Providing coverage of Alaska and northern Canada's oil and gas industry
August 2017

Vol. 22, No. 33 Week of August 13, 2017

Tax exemption for AGDC

IRS ruling finds corporation qualifies as tax-exempt state political subdivision

Kristen Nelson

Petroleum News

The Alaska Gasline Development Corp. said Aug. 8 that in a recent ruling the U.S. Internal Revenue Service determined the corporation qualifies as a tax-exempt political subdivision of the state.

This was under new and more stringent proposed IRS regulations, AGDC said.

“This is great news for the corporation and the Alaska LNG project,” AGDC President Keith Meyer said. “Receiving a favorable tax ruling from the IRS was one of the expectations of the transition of the Alaska LNG project to state leadership. The favorable ruling from the IRS will provide significant maneuvering room as we shape the financial structure of the Alaska LNG project,” Meyer said.

As a political subdivision, AGDC will not be subject to federal income tax, the corporation said, and can issue tax-exempt debt. The expectation is that the federal tax exemption can further reduce the cost of service on the system, AGDC said, increasing the competitiveness of the project and improving overall returns to project stakeholders.

The state, through AGDC, took over the lead on the project at the end of last year. Previously it was a partner with North Slope producers ExxonMobil, which led the project, BP and ConocoPhillips.

The tax-exempt IRS ruling was one of the steps AGDC believed it could take to lower the cost of the project and make it competitive once it took over AKLNG.

AGDC said it “was not dependent on this ruling to make Alaska LNG economically viable; however, the ruling creates the opportunity, under the right conditions, for lower cost debt financing and makes the project even more competitive.”

Not necessarily expected

A favorable IRS ruling was not the universally expected outcome.

In hearings last August, Charles Schuetze, a tax attorney with Manley & Brautigam in Anchorage, told legislators that while it might be possible for AGDC to gain tax-exempt status for a project totally owned by the state, recent changes to IRS regulations would make that more difficult. Revised rules issued in February 2016 revised requirements for classification as a political subdivision by specifying that a project be under government control and government ownership, Schuetze said.

He said if private partners are brought in as investors, something Gov. Bill Walker has discussed, it would make securing tax-exempt status very difficult, because of the requirements for government control and ownership.

Tolling model

AGDC’s Meyer has discussed a tolling model for the project, with the infrastructure owned separately from the producers, something he described as typical for gas pipelines in the continental U.S.

Shippers on the system could be LNG customers who buy natural gas from the producers on the North Slope and pay to have the gas shipped and liquefied, or producers who buy capacity on the system to supply their worldwide LNG portfolio, Meyer told the AGDC board in December.

Basically AGDC would own the infrastructure - the North Slope gas processing facility, the pipeline and the LNG facility in Nikiski - and would charge for the use of those facilities.

AGDC could also purchase gas and capacity on behalf of customers and sell LNG to customers, Meyer said, something that might be attractive to Asian utilities he told the board.

Nikos Tsafos with enalytica, a consultant to the Legislature, told legislators at the August hearing that there would be risks to the state if it bought gas from producers to sell on world markets. Financial markets would be leery and the state could be unable to get outside funding for gas purchases, Tsafos said, telling legislators: “If they (the producers) offer you gas, don’t buy it.”

Tsafos critiqued the tolling model, saying that by itself it doesn’t reduce the cost of supply, which he said could only be reduced with acceptance of a lower return on capital invested in the project.

On the positive side of a tolling model, Tsafos cited the example of Indonesia where the government owns the infrastructure but construction and operation are managed by the companies supplying the gas.

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