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Vol. 12, No. 10 Week of March 11, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Legislature gets AGIA

First hearing in House O&G March 13; Alaska legislators support concept

By Kristen Nelson

Petroleum News

The Alaska Legislature is now in possession of Gov. Sarah Palin’s Alaska Gasline Inducement Act, with the first hearings scheduled on the bill in the House Special Committee on Oil and Gas March 13.

House Bill 177 has referrals to Oil and Gas, Resources and Finance. Senate Bill 104 has referrals to Resources, Judiciary and Finances.

The governor gave the bill a two-city sendroleum Newsoff March 2. The governor, administration officials and legislators were joined — in Juneau and Anchorage — by representatives of the North Slope producers, the partners in the previous failed contract, along with companies and organizations which had been outside the last contract, and, in some cases, opposed to it: Alaska Gasline Port Authority, Alaska Natural Gas Development Authority, Alaska Power Association, The Alliance, Anadarko Petroleum, Arctic Slope Regional Corp., Backbone 2, BP Exploration (Alaska), Chevron, ConocoPhillips Alaska, Enstar Natural Gas, ExxonMobil Production, Kern River/MidAmerican, Resource Development Council, Shell Exploration and Production Co. Alaska and TransCanada.

“AGIA moves the gas line forward,” said Commissioner of Natural Resources Tom Irwin, who was ousted by the previous administration from that position over disagreement on the proposed gas line fiscal contract.

Under the Alaska Stranded Gas Development Act, the vehicle for the previous proposal, the Revenue commissioner had the authority to determine the viability of a project. Under AGIA, the Revenue and DNR commissioners act jointly.

Irwin said he has been asked, since the deal with the producers is so close to completion, why not just tweak it?

“Wrong,” Irwin said. “There is no completed deal.” The limited liability company language for the proposed contract was never completed, he said. “If the originators of that deal can’t agree on even who’s the leadership, the LLC language is not complete.”

Midstream, upstream inducements

A major inducement for the midstream portion of the project, the pipeline itself, is up to $500 million in state matching funds for work needed for certification by either the Federal Energy Regulatory Commission or the Regulatory Commission of Alaska.

Palin said while that “sounds like a jaw-dropping figure,” it’s about half of what it should take to get the required certificate and needs to be compared “to the prior proposed deal, where the state was at risk for $13 or $14 billion.” By comparison, she said, “this is a solid, definitive, transparent amount.” The proposed matching amount is up front and on the table for all to see, the governor said, and is “our real skin in the game here that proves our commitment.”

Revenue Commissioner Pat Galvin said upstream incentives include royalty issues and the production tax “available to a producer who makes a commitment in the initial open season of the licensed project.”

On the tax side, he said, “we are providing a surety that the tax rate that is in place at the time of the open season will be the tax rate that they pay for the first 10 years of gas flow.”

Royalty changes offered

Those making the gas commitment will be offered “an alternative to the royalty structure that’s available in our leases currently,” Galvin said.

Kevin Banks, acting director of the Division of Oil and Gas, said the state’s leases require the payment of the “higher of” either what the lessee gets when he sells his gas “or what others receive for their gas when they sell gas out of the same field.” The lessee doesn’t know what royalty is due until the state finishes auditing.

What the state is proposing, Banks said, “is to create a mechanism which will rely on indices of industry published prices for gas” and then deduct the actual transportation cost and “make the calculation so transparent, so easily calculated that the lessee will know at the time they make the payment what their royalty’s value will be and there will be no retroactive or very little need for a retroactive adjustment.”

Leases also allow the state to switch from taking its royalty in kind or in value with about three month’s notice, causing complications for lessees on both the transportation and the marketing side of a gas pipeline. The state is proposing, Banks said, that the transportation capacity that goes with the royalty will stay with the royalty: “If we take it in kind we will assume the responsibility for the capacity; if we turn the gas back to the lessee, we will offer the (matching) capacity back to the lessee.” On the marketing side, the state is proposing to give appropriate notice so that once lessees have contracts in the marketplace, “they are not trapped in a situation where they’ve made commitments to customers and now don’t have gas to sell them.”

