When the dust finally settled a week after Commissioner of Natural Resources Tom Irwin put gas pipeline negotiation concerns in a memo, he was out and Alaska Gov. Frank Murkowski had in hand resignations from six department officials including both deputy commissions, three directors and one of the commissioner’s special assistants.
The governor named Mike Menge, his advisor on energy, mining and the environment for the last two years, to replace Irwin.
The public brouhaha started when Irwin, concerned over the direction of the state’s gas pipeline negotiations with BP, ConocoPhillips and ExxonMobil, wrote to Attorney General David Márquez Oct. 20, asking for legal clarification on a number of issues. The departments of Revenue, Natural Resources and Law are all involved in negotiating a fiscal contract for a gas pipeline project.
The governor released Irwin’s memo Oct. 21 and put him on administrative leave Oct. 22.
Murkowski told an Oct. 27 press conference that he met with Irwin earlier in the day and the two agreed Irwin should leave.
Six senior department officials then submitted their resignations: both deputy commissioners, Marty Rutherford and Dick LeFebvre and Nancy Welch, one of three special assistants in the commissioner’s office; Director Mark Myers of the Oil and Gas Division; Director Bob Loeffler of the Division of Mining, Land and Water; and Office of Project Management and Permitting Director Bill Jeffress.
In letters of resignation copied to the press the six said they were resigning because of the dismissal of Irwin and the administration’s position in the gas pipeline negotiations. The resignations were effective Nov. 15 “or sooner at your discretion,” as Rutherford put it.
Jeffress, LeFebvre, Loeffler and Welch said they regretted resigning but had no alternative following Irwin’s dismissal. “Unfortunately, I am unable to support the direction of the Administration and believe it is necessary to take this action,” all said.
Letters from Rutherford and Myers were more detailed.
“I regret that I must take this action but I feel I have no alternative following the dismissal of Tom Irwin … and the position the Administration has taken in negotiations regarding a North Slope gas pipeline,” Rutherford said. “Supporting the Administration’s position would require me to accept terms clearly not in the interest of the state.” Rutherford, who has been with the state some 23 years, most of the last 11 as deputy commissioner, said she was proud of the work the department has done in pursuit of a natural gas pipeline and said she believes “the action I have taken today is necessary to avoid that effort going to waste.”
Myers also said he had no alternative to resignation because of Irwin’s dismissal and the administration’s position in the gas pipeline negotiations. “Staying in this position would require me to compromise my values as to what is right, both legally and ethically, and what is in the interests of the state,” said Myers, who has been with the state for more than 11 years, five as director.
“As you know,” Myers told the governor, “I adamantly disagree with the Administration’s current position on gasline negotiations. While I appreciate the offer to remain in my position while avoiding all work associated with gasline negotiations, I do not believe that scenario is feasible. The current negotiations have implications that permeate every aspect of the state’s oil and gas interests now and into the future. I cannot continue as director and watch silently as the state’s interests are undermined by creating barriers for the new oil and gas participants that are so vital to the economic future of the state.”
Myers told Petroleum News after the press conference: “One point we wanted to bring forward is we’re baffled that the governor is only moving forward one contract. With the TransCanada and port authority options available to him, why isn’t he moving all three forward so that the Legislature and the public can consider them?”
The application from TransCanada is to build a pipeline to the Lower 48. The All Alaska Gasline Port Authority proposes a pipeline to Valdez with liquefied natural gas shipped by tanker to the West Coast. Neither of these project sponsors owns any gas.
A spokesman for TransCanada said they reached a conceptual agreement with the state last spring.
Irwin’s memo
Irwin’s memo, a request for legal advice addressed to Attorney General David Márquez, asked for clarification on a number of issues in the gas negotiations, beginning with whether the state can negotiate under the terms of the Alaska Stranded Gas Development Act for gas which, because of the changing natural gas market, is no longer stranded as defined under the act.
The administration has learned a lot since the negotiations began, Irwin said, and “some members of the Department of Natural Resources — myself included” want legal advice on whether the administration “is operating within the limits of current law” in its negotiations with the producers. He said the concerns “may be further complicated by any split among the Sponsor Group into individual companies and whether an individual company meets the statutory requirement to be a qualified applicant with a qualified project.”
The Governor announced an agreement with one of the three project sponsors, ConocoPhillips, Oct. 21.
On the issue of whether the gas is stranded, Irwin said the governor “acknowledged in his recent speech before the State Chamber of Commerce in Valdez, that gas must now be considered ‘unstranded.’”
