Gas line construction could cut Alaska oil tax revenues by hundreds of millions

Pipeline carrying oil from Alaska's North Slope to Valdez, Alaska. (iStock)
Pipeline carrying oil from Alaska’s North Slope to Valdez, Alaska. (iStock)
FAIRBANKS — State oil income could drop anywhere from $250 million to $375 million a year during gas pipeline construction, according to legislative consultants.

Reduced oil tax revenue could total $1.5 billion over four years, as field development costs at the North Slope’s Point Thomson field kick in. Those costs are deductible against state oil taxes, both for oil and gas production.

The administration of Alaska Gov. Sean Parnell rejected a request by Anchorage Rep. Geran Tarr for details on how much the Point Thomson project would cost the state in lower tax receipts, saying “information concerning field development costs for Point Thomson is not public.” But consultants for the Legislature and the administration have both provided analysis showing that developing Point Thomson, a project led by Exxon Mobil, would cut state oil income during gas pipeline construction.

The administration said there would be a reduction in oil taxes, but it “would be more than offset” with income from natural gas and natural gas liquids once the project is moving petroleum. The administration did not provide numbers to back up that statement.

In a presentation last week, a consultant for the Legislature, Janak Mayer of enalytica, said development costs — mostly at Point Thomson — are expected to range up to $4.5 billion. “That’s an assumption on what’s required for additional gas work development,” he said. Point Thomson, about 60 miles east of Prudhoe Bay, contains a quarter of proven North Slope gas reserves.

Deductible expenses

Mayer said there would be a “state contribution” to help pay for that gas development through lower oil taxes. “The way the legislation is written at the moment, all upstream costs, regardless of whether they are for oil or for gas, are deductible against the oil production tax,” he said.

“In our analysis we’ve shown what the possible impact of that could be. You should expect that the state will be receiving, in those years that construction is going on, lower oil tax revenues to the tune of 35 percent of the upstream costs,” he said.

His presentation said oil revenues would fall about $250 million a year from 2020-2024 if Point Thomson development costs are in the $3 billion range. If Exxon spends $4.5 billion on Point Thomson, the annual reduction for those four years would be about $375 million. He also said that it is far too early to know what the real numbers will turn out to be as the engineering work on the pipeline has not taken place.

Anchorage Rep. Mike Hawker asked: “Has anyone done an analysis of exactly how much the state is going to be paying to develop, to do the infrastructure development for the upstream of Point Thomson that is not a state asset, that is not part of this project, that is in fact purely the asset of the producers?”

Mayer said, “Think about it as 35 percent of around $4 billion. But again, we’ll have a much better view of that down the track.”

Hawker said he believes that ultimate cost of developing Point Thomson could exceed $4 billion, perhaps reaching $10 billion.

Rejecting arguments

Natural Resources Commissioner Joe Balash and Revenue Commissioner Angela Rodell testified before the House Resources Committee Monday, taking issue with critical remarks offered last week by legislative oil and gas consultant Roger Marks, who identified several issues in the proposed gas pipeline agreement that he said could prove expensive.

Rodell and Balash defended the deal with TransCanada negotiated by the administration on various fronts.

“TransCanada is not just a bank in this context. What it is they’re bringing to the table is far more than what you can get at Wells Fargo,” Balash said, adding that he thinks the arrangement is a good one for the state. He said there may be only three or four companies that could “get in the door” and compete with TransCanada if a decision were made now to seek competitive bids. There are other problems as well, he said.

“Everybody’s seen TransCanada’s terms,” Balash said. “So how competitive is the process going to be?”

Rodell said she did not agree with Marks on state bonding capacity and whether a gas shipping commitment would be official state debt. One argument for the TransCanada arrangement is that the state could not afford to pay for its share of the pipeline and meet other public needs. Marks said the debt to pay for shipping gas would count against state debt, but Rodell said that’s not the case.

She compared the requirement for the state to meet the shipping contracts to its obligations for pension retirement systems. “Look at the employment contracts under PERS and TRS and the commitments we’ve made there. And we don’t consider that to be necessarily a full-on liability of the state,” she said.

She also said that tax-exempt bonding through the Alaska Railroad is not likely to be feasible, an approach suggested by Marks as a way to lowering costs to consumers. She said an in-state gas line is one thing, but the IRS is unlikely to sign off on tax advantages for a project controlled by private companies that exports most of the gas.

Homer Rep. Paul Seaton asked about comment by Marks suggesting that the state should wait until a project is sanctioned before investing. Acting now would put $600 million at risk, Marks said, adding that the oil companies are better suited to take the risk.

Balash said that having a say on locations in Alaska where gas could be removed and making sure that the pipeline can be expanded are reason enough for the state acting sooner. Seaton said those appear to be nominal issues that would be addressed by the companies and he asked for a written report on the risks vs. rewards of investing now or later.

“I’m not sure if we’re supposed to just trust the companies to do everything that’s right and best for us or if we’re supposed to be an ‘owner state’ and actually look out for our own interests,” said Balash. “That’s the angle that we’re looking at this from.”

He said it would be hard to put an exact dollar value on the importance of early involvement, but “we will certainly outline the benefits of participating early versus later.”

Dermot Cole can be reached at dermot(at) Follow him on Twitter at @DermotMCole.

Related Links:

Canada: Oil and gas consultations in Canada’s eastern Arctic next week, CBC News

Greenland: Statoil awarded exploration licence off Greenland, Eye on the Arctic

Norway: Oil, Industry and Arctic Sustainability, Deutsche Welle’s Ice-Blog

Russia:  Russia sees Wrangel Island oil and gas potential; Greenpeace eyes an eastern Arctic front, Alaska Dispatch

United States: Shell calls off 2014 oil exploration in Arctic Alaska, Alaska Dispatch

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