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Vol. 12, No. 3 Week of January 21, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Competition the key

Palin: new gas line bill’s inducements will give Alaska ‘skin in the game’

Kristen Nelson

Petroleum News

Alaska’s new governor, Sarah Palin, says the state must ramp up resource development across Alaska, beef up oversight on the North Slope and end warehousing of the state’s resources at Point Thomson.

But the resource focus of her first state-of-the-state address Jan. 17 was the gas pipeline bill her administration will introduce, a bill that will offer a competitive process with inducements to those building the line and to those who have leases with natural gas.

The gas pipeline is “the primary focus of our long-term energy plan,” Palin said.

She said that while it is in Alaska and America’s interest to get North Slope gas to market, “It won’t happen with the snap of a governor’s fingers.”

There are “many entities with differing considerations” and the project needs to ensure that viable explorers and producers “can access the gas line on reasonable terms and we need a project that can be expanded when there’s more gas found.”

A gas line project is costly and risky, but “this is a sound, economic project,” Palin said.

Alaskans learned a lot from the previous administration’s attempt to develop the state’s gas under the Alaska Stranded Gas Development Act. We learned, she said, that “Alaska’s gas isn’t stranded.”

We also learned a lot about the oil producers’ terms, Palin said.

“We learned that under the old act, some producers will talk to us, and talk to us, and talk to us until we agree to their terms.

“Well, those terms were unacceptable. They demanded that, in a sense, we give up some fundamental rights as a state” because the deal would have removed the state’s taxing, regulatory and judicial authority for decades.

It was no deal, Palin said. And it exceeded the administration’s authority.

The producers didn’t have to commit to preparing applications, “much less build a gas line,” she said without naming her predecessor Frank Murkowski and the unsuccessful deal he put together with the three major North Slope oil producers, BP, ConocoPhillips and ExxonMobil.

New vehicle for gas

Palin said it was time to leave the old act behind and “move forward with a new vehicle” for a gas pipeline, one that “builds on the knowledge and experience gained from a valiant — but futile — effort previously in a non-competitive process.”

The new process will be embodied in the Alaska Gasline Inducement Act or AGIA.

“The centerpiece of this is to induce construction of the gas pipeline.”

Palin said this would be a gas pipeline constructed on the state’s terms, “without selling Alaska’s sovereignty.”

It “allows transparent and competitive processes,” she said. “It jumpstarts progress with incentives, and it strikes the right balance on a project for the state, the nation, the project proponents and the producers.

“It will be good for all,” she said.

The bill will be introduced in this session; currently the administration is “scrutinizing its legality … its strategy and its efficacy. We’re doing that now with top experts. With legislation this important, really, it is more important that we do it right than do it fast,” she said.

The review includes potential applicants. Palin said she and Lt. Gov. Sean Parnell began meeting with potential applicants the day after they took office, and are continuing to meet with them.

What’s in the act

Palin said the act “offers inducements to those who will build the pipeline itself.”

It might be the three major North Slope oil producers who build the line, she said, “it might be an independent oil or pipeline company; it might be a state or quasi-state entity” — or a combination of the above.

She said there will be pipeline construction incentives to encourage companies to compete for the right to build the line.

“We’re currently developing such incentives as a substantial state capital contribution so bidders know that the state will have skin in the game, too. Alaska will have skin in the game.”

The bill will also include “permit streamlining and state-funded training programs to ensure a qualified Alaskan workforce.”

To be able to compete for the inducement package, “the applicant must agree to certain bedrock, must-have requirements of the state, such as gas for Alaskans and jobs for Alaskans and project benchmarks.”

And competition and long-term exploration and development on the North Slope will be required. “This pipeline must be able to expand in step with the development of new reserves so North Slope gas energizes us not just for our lifetimes, but for the lifetimes of our children.”

Inducements also extend to those who hold the leases and control the gas.

“Regardless of who builds the line, we need a mechanism to strongly encourage the leaseholders to commit their gas to the licensed project.”

Palin said one of the most appealing differences between this bill and the stranded gas act, is that it “will contain clear, competitive criteria by which we can judge which projects best meet our long-term needs. That means that Alaskans will know why the state is making the choices that it is.”

DNR will do energy audit

“Without increased oil development, forecasts show about $100 million reduction each year in available revenue,” so responsible resource development must occur across the state, Palin said; development the state can encourage by providing “stability in regulations for our developers.”

The responsible part is crucial, and to prove the state “can responsibly develop, we’ll beef up oversight on the North Slope because we’ve seen some legal obligations ignored.”

“Greater oversight ensures proper maintenance of the lines that carry our oil to market. And I won’t tolerate corrosion eating through pipes while crippling our state economy with costly shutdowns,” she said.

“I’ll establish a dedicated state team to ensure rigorous inspections and line integrity analysis. Our oil must, and will, flow to help continue to fund our essential services.”

The governor said she is struck by the “absurd situation” that Alaska is in, that with its abundant energy resources, so “many communities (are) facing threats to safety and wellbeing because of the high price and limited supply of energy.”

The state needs to coordinate its energy programs, Palin said, “to find local sources, to help communities become self-sufficient.”

“So, DNR will inventory potential sources of energy, all of those, including renewables like tidal and wind and hydro and geothermal. Taken together, new initiatives can finally provide new energy.”

Resources must be developed

The governor said energy must also come from known resources, and said her administration would “aggressively defend” the state’s obligations to develop those resources.

Palin cited the Point Thomson field on the North Slope. Huge reserves are known there, she said, but producers hold the leases in “iron-clad contracts. They’re promises to develop the public’s resources for mutual benefit — or give back the leases.”

Without mentioning Point Thomson operator ExxonMobil by name, Palin referred to a “large producer” that has held the leases for 30 years with no development.

“Warehousing Alaska’s resources is not an option anymore,” she said. “We can’t afford it.”

Alaska is asking to have the 1002 area of the Arctic National Wildlife Refuge opened for drilling, but can’t even get its own lands adjacent to ANWR developed, she said.

“I promise to vigorously defend Alaska’s rights, as resource owners, to develop and receive appropriate value for our resources.”

PPT not her preference

On the petroleum profits tax passed by the last Legislature, the governor said that she would have preferred to stick with a tax based on the gross value of oil and gas, rather than the net profits tax, but PPT is law, “so I’ve asked our Revenue commissioner to assess and adopt the necessary regulations to ensure PPT works as Alaskans were promised, and tighten up any loopholes.”

She said her administration would watch carefully as the first tax returns come in to make sure there aren’t any surprises.

“If so, let’s try again and get our production tax right.”

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