The governor said Sept. 13: “The gas truly was stranded, because the economics weren’t there to support it.” Two things, he said, happened to change that: Congress passed federal enabling legislation and the price of gas increased. “But what’s happened with the economics made it feasible to basically look at Alaska gas as unstranded,” he told the state chamber, “and that’s kind of where we are at this time and that’s why this project has moved to the point where we do have three applicants that have submitted applications.”
The definition section in the act (AS 43.82.900) says: “‘stranded gas’ means gas that is not being marketed due to prevailing costs or price conditions as determined by an economic analysis by the commissioner for a particular project.”
“My first question, then,” Irwin said, “is whether this Administration is operating within the confines of current law by continuing with negotiations with the Producers under the Alaska Stranded Gas Development Act when all analyses indicate that the project as a whole — and particularly Prudhoe Bay and Point Thomson gas — does not meet the definition of ‘stranded gas’ contained within that Act.”
The other seven concerns on which Irwin asked for legal clarification are: conflicts between the proposed contract and the state’s oil and gas leases, including pressure the department is under “to endorse terms governing Point Thomson development that are inconsistent with and materially weaker than” obligations to develop the field under the unit agreement; whether the state should take the risk of committing to take all of its royalty gas in-kind without “proof or compelling evidence” that the project is dependent on that commitment; lack of modeling to support the need for fiscal support from the state over three decades of the proposed project (“I do not believe that the economic viability of the project requires the state’s ‘give’ nor that the prospect of long-term changes to the fiscal system are necessary,” Irwin said); whether proposed contract terms for events such as breach of contract concur with stranded gas act requirements; whether proposed contract terms are tied to “alteration of tax methodologies or rates on existing oil infrastructure or production,” and if so, whether that is legal under the act; whether legislation the administration would propose to address some of the above concerns would allow the signing of a preliminary fiscal interest finding in advance of such legislative changes; and whether Revenue’s determination that fiscal findings would not include a quantitative evaluation of alternative projects is legal under the act.
Primarily policy issues, says Márquez
In a response issued Oct. 27, Márquez said issues raised by Irwin “are largely policy questions, not legal questions, and as such are within the purview of the governor and the legislature to resolve.”
As to whether there could be legal repercussions Márquez said: “The fact that you and your staff may have a different vision of what best serves the interests of the State as compared to others in the Administration does not make their judgments — or yours — on fundamental policy issues either unlawful or improper.” The governor, “after considering the concerns of his advisors,” is ultimately “charged with the responsibility to negotiate terms that best serve the long-term interests of the citizens of Alaska, and submit those terms for public comment and legislative review,” he said.
Márquez said Pedro van Meurs has produced a number of analyses “that provide a solid basis for the Administration to determine that the gas meets the statutory definition of ‘stranded gas.’” Because the Legislature must approve a contract, “whether the gas is ‘stranded gas’ at any particular point is not determinative.” If the Legislature approves a contract, “it will have determined either that the gas is ‘stranded gas,’ or that whether the gas is ‘stranded gas’ does not matter.” If the Legislature decides to go forward with a contract, Márquez said, that decision “would reflect its determination that the terms are beneficial to the State and worthy of implementation.”
Issues around signing a fiscal finding, Márquez said in response, “are premised on an incorrect reading of the statutory language. The SGDA authorizes the Commissioner of Revenue, not the Commissioner of Natural Resources, to make preliminary findings.”
On whether a contract can be based on future changes to statute, Márquez said the need for amendments to the stranded gas act “became clear early in the negotiation process.” The act does not contemplate state ownership in the gas pipeline but once the governor made that determination, “identifying what statutory amendments would be necessary to achieve that goal is neither unlawful nor improper…” And outside the stranded gas act, both the governor and departments have “broad authority … to consider and propose changes in state tax and royalty regimes.”
As to the adequacy of proposed draft findings, Márquez said the stranded gas act does not require the commissioner of Revenue to “include a quantitative evaluation of the alternatives such as those embodied in the other applications submitted.” And, he said, the stranded gas act gives authority to the administration “to decide which proposed project best promises the development of a gas pipeline and to negotiate a complete package of terms to achieve that goal … (and) does not require the Administration to negotiate with all applicants.”
As to whether proposed contract terms “materially conflict with the obligation of an oil and gas lessee” under existing leases or unit agreements, the Legislature can determine whether a conflict exists and suggest an amendment to the contract or amend the act.
On taking royalty gas in-kind, Márquez said “these issues involve complex economic, commercial, and ultimately political judgments. Other officials and experts differ with your opinion on these important questions,” he said and noted that officials “have continually had a vigorous and healthy debate on all of these issues. This debate will continue if and when a proposed contract is submitted to the public, and it can be resolved by an act of the Legislature.”
