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Vol. 15, No. 17 Week of April 25, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Gas storage bill passes

Legislature offers incentives to Cook Inlet builders, explorers; RCA role defined

Wesley Loy

For Petroleum News

The Alaska Legislature, in one of its final acts for the 2010 session, passed a bill to encourage development of natural gas storage capacity in Cook Inlet.

House Bill 280, dubbed the Cook Inlet Recovery Act or CIRA, also enhances incentives for natural gas explorers, and clarifies the Regulatory Commission of Alaska’s powers with respect to gas storage operations and utility gas supply contracts.

The prime sponsor, Rep. Mike Hawker, R-Anchorage, said he hopes the bill will help alleviate the supply crunch facing the state’s Southcentral population center as Cook Inlet gas reserves dwindle and deliverability stresses mount.

The bill offers utilities “pathways to success” in keeping Southcentral homes and businesses lighted and heated in the near-term, Hawker said.

“The CIRA is a way to ensure that natural gas supplies are available year-round, allowing producers to store more gas in the lighter summer months for the big draws during winter,” said House Speaker Mike Chenault, R-Nikiski.

The bill passed with overwhelming majorities in both the House and Senate.

It now goes to Gov. Sean Parnell, who can sign it into law.

What it does

The 16-page bill has two major components, one providing tax credits and other incentives for development of gas storage capacity and another offering incentives to explorers.

The bill also contains language mandating that RCA regulate gas storage facilities. The RCA in January asked for legislative guidance, saying it was unsure of its authority over storage projects.

A big goal of Hawker’s was to spur rapid development of storage, as some have raised fears of potential blackouts in coming winters if insufficient gas is available during cold snaps for electric power and gas distribution utilities.

With respect to storage incentives, the bill creates a new corporate income tax credit of $1.50 per thousand cubic feet of new gas storage capacity opened during 2011-2015.

The maximum credit per facility would be $15 million. To qualify for a credit, a facility would need a working storage capacity of at least 500 million cubic feet of gas, and a minimum daily withdrawal capability of 10 million cubic feet.

The bill also provides owners of new storage operations a 10-year exemption from any state land lease fees or rents.

As for exploration incentives, the bill would sweeten existing Cook Inlet tax credits by providing a straight 40 percent credit against production taxes for exploration expenses. Under the current statute, the credit is 30 to 40 percent, a bill summary from Hawker’s office said.

The bill was amended so that the 40 percent credit actually applies to a much larger region of the state — the area south of the Brooks Range.

Hawker has said his bill is structured so that “any financial incentives are required to pass through the supply chain to utilities and, in turn, to their customers.”

Popular support

The idea of encouraging construction of gas storage capacity in Cook Inlet has garnered strong support among regulators and elected officials.

On March 29, Anchorage Mayor Dan Sullivan’s Energy Task Force released a resolution that said in part: “The Task Force concludes that storage of all types is essential to meeting the challenge of gas deliverability and reliability for heating and electric generation for Southcentral residents.”

In the Legislature, Hawker’s bill enjoyed strong bipartisan support.

It also won the support of Sen. Hollis French, an Anchorage Democrat who had introduced his own gas storage bill, Senate Bill 203. That bill didn’t advance.

French told Petroleum News he likes the Hawker bill.

“I was very happy,” he said. “It really didn’t matter whose bill passed. It mattered that we got the job done.”

French believes the bill will work. Already, he said, industry players have shown the desire to develop gas storage capacity, which can be quite expensive.

“There’s a business case out there for a storage facility, and this bill makes the business case a little better,” French said.

Enstar Natural Gas Co., the Anchorage gas utility, had been working with a TransCanada subsidiary, ANR Pipeline Co., on a storage venture called Cook Inlet Natural Gas Storage or CINGS. Recently, the companies found they were unable to work out a commercial agreement and Enstar elected to buy out ANR’s interest. But Enstar says it plans to move forward with the storage project.

State reservations

Near the end of the legislative session, the Parnell administration expressed some concerns about Hawker’s bill.

Administration officials don’t care for language that says the state’s oil and gas director “may not deny an application for a lease or assignment of a lease of state land for the development and operation of a gas storage facility solely because the gas storage facility would be used exclusively or primarily to store gas owned by the owner or operator of the gas storage facility.”

Hawker said he included the language at the behest of oil and gas companies who want to be able to hold gas for purposes of managing their inventory and fulfilling supply contracts.

But Alaska Oil and Gas Director Kevin Banks said he believes a storage lease carries a public service obligation, and so a storage facility should be available to third parties such as new Cook Inlet explorers who need storage capacity.

Typically, depleted gas reservoirs are used to store gas, and these are in very limited supply in Cook Inlet, Banks said.

Chevron and Marathon already have “propriety” storage facilities in Cook Inlet for warehousing their own gas.

Other views

Enstar spokesman John Sims said his company was most pleased with the RCA aspect of HB 280.

“The nice thing about it is, it provides some clarity to the process,” he said.

Enstar had favored RCA regulation of gas storage projects.

JR Wilcox, president of small oil and gas producer Cook Inlet Energy, also had praise for HB 280.

“CIRA should help make some investments economic that were marginal before,” he said. “The rise in the capital expenditure credit to 40 percent is particularly important for developing new fields in the Inlet.”

Bill Van Dyke, of Anchorage consulting firm PRA, noted in a preliminary review of the legislation that the 40 percent credit “only applies to wells. It does not apply to platforms and other infrastructure.”

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