 Federal Gas Tax Credit Good for Consumers; Similar to Canadian Assistance June 06, 2002
"Governmental incentives for the domestic oil industry are a common part of the landscape in Canada," says the analysis prepared by the Governor's Washington, D.C., office in conjunction with energy consultants. "In their eagerness to advance their own interests, they have ignored the reality that both the national government of Canada and the governments of other Canadian provinces provide special economic support to both developing and established oil interests, including protection against swings in commodity prices." The Alaska governor released the four-page analysis as he headed Wednesday afternoon to a meeting of western Canadian premiers and the U.S. ambassador to Canada and the Canadian ambassador to the U.S. Knowles plans to tout development of the Alaska Highway natural gas pipeline project, which would create thousands of jobs in Alaska, Canada and lower 48 states and produce billions of dollars in revenues for the U.S. and Canadian treasuries. The Governor met Tuesday in Anchorage with Alberta Premier Ralph Klein and welcomed Klein's support of two pipelines to carry Arctic natural gas to thirsty North American markets. "Premier Klein wisely pointed out that North American demand requires Arctic gas from both Alaska and Canada and in fact, much of the gas from the MacKenzie Valley likely will be used to assist in the development of oil sands in Alberta," Knowles said. "That's another reason why America and Canada need two pipelines-one to carry Alaska North Slope gas to North American markets and one to tap smaller gas reserves in the Northwest Territories for domestic use." The governor's office analysis says that at the start of operation, the Alaska Highway gas pipeline will ship 4 billion cubic feet per day - almost 7 percent of domestic consumption - all from safe and secure U.S. fields. This new source of supply should also help reduce natural gas prices to consumers in the United States and Canada. To encourage development of this vast resource, the U.S. Senate's Alaska Gas Pipeline Act of 2002 provides a potential tax credit for Alaska natural gas that will materially enhance the prospect for an Alaska gas pipeline. It is a potential tax credit because it is available only if natural gas prices fall below predicted levels. In addition, any credits used when prices are low would be repaid if prices exceed a ceiling in the legislation. "Though limited, this potential credit materially reduces the risks of investing in the pipeline associated with wide swings in natural gas prices," the report says. "Reducing that risk is a key step towards securing the financial commitments that will make feasible this unique, and uniquely expensive, pipeline. America will be more secure, too, because gas from that pipeline will offset at least some of the dramatic growth in demand for natural gas that is predicted for Lower 48 markets." Some Canadian interests and proponents of a less desirable route traversing the Beaufort Sea have criticized the credit, calling it a subsidy that is unfair to Canadian gas companies. A study prepared for the government of the Northwest Territories by the energy consulting firm Purvin & Gertz has been used to support these claims. "They ignore the beneficial impact to millions of consumers from the credit - a lowering of natural gas prices in the U.S. and Canada," the report says. "More broadly, they also ignore that governments throughout the world typically enter into special concessions and support incentives for their domestic petroleum industries. In short, the commodity risk tax credit is not out of character with what governments do to spur development of natural resource industries that will benefit their populations, businesses and economies." The report states that the "lower sustained market price" from a successful Alaska gas project could delay Mackenzie Delta gas production for years, but Knowles noted that a lower sustained market price means lower gas prices for retail consumers of natural gas in the United States and Canada. "No one needs fancy economic analysis to understand that consumers and the nation benefit from lower prices for natural gas used in home heating and cooking and power generation," Knowles said. "Not only that, but government incentives for the oil industry are a common part of the landscape, even in Canada." For more than two decades, the Canadian federal and provincial governments have provided incentives to develop and exploit the its oil sands resource that are projected to total $820 million from 1986 to 2030. The Hibernia project in Newfoundland also relied heavily on governmental grants, loan guarantees, and tax exemptions. In 1988, when low oil prices put the project in jeopardy, the Canadian government came up with a $1 billion grant and a $1.66 billion loan guarantee. "Unlike many of the economic incentives provided by the Canadian government to its domestic projects, the Alaska gas tax credit comes into play only if gas prices fall below a floor and will be repaid if prices later rise above the ceiling," the report says. "It is a credit that comes with proper strings attached to protect the federal fiscal interest." In fact, such incentives are common around the world. In 1995, the U.S. Congress passed royalty relief to encourage