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Oil tax lock tied to project approval Alaska Legislature amending administration changes to Stranded Gas Development Act, setting up state pipeline company; work won't be completed during this special session Kristen Nelson Petroleum News
The production profits tax wasn’t the only firecracker issue in the Alaska Legislature as the first special session of 2006 approached the June 8 end of its 30-day term.
The administration introduced bills related to the gas fiscal contract and the Alaska Natural Gas Development Act May 31.
The bill amending the Stranded Gas Development Act was amended in both House and Senate to limit oil tax certainty to after a gas pipeline project is sanctioned and to end that surety after a period of time estimated to allow cost recovery on the project. For the remainder of the contract period, changes could be made as long as changes were balanced to keep the economic impact neutral.
On the last day of the special session one bill was headed for a conference committee, one was in committees in both the House and Senate and the third was on the Senate floor for a reconsideration vote. House Resources passed out a committee substitute, but House Judiciary, the next committee of referral, adopted the version that was on the Senate floor.
The simplest of the three bills, giving the Alaska Supreme Court original jurisdiction over cases challenging the contract and providing a window for such challenges to be filed, passed both the Senate and the House and was awaiting Senate concurrence with House changes June 7.
The administration’s bill, and the version that passed the Senate, dealt only with original jurisdiction; the House added expansion of the public comment period, moving from 30 days in statute to 90 days.
The administration proposed a 60-day window for filings of challenges, the 60 days to start after the contract has been executed by all parties. The Senate doubled the time, to 120 days. The House changed the challenge period to 90 days, and also added the provision extending the public comment period.
The Senate failed to concur in the House amendments to Senate Bill 2002 by a 4 to 12 vote June 7. Senate members of a conference committee were appointed; the House had not met again when this issue of Petroleum News went to print.
The second bill, SB 2003, establishing the Alaska Natural Gas Pipeline Corp. to own and finance the state’s share of a North Slope natural gas pipeline, was still in committees in both bodies June 8. House Resources passed out a committee substitute which is in House Judiciary.
In addition the Senate Special Committee on Natural Gas Development held roundtable discussions June 7-8 to give members of the Legislature the opportunity to question representatives of the administration and project sponsors, as well as consultants to Legislative Budget and Audit. (See story in the June 18 issue of Petroleum News.)
The big bill The bill conforming the contract to the Stranded Gas Development Act, SB 2004, passed the Senate June 6 and was up for reconsideration vote June 7. House Resources heard the House version, House Bill 2004, and passed out a committee substitute, but the next committee of referral, House Judiciary, adopted the Senate version as its working copy.
Judiciary Chairwoman Lesil McGuire, R-Anchorage, told committee members June 6 that the administration would walk through differences between the House Resources and Senate versions of the bill and the committee would work on the bill and take amendments the week of June 12, giving members time to discuss and prepare amendments.
When the bill was introduced in House Resources June 1 Kevin Jardell, the governor’s legislative director, told committee members the amendments are necessary to bring a contract to the Legislature, so legislators can make a policy call on whether they want to approve the contract. He noted that the stranded gas act was amended in 2000 and again in 2003, and said the current changes reflect changing economic conditions and what the state had to do to bring North Slope gas to market.
Jardell said these amendments are broader than those released in the fiscal interest finding because after consultation with attorneys the administration recognized it needed broader authority to respond to input from the public and from legislators.
Joe Donohue of Preston Gates & Ellis, who has been working on the conforming amendments, said most of amendments in the first part of the bill were driven by the decision of the administration to have the state become a full commercial partner in the project and relate to decisions about equity position, taking royalty and other taxes in kind and the state’s responsibility to ship and market its gas.
Committee members expressed concern about giving the administration too much authority through the amendments. Donohue and Jardell said the amendments were a step in getting a contract before the Legislature, where legislators would have to approve what the administration has negotiated. Jardell described the stranded gas act as authority given to the administration subject to ratification.
Sponsors could bid for state Dave Van Tuyl, commercial manager for the Alaska gas group for BP Exploration (Alaska), told House Resources the contract provides that the state could request the producers to participate in the open season and acquire appropriate capacity on its behalf. In that event, he said, the state would also identify the amount of capacity it needs for in-state gas and the sponsor would attempt to acquire firm transportation on the state’s behalf. “It’s an auction, so there’s no guarantee,” Van Tuyl said.
