Many Alaskans think a natural gas pipeline to the Lower 48 would give the state new riches in the form of taxes and royalties.
Don't bank on it, some state senators say. In fact, under some scenarios presented to the Senate Finance Committee Wednesday, if the big gas pipeline is built, and gas starts to flow, the state could make nothing off the gas and might even see a drop in oil revenue.
The loudest alarm is coming from Sen. Bert Stedman, a Republican from Sitka who chairs the Senate Finance Committee, but he's not alone, and many lawmakers are paying attention to hearings he's conducting to get to the bottom of the situation.
"Two billion," Stedman told reporters recently. "That's how much is on the table, per year, ballpark. Two billion, that's to the red, by the way. That's not added to the treasury. That's out the treasury's door."
The hit comes when oil prices are high and natural gas prices are relatively low -- because the complicated current tax formula links the two values.
In one example presented Wednesday, if oil prices were $120 a barrel and natural gas was $8 a unit, at a certain level of production the state would collect $5.5 billion under current law. That's less than the amount on the oil alone. If oil and gas profits were taxed separately instead, the state treasury would get $7.5 billion.
"Why would we do this?" Stedman asked state Revenue Commissioner Pat Galvin on Wednesday.
It's up to legislators, Galvin said, but the idea under the Alaska Gasline Inducement Act of 2007 is for the state to take on some of the economic risk so that the project is more appealing to a company that is evaluating whether to put tens of billions of dollars into an Alaska gas pipeline.
"That's what scares the chairman," Stedman responded. If the tax structure stays as is, he said at one point, "the public is going to throw me out along with everybody in the building."
10 YEARS OF FAVORABLE TAXES
Legislators haven't debated the gas-tax issue in depth before now because, without North Slope commercial gas production, there hasn't been much natural gas to tax.
But now two competing gas pipeline projects are in early stages, and this year both plan to seek commitments from oil companies to ship their North Slope gas through their pipelines, a period known as "open season." One project, led by TransCanada Corp. that also includes Exxon Mobil, is financially backed by the state. The other is led by BP and Conoco Phillips.
Some legislators feel an urgency to change the law, perhaps by separating the oil and gas taxes. They worry the oil companies will be able to lock in that favorable tax structure for the first 10 years that natural gas flows, assuming a pipeline is ever built. Under the Alaska Gasline Inducement Act, the gas taxes for 10 years are linked to whatever rate is in effect as of May 1, according to Galvin.
But Galvin also told lawmakers the Legislature can change that law or enact new legislation, either before or after May 1. When AGIA was passed, there was an expectation the state would keep true to it, but it's not a binding contract between oil companies and the state, he said.
WHEN TO ACT?
Some legislators said in interviews it could be messy to change the law after oil companies make commitments to ship gas in the open season.
"At the minimum, we wouldn't be on the moral high ground," said Sen. Joe Paskvan, a Democrat from Fairbanks and a lawyer who is sitting in on weeks of Finance Committee oil and gas hearings at Stedman's request. He said Wednesday that the Legislature should act, at least by separating the oil and gas taxes, and do so this legislative session, before the May 1 trigger.
"It's not life or death, but there are billions of dollars at stake, potentially," said state Sen. Johnny Ellis, D-Anchorage and a Finance Committee member. The issues are being sorted out methodically and there's not yet a clear solution, he said. The committee isn't even considering a particular bill yet.
Other senators have been popping into the hearings too, including Senate President Gary Stevens, a Republican from Kodiak, and Sen. Hollis French, a Democrat from Anchorage who said lawmakers need to hear from oil producers but it sounds like any problem with taxes could be repaired later.
Rep. Bill Stoltze, a Republican from Chugiak who co-chairs the House Finance Committee, said he hasn't yet studied the issue but talks to Stedman about it regularly over early morning coffee and is glad his colleague is taking a look. "Anything that has potential exposure to the state, by God, I want to totally vet it," Stoltze said. "What is the worst we are going to have if Bert is alarmist? Well then, we've had a few hearings. But if he's right, by God, we sure want to know."
Copyright (c) 2010, Anchorage Daily News, Alaska. Distributed by McClatchy-Tribune Information Services.