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Sponsor Statement for HB 190
Alaska Natural Gas
Pipeline Incentive Act

An Act levying and collecting a tax on certain North Slope natural gas in place if certain requirements relating to its sale and delivery are not met, and imposing a limit on the Department of Natural Resources that relates to the issuance or extension of oil and gas leases containing natural gas that is capable of production in paying quantities; and providing for an effective date.

For many years, the State of Alaska has relied heavily on the production of oil to foster its livelihood, provide opportunities for its people, and generate revenues to ensure continued prosperity. We have all seen and enjoyed the positive effects of oil development. However, low oil prices, reduced production, and potential field depletion adversely affect the state's ability to provide a secure future for its people.

As of the end of the last century, December 31st, 1999, through political subdivisions of state and local governments, the people of Alaska accrued roughly $55 Billion dollars in taxes, royalties and settlements from the oil industry. In addition, the industry has provided enormous employment opportunities, infrastructure growth opportunities, and a host of other positive benefits to the state.

While Alaska has enjoyed many positive benefits from production of its oil resources, the industry has profited greatly as well, earning approximately $65 Billion dollars in pre-federal tax revenues from Alaskan operations. The industry's Alaskan operations also have provided for their West Coast refinery and petro-chemical feed stocks.

As we face an enormous budget deficit, we must look beyond our reliance on oil production, budget cutting, and taxation as the only means of ensuring a long-term fiscal solution. It is incumbent upon the leaders of this state to recognize that further resource development is critical in order to secure an additional and substantial revenue stream to the State of Alaska.

Conservatively, 35 trillion cubic feet of natural gas reserves have been identified on the North Slope, and estimates of 100 tcf of reserves yet to be proven are realistic. The failure of the Legislature to insist upon commercialization of this vital resource as a valuable commodity is in direct conflict with the provisions of the Constitution of the State of Alaska.

Article VIII, sec. 1, Constitution of the State of Alaska, provides that it is the policy of the state to encourage the settlement of its land and the development of its resources by making them available for maximum use consistent with the public interest.

Article VIII, sec. 2, Constitution of the State of Alaska, requires the legislature to provide for the utilization, development, and conservation of all natural resources belonging to the state, including land and waters, for the maximum benefit of its people.

The resource of greatest value associated with economic growth now available to Alaska is North Slope natural gas.

The past months have shown a critical need for new supply to the "Lower 48", and recently, representatives of the Asian gas markets have expressed immediate interest in contracting for the purchase of North Slope natural gas.

Despite repeated efforts on the part of Alaska's Legislature, Administration, and Municipalities to encourage an Alaskan gas pipeline, the producers continue to favor their competing projects around the world. The latest news of the involvement of Phillips Petroleum and Chevron in projects to bring LNG from Australia to the U.S., and the possibility that BP will be in a position to bring LNG to the U.S. market from Egypt, further exemplifies the propensity of major leaseholders on the North Slope to subordinate an Alaskan project to their holdings elsewhere for reasons of internal best interest economics.

The time has come for Alaska's legislature to send a clear and compelling message to the producers: we will meet our constitutional obligation and insist that Alaska's resources be developed in a manner that is in the maximum best interest of the people of the State of Alaska.

To that end, HB 190 will levy a tax on North Slope natural gas in an amount that will provide an economic incentive to the producers to expedite an Alaskan project.

Firstly, HB 190 encourages development of our resources by applying a tax rate of $.02 per mcf to the natural gas resource under lease on the North Slope if certain performance benchmarks are not met.

The gas reserves tax does not take effect if the leaseholders secure specific benchmark requirements. By December 31, 2003, the leaseholders must have signed agreements to sell a minimum of 500,000,000 mcf per year for at least a 20 year period. If the 2003 benchmark is met, the gas reserves tax does not take effect until December 31, 2007. On this date, if North Slope natural gas is delivered to market, the gas reserves tax is removed from the statutes. These benchmarks are reasonable and achievable.

Secondly, HB 190 inserts specific language into leases upon initial contract, renewal or transfer of leases, which requires the sale of natural gas when certain conditions are met. The current lease language requires only general efforts for development. We must be more specific regarding reasonable expectations for natural gas development.

Finally, HB 190 provides for an option under which North Slope leaseholders may surrender rights held in land under lease in order to avoid liability under the act.

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