Committee Co-Chair Ralph Samuels, R-Anchorage, asked how a local distribution company like Enstar would participate when there is currently no way to get natural gas to Anchorage from a mainline route. Van Tuyl said Enstar could bid for capacity to take gas off the line at Glennallen. Shippers in the open season would bid for both in-state and long-haul capacity, he said, and that allows the project sponsors to design the project to meet the needs of market.
Co-Chair Jay Ramras, R-Fairbanks, asked about areas like Fairbanks, which has an immature gas economy and over time would need more gas than it would initially.
Bob Loeffler of Morrison and Forster, a Washington, D.C., law firm, speaking for the administration, said June 2 that the contract requires a complete study of in-state gas needs before the open season. The federal legislation, he said, had the study at a much later date.
The study will identify both what those in-state gas needs are, he said, and when they will occur. The contract requires the project to consult with the state on locations for taking gas off in Alaska and to fund up to four off-take points in Alaska. Loeffler said that gets the off-take points designed into the project from the beginning so you don’t have to deal with tapping into live pipe. He noted that additional off-take points may be agreed to, or required by the Federal Energy Regulatory Commission.
FERC requires the pipeline to offer two categories of service in the open season, Loeffler said: long-haul and in-state service, with separate tariff rates. Bidding evaluation for in-state service in the open season is supposed to be separate from evaluation of long-haul. People can also bid on something different — service to a different off-take point than those proposed or service starting up in five or 10 years after the project starts. That would be a non-conforming bid, but the pipeline would be required to evaluate it, he said.
Based on the study and the open season, “we’ll know something but we won’t know everything about in-state needs,” Loeffler said.
The pipeline will assemble the bids and award capacity according to the most valuable bids, he said, but it has to look at in-state bids separately. FERC also requires that the pipeline consider late bids.
The pipeline will likely design somewhat more capacity than a 100 percent fit to the bids because it wants some flexibility later on, but won’t be able to build in much extra capacity because FERC won’t let the cost of extra capacity be charged to shippers.
What if no one bids successfully for in-state deliveries? Loeffler said FERC has said there is a “continuing obligation” for in-state room in tariff.
What happens once the project is in operation and someone has a need for shipping capacity? There may be extra capacity designed in, shippers may release capacity or there could be expansion, he said.
What about selling gas? Rep. Harry Crawford, D-Anchorage, asked about a provision in the contract that says no party is required to sell gas in-state, although the state will have 20 percent of the gas and could use that for in-state needs. He asked if it would be detrimental to the state to sell in-state, and if other shippers would make more moving gas to Alberta.
Loeffler said the state will have roughly 800 million cubic feet per day, about four times the current amount of gas used in-state.
Future administrations, he said, would have to decide the price for selling gas in-state, but wouldn’t necessarily make more money shipping clear to Alberta because it costs more to ship the gas that far.
Whether the state would want to reduce the price for in-state sales is a question for future administrations, he said.
In response to another question from Crawford Loeffler said the state would still get its 20 percent of revenues from the entire pipeline; the fact the state took gas off in Alaska doesn’t affect its pipeline revenues. All revenues on shipping that the pipeline earns go into one pot; the state gets 20 percent of that pot.
More capacity options for local distribution companies BP’s Van Tuyl said consultation is available before the open season so the pipeline may be able to offer what a local distribution company wants in the open season. He said a local distribution company has a number of options: it could buy its ultimate capacity demand, say 100 million cubic feet a day, and release unused capacity back to the pipeline; it could negotiate seasonal transportation services or structured capacity, where it might need 10 million a day, ramping up to 20, with not as much in the summer; it could bid on capacity for a limited term with renewal rights and the those rights could include increasing the volume; it could negotiate incremental increases at shipper’s option, where it wants to be able to call on incremental; it could contract with a third party that has capacity; and could use authorized overrun service.
Authorized overrun service occurs because a pipeline will offer for firm transportation service what it can make available every day, based, for instance on a warm summer day with one compressor down, Van Tuyl said. But the pipeline often has more capacity than the firm transportation that is taken, and in general more would be available in winter because compressors work better in winter. There is also interruptible transportation service, available at times when there is additional capacity, but callable if someone else needs it.
