A Citizen’s Guide

To get more natural gas for a pipeline to the Lower 48, the Murkowski administration has proposed lower production taxes on gas–but companies that own gas south of the Brooks Range wouldn’t qualify.

The Brooks Range divide is one small part of the administration’s proposed gas pipeline contract with the major North Slope petroleum producers, which is now before the Legislature in special session.

Doyon Ltd., Interior Alaska’s regional Native corporation, objected to the provision in a public letter last month.

Doyon believes it could have trillions of cubic feet of natural gas under its lands in the Yukon Flats, located south of the Brooks Range. Company officials think that gas, if its delivered to the proposed line to the Lower 48, should be offered the same tax benefits as any found north of the range.

“If we have to put our gas in at a higher tax rate, that puts us at a disadvantage,” said Allen Todd, Doyon’s attorney, on Friday.

Top administration officials, also contacted Friday, didn’t jump to defend the language in the bill. They said it was a remnant of their process, which has focused on getting North Slope gas to market.

“There’s nothing that we’re doing that is meant to be exclusionary,” said Mike Menge, state commissioner of natural resources.

Ken Griffin, deputy commissioner, said the Legislature could modify the provision before passing the bill.

The administration’s proposed “Uniform Upstream Fiscal Contract Act” would offer reduced taxes, for a lengthy period, to any qualified gas owner that signs a contract with the state promising to deliver gas to the pipeline and to comply with other terms.

To qualify, the gas must be “located in the state north of 68 degrees North.” That line of latitude runs east-west roughly along the spine of the Brooks Range.

“The effective production tax rate will be 7.25 percent for that (North Slope) explorer,” Doyon said in its letter. “In contrast, a Yukon Flats leaseholder who is not eligible for the uniform upstream fiscal contract will pay a production tax rate on gas under current law of 10 percent.”

Todd said Doyon officials aren’t sure why the administration proposed the 68-degree line.

“We’ve heard different rationales and none of them have held together,” he said.

Menge said the language dates back to federal legislation, which provided advantages for developing North Slope gas and defined it as that found north of the 68th parallel.

“Commercialization of the line is going to be based on North Slope gas,” Menge said.

Nothing in federal law requires the proposed gas pipeline to carry only gas from the North Slope, though, he said.

If Doyon finds gas in the Yukon Flats, “we’d certainly take that into consideration,” he said.

Todd said Doyon has talked with the major North Slope producers and found them receptive to Yukon Flats gas.

Griffin, the deputy commissioner, said the administration’s main concern is providing incentives to get gas in the pipeline.

The Legislature could decide that any company that wants to develop natural gas anywhere in the state should get the tax advantages and “fiscal certainty,” he noted. But that wouldn’t necessarily help get gas in the pipeline, he said.

If the Legislature tried to extend advantages to all gas producers, “I think the administration would go in and would say ‘Anyone who wants fiscal certainty should be delivering gas to the pipeline,’” Griffin said.

Todd said that would be Doyon’s intent if it finds gas. Building its own line from the Yukon Flats to Fairbanks or some other market is “not realistic,” he said.

According to Doyon’s letter, the Yukon Flats area could contain 5 trillion to 15 trillion cubic feet of gas and the Nenana Basin another 3 to 5 trillion, compared with the 35 tcf of proven reserves on the North Slope. And at least some of Doyon’s gas would be closer to the pipeline than gas in the National Petroleum Reserve-Alaska.

Like other gas explorers without an ownership stake in the pipeline, Doyon also is worried that the big North Slope owners won’t make space for their smaller competitors.

Doyon acknowledged that the Federal Energy Regulatory Commission has asserted authority to force the owners to expand the line. Doyon could also try to buy space, or it could wait until the North Slope reserves decline enough to create some room in the line.

“None of these options provide much, if any, certainty to independent explorers that they will be able to acquire reasonably priced capacity when they need it,” Doyon’s letter said.

Even so, Doyon officials are not enthused about the administration’s attempt to address the concern in the contract by outlining how the state could obtain a line expansion. They recommended deleting that section of the state contract.

Todd said the company would rather just stick with the FERC’s rules.

“Our concern with the state’s proposal is it would add a layer of complexity that really isn’t needed,” he said.

Washington, D.C., reporter Sam Bishop can be reached at (202) 662-8721 or sbishop@newsminer.com. News-Miner reporter Stefan Milkowski in Juneau contributed to this article.