Computer model will help legislators plan for gas tax changes

In anticipation of changes to the way Alaska taxes natural gas, lawmakers are looking to a new computer program that models the ways in which various development, transportation and economic scenarios could affect state coffers.

Created by consultant David Wood, the program models likely results of the state's take for a variety of multi-year development scenarios for natural gas reserves under wide-ranging economic conditions.

A potentially powerful new tool in lawmakers' planning arsenal, the modeling program is expected to help legislators weigh tax schemes Gov. Sean Parnell's administration may present in the future as plans move forward on the two proposals for large-diameter natural gas pipelines. TransCanada Corp., with the Alaska Gasline Inducement Act license and $500 million from the state, is working on such a pipeline. So are BP and ConocoPhillips, partnering as Denali, The Alaska Gas Pipeline.

While there isn't a tax change on the table right now, pipeline proponents haven't shied away from saying producers will want changes to the state's fiscal terms -- including taxes -- before they'll commit gas to a pipeline during an open season. Both projects are planning open seasons in 2010, a process during which the industry and the state can expect to get a clearer picture of the capital costs -- a key component of any discussion of fiscal terms.

On the other hand, Parnell says the state doesn't need to alter gas taxes until producers can come to the table with hard numbers, likely after an open season.

"The governor has been pretty clear that he doesn't see the need for discussing changes to the state's fiscal system until we see more alignment with the projects," state Department of Revenue Commissioner Pat Galvin said. "Until you have a project that has established economic terms, it's only speculation to talk about how the tax system affects production of gas."

Just the same, lawmakers said the program, along with expert advice from consultants Dan Dickinson and Wood, will help prepare them for talks on the complicated issue.

"The program is intended to help us with fiscal design, but I think it's also going to help show the Legislature and the public the complexity of this (pipeline) project," Sen. Bert Stedman, R-Sitka and chairman of the Senate Finance committee, said. "A $30 billion to $40 billion infrastructure project is so immense and can go upside down so easily."

As a starting point, lawmakers could use the program during the next session to consider breaking apart a linked oil and gas tax and structuring a separate gas tax.

Under Gov. Frank Murkowski's tax proposal, Alaska was due a 20 percent in-kind royalty as its share of production. But under Gov. Sarah Palin's tax regime, Alaska's Clear and Equitable Share, oil and gas are linked, rated on their comparative energy value.

By linking the two, ACES balances the state's take with incentives for producers to develop less valuable gas, supporting plans for a gas pipeline, Galvin explained.

The computer program variables may further an understanding of how the tax structure might respond under changes to the ratio of oil and gas prices. The ratio of gas to oil prices was one to 13 for seven of the past 13 months, but in August went far afield, to one to 22.5. Taxed together, low gas prices could dilute the economic boon to the state expected from high oil prices, Stedman and others caution.

"There was no need, under the original PPT discussion, to be bogged down into the issue of BTU equivalency," Stedman said. PPT, or Petroleum Profit Tax, was Murkowski's plan. That was before the prospect of a gas pipeline releasing Alaska's stranded resource. "Now, it is very relevant. We're not looking at gas in-kind, so we have to rely on royalty tax structure to drive our economic value."

Palin's administration acknowledged at the time that the economic impact of ACES was only analyzed for oil; at that point, Alaska didn't have North Slope gas production. The administration planned to review the impacts on gas once more was known about production costs associated with commercializing North Slope gas.

Stedman said the program could prove helpful in deciding what to do about gas taxes, although he cautioned that the complexity could lure some "down too many rabbit trails."