gary Wilken, R-Fairbanks, questioned what the state got in return for agreeing not to raise taxes.

He said over the last few months, he’s had essentially the same conversation with hundreds of Fairbanksans. They note the lock-ins and ask, “What do we get for that?” Wilken tells them they get a gas line. They ask how he knows that, and when he begins to explain, they say, “It’s a ‘Trust me.’”

Without being able to give a solid answer, Wilken said he feared an uncomfortable campaign season and the passage of the ballot initiative to tax gas reserves, neither of which he wanted.

Wilken is one of only 10 lawmakers not up for re-election this year.

Jim Clark, the governor’s chief of staff and chief pipeline negotiator, responded.

He said the honest answer to Alaskans is, “We cannot say with certainty that signing this contract will get us a project.”

The contract is a step in the process, he said, and one that the administration believes will move the project forward.

Wilken did not challenge the notion of fiscal certainty, but asked for some sort of “benchmark” required of the oil companies in return.

Sen. Fred Dyson, R-Eagle River, seconded Wilken’s concerns and asked whether the state could strengthen its ability to push the project forward.

“Having something firm in there will give the people of Alaska more comfort,” he said.

Dyson noted criticism saying the state’s “club”–the ability to request to terminate the contract if it believes the companies are stalling–was “so Draconian that we’d probably never use it.”

Van Meurs and Clark defended the requirements to perform, which they argued were stronger than others worldwide and had similar effects as penalties. They acknowledged the broad concerns over fiscal certainty and said they would consider changes to the lock-ins, such as those proposed during the last special session, but stood by the decision to provide certainty on both gas and oil.

“There are definitely different ways of doing this,” said van Meurs, “as long as we stick with the basic concept.”

Van Meurs was candid in explaining why it wouldn’t work to grant certainty only as long as the companies needed to gain a return on their investment. To compensate for the risk, the companies needed assurance of “extra profits” well over a reasonable rate of return if the project went well, he said.

Van Meurs also described the state’s granting of fiscal certainty as a benefit to the state and “fundamental to an exploration strategy” that would hopefully fill a gas line for generations. He argued that predictable tax rates would make the state more attractive to oil companies.

“There is a benefit for Alaska if we give fiscal stability on oil,” he said. “It’s not just a loss.”

Representatives from the oil companies described fiscal stability as “essential” and “critical” to the project.

Dave Van Tuyl of BP presented a long list of changes to the state’s oil and gas taxes before and after construction of the trans-Alaska oil pipeline to show that it was not unreasonable to want protection from future tax changes.

“There has been a history of tax changes,” he said.

Sen. Kim Elton, D-Juneau, who had claimed before that the Legislature had not been “rapacious” in its taxing of resources, said he was distressed by Van Tuyl’s “litany” of tax changes, which he said came from lawmakers’ efforts to do the best for the state.

Van Tuyl agreed, when Elton asked, that BP’s history with the state had been “mutually beneficial.”

Attorney General David Marquez presented his opinion that locking in the taxes was in fact constitutional and argued that the administration and Legislature would be shirking their duties if they dropped the project out of concern it wouldn’t survive a court challenge.

The committee will continue its work today.

Stefan Milkowski can be reached at smilkowski@newsminer.com or 459-7577.