investment in technology and infrastructure for deepwater natural gas and oil projects in the Gulf of Mexico. Norway has encouraged investment in infrastructure in the harsh environment of the North Sea by providing a permanent tax benefit through increased depreciation. And Venezuela has instituted incentives for investment in its heavy oil sands though sizable reductions in the corporate tax rate and royalties and an exemption to the value added tax. "The Alaska gas tax credit is specific, conditional, subject to payback, and has a limited life," Knowles said. "Opponents of the credit ignore that an Alaska gas pipeline is likely to mean lower natural gas prices to consumers in the U.S. and Canada. They also ignore the fact that incentives for development of new resources are widely used in Canada, the U.S. and throughout the world. "This tax credit will merely assist the development of an Alaska natural gas pipeline by reducing the consequences of price swings in the natural gas market," the governor concluded. "It will help open up huge reserves of natural gas on Alaska's North Slope and provide a new long term major source of domestic energy. This is clearly in the best interests of both the United States and Canada." Knowles returns from Dawson to Juneau on Thursday. The text of the Alaska Gas incentives Analysis follows:
Consumers in the Lower 48 and Is Similar to How Canadian and Other Governments Assist Their Petroleum Industries At the start of operation, the Alaska gas pipeline will ship 4 billion cubic feet per day -- almost 7 percent of domestic consumption--all from safe and secure domestic U.S. fields. This new source of supply should also help reduce natural gas prices to consumers in the United States and Canada. The Senate's Alaska Gas Pipeline Act of 2002 provides a potential tax credit for Alaska natural gas that will materially enhance the prospect for an Alaska gas pipeline. It is a potential tax credit because it is available only if natural gas prices fall below the prices predicted by the federal government. In addition, any credits used when prices are low must be repaid if prices increase past the threshold set in the legislation. Though limited, this potential credit materially reduces the risks of investing in the pipeline associated with low periods in natural gas prices. Reducing that risk is a key step towards securing the financial commitments that will make feasible this unique, and uniquely expensive, pipeline. America will be more secure, too, because gas from that pipeline will offset at least some of the dramatic growth in demand for natural gas that is predicted for Lower 48 markets. The Alaska natural gas pipeline will unlock the huge reserves -- 100 trillion cubic feet or more -- of natural gas on Alaska's North Slope and elsewhere in Alaska. Some Canadian interests, allied with Texas proponents of a less desirable route traversing the Beaufort Sea, have argued against the credit, saying it is unfair to Canadian gas companies, is a subsidy that operates to their detriment, and will produce a misallocation of resources in the North American natural gas market. They even contend that the economy as a whole will lose because of a "sub-optimal allocation of resources." A study prepared for the Government of the Northwest Territories by the Canadian office of an energy consulting firm, Purvin and Gertz ("P&G"), has been circulated in support of these criticisms. The true picture is different from that drawn by the Northwest Territories and its consultants. In their eagerness to advance their own interests, they have ignored the reality that both the national government of Canada and the governments of other Canadian provinces provide special economic support to both developing and established oil interests, including protection against swings in commodity prices. They likewise ignore the beneficial impact to millions of consumers from the credit -- a lowering of natural gas prices in the U.S. and Canada. In fact, they criticize the credit because it will lower prices to certain gas producers without mentioning that lower producer prices means lower consumer prices. More broadly, they also ignore that governments throughout the world typically enter into special concessions, and support incentives for their domestic petroleum industries. In short, the commodity risk tax credit is not out of character with what governments do to spur development of natural resource industries that will benefit their populations, businesses and economies. Governmental incentives for the domestic oil industry are a common part of the landscape in Canada. A Canadian Department of Finance Working Paper recently concluded:
