BP presents Bush administration with alternative to ConocoPhillips tax incentive

Kristen Nelson, PNA Editor-in-Chief

The Bush administration asked BP to come up with alternatives to the gas price tax credit in the Senate version of the energy bill. In response, BP suggested a package: three things aimed at reducing pipeline costs — resulting in a lower tariff — plus a production tax credit, BP Exploration (Alaska) Inc.’s Dave MacDowell told PNA Oct. 9.

To reduce pipeline costs and hence the tariff, BP has suggested: a U.S. government loan guarantee of up to 80 percent of the total capital costs to reduce the cost of borrowing; accelerated depreciation — from 15 years to seven years — to let investors recover their costs more quickly; and clarification that the Alaska pipeline gas treatment plant qualifies for existing enhanced oil recovery tax credits.

“Those three have the effect or reducing the toll,” MacDowell said. “When you reduce the toll it lessens the likelihood that the production tax credit kicks in.”

The production tax credit is fashioned after existing section 29 production tax credits, he said. It would begin to phase out at field prices above 83 cents a million British thermal units and would be zero at $1.35 per million Btu and up.

“This simply says, if field prices are $1.35 or higher, there’s no tax credit.

“If field prices are 83 cents a million Btu or below, there’s a 52 cents per million Btu tax credit,” MacDowell said.

“It’s a package,” he said.

“It builds on itself. Lower tolls help raise field prices, which means the field tax credit is less likely to kick in.” MacDowell said BP would be happy with the existing Senate language or with this alternative package. This isn’t better than the other.

“We were asked to come up with an alternative and we did.”

U.S. Senate language from Phillips

Joe Marushack, vice president, ANS gas commercialization for then-Phillips Alaska Inc., now ConocoPhillips Alaska, reviewed the proposal before the Alaska Legislature’s Joint Committee on Natural Gas Pipelines in August.

Phillips worked on federal enabling legislation for an Alaska gas project with BP and ExxonMobil, he said.

“Separately we addressed a federal tax mechanism to share the risk with the ultimate beneficiaries.” It’s not possible to address all the risks, Marushack said, “but we’ve addressed an important risk, and that’s the risk associated with volatile markets.”

The federal fiscal legislation proposed by Phillips, he said, “provides a risk mitigation mechanism through an income tax credit at unexpectedly low prices.

“There is not a floor price. The market will be what the market is.”

What would happen with the $3.25 trigger price at the Alberta hub, he said, is “you get a federal tax credit to the extent that you’re a taxpayer in the U.S.” That tax credit, however, would have to be repaid if the price of gas rose above a certain level.