And lastly, he said, the system could be expanded.
Van Tuyl said the pipeline company will make the decision as to what service it offers, but customers can also go to FERC and ask them to require a service not offered.
Tools for next administration? Before House Resources considered amendments, Samuels asked Jardell about providing tools — through the amendments — for a future administration to work on a contract, if this one isn’t passed, and pointed out to committee members that if the Legislature limits the tools to negotiate a contract the next administration might find it even more difficult to negotiate. He noted that members of the committee were among those who voted to have gas taxes locked in by a contract. If tools are taken away from this administration and future administrations, he said, it would take a session of the Legislature to get a tool given back.
Jardell said the administration recognizes it is asking the Legislature to expand the scope of the stranded gas act, and said he believes everything the administration is asking for “is in alignment” with the stranded gas act.
The block on new taxes in the contract — the state would reimburse project sponsors for taxes, such as the gas reserves tax which is on the November ballot as an initiative measure — was an issue for several committee members, including Ramras, who said while he would vote no on a gas reserves tax, he was concerned that what the Legislature was being asked to authorize would “legally thwart the will of the people.”
Jardell said there is no attempt to thwart the ability of municipalities or the state to tax because the Legislature will make the final decision on the contract: The Legislature told the administration in the stranded gas act to negotiate a deal and bring it back for approval. He said he understands there are provisions in the contract people don’t like: “You don’t get everything you want when you negotiate,” he said, but what the state did get was revenues and an extension of the life of the trans-Alaska oil pipeline.
Three-part scenario for oil Samuels introduced an amendment which, like that in the Senate version of the bill, would create a three-part scenario for oil taxes.
There would be no fiscal certainty until the date of full project funding or the date of the issuance of the certificate of public convenience and necessity from FERC. Usually full project funding will come after FERC approval, Samuels said; that’s when financing is placed and things will move ahead.
Until that time the Legislature could change taxes on oil.
Once the project moves ahead, oil taxes would be locked for 14 years, an estimate of when full capital cost recovery would be achieved, meeting what Samuels described as a request from industry that the state not change the rules once they start spending a lot of money.
After that, a fiscal balancing agreement kicks in, keeping the total economic impact to industry the same.
Samuels said if transportation commitments are for 20 years and it takes roughly five years to get to project sanction from right now, the companies will be covered fiscally until that time. If it takes longer to get to project sanction you don’t get any benefit from the fiscal balancing because you use up all your time on the front end.
Ramras proposed amending the 14 years to 12, and eliminating fiscal balancing for the remainder of the contract. Both changes were approved.
Interest finding also an issue Rep. Carl Gatto, R-Palmer, wanted to amend the act to replace the long-term fiscal finding with a best interest finding, citing difficulties in the Matanuska-Susitna Borough over coalbed methane. The administration proposed changing a single reference in the stranded gas act from best interest to long-term fiscal interest. Jardell said Gatto’s amendment would be a “poison pill for the project” because it would retroactively change all long-term fiscal finding references to best interest. The commissioner of Revenue’s preliminary finding is a long-term fiscal finding.
Jardell said the Department of Natural Resources’ best interest findings allow the commissioner to go ahead with things like lease sales, while the long-term fiscal finding does not allow the Revenue commissioner to go ahead with the contract, but only to bring a contract to the Legislature for approval. Jardell said the administration couldn’t find anything in the legislative record for the stranded gas act that explained the single inclusion of best interest and Donohue said the intent was a technical amendment.
Rep. Gabrielle LeDoux, R-Kodiak, asked why the commissioner couldn’t just amend his findings to show the contract is also in the best interest of the state.
Jardell said if best interest is left in, it would require a best interest finding before the contract could be forwarded, and said the administration could do a best interest finding without a problem before sending the contract to the Legislature.
Paul Seaton, R-Homer, proposed an amendment to remove a provision allowing the state to waive sovereign immunity, arguing that the state could waive this on an individual basis. Jardell said he believed that it would kill the project, and said the state waives sovereign immunity in its contracts, “otherwise no one would enter into contract with us.” This amendment failed.
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