The same story is true on the Hibernia project in Newfoundland. In January of this year, the Director of the Canadian Center for Policy Alternatives - Nova Scotia wrote, "Hibernia was to be constructed and operated without government money. In the end the project relied heavily on governmental grants, loan guarantees, and tax exemptions." In l988, for example, "when low oil prices put the project in jeopardy, the Canadian government came up with a $1.04 billion grant and a $1.66 billion loan guarantee." Similarly, the Hibernia Management Development Corporation is allowed to use expenditure on petroleum projects to reduce its tax obligations. The P & G study for the Government of the Northwest Territories completely ignores these Canadian subsidies and incentives. It argues that any conditional credit for Alaska gas supplies would produce "a misallocation of resources and distort the continental North American natural gas market." By ignoring the subsidies and incentives that Canadian governments chose to provide for projects in their national interest, the P & G study assumes a purely hypothetical world in which governments do not naturally support projects in their national interest. It conveniently overlooks the existing consequences on energy markets from the subsidies provided for Canadian oil sands and eastern Canada fields. It implicitly assumes that incentives are appropriate and not worthy of comment where they benefit particular Canadian interests, but undesirable when they benefit the interests of both Canadian and U.S. producers and consumers. A more balanced study would recognize that the base case in both Canada and the U.S. involves market incentives. P & G's refusal to acknowledge the beneficial effect on consumers of natural gas is particularly nearsighted. The report notes that the "lower sustained market price" from a successful Alaska gas project could delay Mackenzie Delta/Beaufort Sea gas production for many years. A lower sustained market price means lower gas prices for retail consumers of natural gas in the United States and Canada. No one needs fancy economic analysis to understand that consumers and the nation benefit from lower prices for natural gas used in home heating and cooking and power generation. Unlike many of the economic incentives provided by the Canadian government to its domestic projects, the Alaska gas tax credit comes into play only if gas prices fall below a floor and will be repaid if prices later rise above the ceiling set out in the legislation. For this and other reasons, the tax credit provision received a zero score in terms of possible budgetary impact. It is a credit that comes with proper strings attached to protect the federal fiscal interest. For example, in addition to the repayment obligation, the availability of the credit itself sunsets after 15 years. There have been suggestions that the credit could precipitate contentious trade issues with Canada. It is premature to reach such conclusions, especially given the existence in Canada and in the United States of many contemporaneous provisions of law that provide worthwhile incentives to the petroleum industry. There are appropriate intergovernmental forums for resolving any such issues in the event that they should arise. The
House and Senate Energy Bills also would continue the established
Section 29 tax credits that encourage investment in non conventional
sources of oil or natural gas. These credits have been widely
employed and are comparable in magnitude to the proposed Alaska
gas tax credit. In addition, tax credits have been provided for
qualified enhanced oil recovery projects, and environmentally
friendly ethanol and methanol derived from renewable sources.
In 1995, recognizing the need to encourage investment in technology
and infrastructure for deepwater natural gas and oil projects
in the Gulf of Mexico, Congress passed legislation encouraging
such projects through royalty relief. Thus, Congress has repeatedly
seen fit to assist the development of natural gas and petroleum
resources on our nation's economic and physical frontiers where
it was deemed in the national interest to do so. One could write many pages about the incentives that governments throughout the world have provided to natural gas and oil explorers and developers. Two examples come quickly to mind. Norway has encouraged investment in infrastructure in the harsh environment of the Norwegian North Sea by providing a permanent tax benefit through increased depreciation. Eligible facilities such as aging offshore production and processing facilities receive greater than book depreciation accelerated over a short period. Venezuela has instituted incentives for investment in its Orinoco Belt heavy oil sands. These include a corporate tax reduction (67% to 34%), a royalty reduction (16.7% to 1% until payout), and a value added tax exemption. These incentives have worked as reflected by the fact that $10 billion has been invested in infrastructure for four different heavy oil projects, with production reaching 750,000 barrels per day. The Alaska gas tax credit is specific, conditional, subject to payback, and has a limited life. The criticisms of the credit are not well taken. Among other things, opponents of the credit ignore that an Alaska gas pipeline is likely to mean lower natural gas prices to consumers in the U.S. and Canada. They also ignore the fact that incentives for development of new resources are widely used in Canada, the U.S. and throughout the world. The tax credit will merely assist the development of an Alaska natural gas pipeline by reducing the consequences of low prices in the natural gas market. It will help open up huge reserves of natural gas on Alaska's North Slope and provide a new long term major source of domestic energy. This is clearly in the best interests of both the United States and Canada. Office of the Governor, June 5, 2002
Source of News Release & Information: Office
of The Governor
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