Pipeline will be open access

Marty Rutherford, deputy DNR commissioner and head of the governor’s gas team, said the bill will ensure “the project is an open access pipeline in two ways: first, by requiring that the pipeline entity solicits new gas every two years and if … the gas is available in adequate quantities, the pipeline will expand to accommodate that new gas.”

The pipeline entity must also commit to a “tariff structure that produces the lowest reasonable tariffs,” she said.

For the expansion, costs will be collected through “rolled-in” rates that pass those costs on to all shippers, with the rolled-in price increase capped at 15 percent of initial rates.

Legislators supportive, will look at proposal carefully

While legislative hearings on the bill have not begun, legislators have commented on the bill in press briefings.

As to when hearings will begin, and how long they will take: “It’s my assumption that the hearings will begin next week,” Senate President Lyda Green, R-Matanuska-Susitna, said March 6, “and I would assume they’d be very vigorous and move along as quickly as we can.” She said the intention is to finish the bill this session.

House Rules Chairman John Coghill Jr., R-North Pole, said a special session may be necessary: “The budget is what we have to do; AGIA is what we want to do. … It wouldn’t be a surprise to me that we go into a special session to complete that,” he said.

Rep. Kevin Meyer, R-Anchorage, co-chair of House Finance, said House Finance should be done with the operating budget by the end of March, so Finance would have time to take on AGIA.

“I may be an optimist, he said, “but I think we can get AGIA done as well during regular session.”

Meyer also said he thinks “we’re going to know fairly quickly how quick AGIA’s going to go. … You’re going to know in the first or second committee the problems that may occur and so by the time it gets to Finance, hopefully all the bugs are worked out and it will be a piece of cake,” he said.

Tariff a concern to legislators

Sen. Fred Dyson, R-Eagle River, said he’s told the governor’s office that he thinks a major Canadian partner in the pipeline would be very helpful because of the rights-of-way permits in Canada “and just Canadian sensitivities,” and said he was assured that the structure of the bill allows for that. He said the governor’s office anticipates that several of the proposals will include Canadian partners.

Senate Republican Minority Leader Gene Therriault, R-North Pole, flagged the tariff issue as one that is of concern to legislators. He said representatives of the North Slope producers have “pitched to me that they need to be the ones to build the line: They’re the only ones that will be concerned about the resulting tariff and that should be of importance to the state.” He said a recent brief written by a staff attorney at the Federal Energy Regulatory Commission in the current TAPS-tariff case indicates the producers “have been less than concerned about the tariff with regards to delivering our oil to market.”

Sen. Tom Wagoner, R-Kenai, agreed, saying the producers “haven’t held the cost down (on the trans-Alaska oil pipeline); there’s no advantage to them to hold the cost down because they own the pipeline.”

Rep. Carl Gatto, R-Palmer, co-chair of House Resources, held a hearing on the FERC briefing (see story on page 1). He said that “with the gas pipeline, the three most important things are the tariff, the tariff and the tariff.”

$500 million will be looked at

On the issue of the optional $500 million matching funds from the state, Sen. Hollis French, D-Anchorage, chair of Senate Judiciary, said “I think that’s one of the good parts of the bill frankly; it allows for competition, allows for an open sort of a bidding process and the state gets a better deal out of it.”

House Minority Leader Beth Kerttula, D-Juneau, called the bill a “good start,” but said she would want to hear testimony on how necessary the $500 million is, and also about whether the state should be offering the tax cap.

Meyer said he has heard questions about whether the $500 million is needed: “If a company can’t afford the $500 million to do the initial design and the engineering, how the heck are they going to afford the $25 billion to build the pipeline?” But he said he thinks the incentive is important to keep “as many players as possible involved in the early process.”

Coghill said the $500 million “is no small chump change … and yet in comparison to the project it’s a small portion.” Questions will certainly be asked about the money, and whether it is tied to getting the work done or to a tariff reduction.

“This is Alaska saying we’re going to put some skin in the game,” he said, “and there’s probably more skin to go and I just hope we don’t get skinned alive on it.”

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