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Providing coverage of Alaska and northern Canada's oil and gas industry
February 2016

Vol. 21, No. 6 Week of February 07, 2016

State gas team updates legislators on organization, decision making

An issue which bothered a number of legislators in last yearís special session on buying out TransCanadaís role in the Alaska LNG Project was how the stateís gas team was organized, and who was running things.

In Jan. 29 presentations to the House and Senate Resources committees members of the state AKLNG gas team addressed that issue, presenting statutory authorities, roles; agency organization and the decision-making process.

State entities involved include the Department of Law, the Department of Revenue, the Department of Natural Resources and the Alaska Gasline Development Corp., with Gov. Bill Walker at the top of the gas team pyramid.

The stateís day-to-day policy makers on AKLNG include Attorney General Craig Richards, Deputy DNR Commissioner Marty Rutherford, Deputy Revenue Commissioner Dona Keppers and AGDC interim President Fritz Krusen.

Rutherford told members of the House Resources Committee that there is a matrix structure where each work stream has an integrated team. Policy that has been set underpins the discussions, but when needed there is elevation to the policymakers and if the issue is significant enough it goes to the governor.

DNR statutory authority

The DNR commissioner has statutory authority to negotiate commercial agreements, market the stateís royalty-in-kind and tax-as-gas volumes, and modify certain lease terms.

Key project areas for which DNR is responsible include negotiating commercial agreements to protect the stateís interests; managing inherent risks in the stateís entry into AKLNG in a commercial role; and, in the event DNR elects RIK, ensuring the certainty of upstream gas supply to meet natural gas and LNG marketing commitments; marketing in-state natural gas and LNG for maximum resource value to the state; and functioning as a shipper on the AKLNG Project system.

DNRís AKLNG project team is primarily focused on: the stateís sovereign responsibilities and duties; making the final RIK vs. royalty-in-value decision; and promoting North Slope hydrocarbon exploration and future development.

On the decision-making process for actions under DNR authority state gas team members develop and vet state positions in consultation with staff from other appropriate agencies, brief the commissionerís office and final decisions are made by DNR Commissioner Mark Myers.

DOR statutory authority

The DOR commissioner has statutory authority to enter into agreements with the DNR commissioner for custody and disposition of TAG gas - assuming the state elects RIK and the producers elect to pay tax as gas.

DORís statutory responsibilities include directing disposition of revenues from TAG; reporting on financing options for state acquisition of ownership interest and participation in a North Slope natural gas project; and in consultation with DNR participating in negotiating contracts and development of terms for inclusion in agreements including gas supply and balancing, marketing, disposition of natural gas and offtake.

The primary focus of DORís AKLNG project team is on identifying and recommending financing options and opportunities for co-investment by Alaska municipalities, regional corporations and residents; through the commissionerís membership on the Municipal Advisory Gas Project Review Board, to develop and implement alternative property tax mechanisms; negotiate alternative property tax mechanisms with project sponsors; gas balancing for RIK/TAG volumes; and participation in development of governance agreements.

Final decisions are made by Commissioner Randall Hoffbeck after development and vetting by state gas team members and briefing of the commissionerís office.

AGDC statutory authority

AGDC has statutory authority to hold the stateís equity ownership in an Alaska liquefied natural gas project.

Its focus is on holding and managing the stateís equity interest in AKLNG infrastructure, including related commercial contracts; functioning as the transporter of the stateís gas through the AKLNG Project system; and developing systems to make gas from the project available for in-state customers at commercially reasonable rates.

The primary focus of AGDCís AKLNG Project team is on advancing the projectís technical design basis; voting the stateís equity share in AKLNG Project decisions; preparing to advance AKLNG to front end engineering and design (the project is in pre-FEED); and acquiring and making natural available to in-state markets.

Decision making for AGDC includes technical and commercial subject matter experts participating in project working groups who make recommendations to management on project-level decisions; the AGDC president reviews and approves AGDCís vote on the project management committee; and the AGDC board approves all major financial and contractual commitments.

AGDC has a board, which has established bylaws; the board approves the annual budget and project work subject to legislative appropriations; and the board approves all project related contracts and any expenditure of more than $5 million.

DOL statutory authority

The Department of Law provides legal services to AGDC, DNR and DOR, both from in-house counsel and from contracted outside counsel. Attorney General Craig Richards told House Resources that the department uses two large international law firms, Greenberg Traurig and Milbank.

He said outside counsel have been actively engaged at the negotiating table for the state every day, but said a big part of the charges by law firms is for lawyers not at the table but who are drafting documents. Richards said those attorneys havenít been that active because on most work streams the state isnít at the document-drafting level.

Asked for benchmarks on specific agreements, Richards said a lot of the information about the negotiations is confidential, including the schedule of meetings.

Rutherford said that, in general, avoiding confidentiality issues, of eight major agreements, seven are in constant negotiation. There are weekly meetings on some, she said, and daily meetings on others. There are, she said, a couple of foundational agreements that have not progressed to the point where draft agreements can be developed.

Work streams

Rutherford said the state gas team manages some 20 work streams, subdivided into commercial and technical, with the commercial work streams required to develop commercial agreements an on the technical side people who understand how the upstream functions, assuring the state has access to the molecules of gas it needs.

The state is not a working interest owner, she said, but has to function the same way. The stateís partners refer to this as a synthetic WIO, Rutherford said. The state has to understand how over lift and under lift works and how the stateís gas supply is protected.

Each state team is led by an agency, DNR or DOR, or by AGDC, she said, but each team includes representatives from other agencies as appropriate, with the teams working both internally and externally. It takes about 7 hours of preparation for an hour of negotiation, Rutherford said, making sure issues are understood and distinguished.

The full state gas team meets weekly to review progress, she said, and AGDC, DNR and DOR meet bi-weekly to coordinate on specific issues.

RACI

AGDCís Fritz Krusen described the RACI structure that is being used, distinguishing who is responsible, who is accountable, who is consulted and who is informed.

Major gas commercialization functions are broken out, with Rutherford responsible for resource ownership, and the DNR commissioner accountable; Keppers responsible for sovereign taxation and the DOR commissioner accountable; Frank Richards of AGDC responsible for project ownership and governance and the AGDC president accountable; Keppers responsible for project financing and the DOR commissioner accountable; Rutherford responsible for LNG marketing and the DNR commissioner accountable; AGDCís Brad Chastain responsible for in-state gas delivery and the AGDC president accountable; and Rutherford responsible for the FEED decision support package and the governor accountable. In each case other departments and the governor are consulted and the Legislature and other agencies were appropriate are informed.

- KRISTEN NELSON






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