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Freezing of taxes may kill Alaska gas deal


June 01, 2006

ANCHORAGE, Alaska - A key component of Gov. Frank Murkowski's proposed natural gas pipeline contract - freezing oil and gas tax rates for 30 years or more - has become a lightning rod for lawmakers.

It's an issue so touchy that it might prove make-or-break for the contract.

Here's how Murkowski and executives for Exxon Mobil, Conoco Phillips and BP see the world: How can the oil companies be expected to bet billions of dollars on a risky gas pipeline when lawmakers later could zap them with billions in unexpected tax increases?




That's what the oil executives mean when they talk about "fiscal certainty."

But many in the Alaska Legislature - Republicans and Democrats alike - see the world differently. They believe the governor is asking them to cede away one of their main powers: the power to tax.

And they won't do it, predicts House Speaker John Harris, R-Valdez.

Under state law, the governor can negotiate a contract setting tax and other terms for oil companies should they decide - after a few years of engineering and permit applications - to build a pipeline from the North Slope gas fields possibly as far as Chicago, 3,640 miles away.

Lawmakers, however, have final say on the contract.

It would be a bold political power play, but Murkowski could send lawmakers a contract that would freeze oil taxes for 30 years and gas taxes for 45 years, as he has proposed. Under the law, legislators can't change the details of the contract - they can only vote yes or no.

And how would they vote if the tax freeze were included?

"A resounding no," Harris said. "I don't mean maybe no. A resounding no."

He added: "The feeling among all members, or most members, at least, is that would be a death knell for the whole process. That would be a slap in the face of the Legislature. And an abuse of power by the administration."

Most likely, it'll be weeks or even months before state lawmakers take a vote on the contract. Administration officials are traveling the state now, holding public hearings on the 460-page draft contract the governor released May 24. Hearings are scheduled for Anchorage on Friday and Saturday at the Egan Center.

State lawmakers, now meeting in special session, are preoccupied just with the state's oil tax, a major source of state revenue.

Murkowski and lawmakers agree that, with oil prices running at historic highs, the state needs to overhaul its tax code to collect a greater share of petroleum profits.

The governor wants a 20 percent tax on oil profits that companies earn in Alaska - and he wants to write that rate into the gas pipeline contract.

Lawmakers have signaled they want a higher oil tax rate. The Senate has passed a 22.5 percent rate, plus a provision to dial up the rate slowly as oil prices climb. The House likely will consider its own oil tax bill this weekend, Harris said.

Even if lawmakers wanted to set tax rates in stone in a contract - thus binding future legislatures to their action - they might be unable to because of the Alaska Constitution.

One section of the constitution says that the "power of taxation shall never be surrendered." But other parts seem to allow for tax exemptions if lawmakers so choose, according to a May 10 legal opinion from Attorney General David Marquez.

Marquez and oil company executives note that lawmakers wouldn't simply be waiving taxes on oil and gas. Rather, for those oil companies signing on to the gas pipeline contract, the state would be replacing the tax with a "payment in lieu of taxes."

In short, the state would still be collecting a lot of money, whether the levy was called a tax or a payment in lieu of tax, Marquez wrote.

Oil company spokesmen insist the type of contract the governor is proposing is used throughout the world.

For example, BP said it and its partners on an oil pipeline running 1,100 miles through Azerbaijan, Georgia and Turkey - a megaproject BP calls "one of the great engineering endeavors of the new millennium" - has a contract that locks in taxes for 40 years.

On the other hand, some countries, bedazzled by today's high oil prices, are infuriating oil companies by changing the rules unilaterally - and drastically. Venezuela has moved to take control of four oil projects. Bolivia recently nationalized its natural gas industry. Ecuador seized one U.S. oil company's facilities.

In Alaska the question remains: Do lawmakers even want to go there? Hold taxes at a set rate for decades? Five times in the last 30 years, legislators have changed the very oil tax that Murkowski is proposing to freeze.

One possible solution that's gained some traction with some lawmakers is the "reopener" idea. That's a provision through which, periodically, the state could go back into a contract and review whether to adjust tax rates if, say, the price per barrel were to soar even higher than the $70 level seen recently.

But prices can go down, too, and reopeners don't provide much comfort to oil companies, said Bob Davis, a Houston-based spokesman for Exxon.

"We want predictability," he said.


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