That’s been going on in the gas pipeline negotiations, the confidential discussions between the State of Alaska and the sponsor group (BP, ConocoPhillips and ExxonMobil) over the last year?
Jim Clark gave the Alaska Support Industry Alliance a glimpse into those negotiations Oct. 13.
The state submitted its proposal almost a year ago, he said, and in December the sponsor group responded.
“And what we’ve been doing since then is attempting to narrow the gap,” Clark said.
From January through July, “the negotiations consisted basically of an exchange of information: workshops on various issues that were associated with the fact that the state was going to take an equity ownership and some of the complications of that and taking our royalty and tax gas in kind.”
The things the negotiators tackled fell into three categories, he said: consequences of the state taking its gas in kind; the question of the amount of government take and making sure the state is fairly compensated; and specific issues such as work commitment, explorer access to the pipeline and gas for use in Alaska.
In June “the governor decided it was time to kick start the negotiations,” and “in July we basically began what has been almost like a labor negotiation … 24 hours a day, seven days a week.” Clark said he counted it as 24 hours a day because most of the negotiating team wakes up in the middle of the night thinking about things that should be discussed.
In addition to Revenue Commissioner Bill Corbus, Natural Resources Commissioner Tom Irwin and Attorney General Dave Marquez, a team of 16 to 18 people have worked full time on the negotiations for the last 13 weeks. “And I just really take my hat off to them,” Clark said, “because they’ve been extremely thoughtful, smart — and had the best interests of the state at heart.”
What’s been accomplished?
“We have proposed and laid on the table a strong fiscal package that I would submit is good for the state,” Clark said. And the state is now waiting for a response from the sponsor group. “Neither side got everything it wanted,” he said. “And there are still issues that we’re discussing … as we try to bring this to a close.”
If the sponsor group accepts, there will be a fiscal interest finding led by Commissioner Corbus. “We will be doing that in conjunction with the Legislative Budget and Audit Committee,” Clark said. The co-chairs of Legislative Budget and Audit, Rep. Ralph Samuels and Sen. Gene Therriault, have devoted “incredible time and effort” to the gas line contract. “They’ve signed a confidentiality agreement that binds us all from talking about the details, but they have really immersed themselves in the details and understand them well and actually we could bring them to the negotiating table tomorrow because they understand the issues that well.”
The fiscal interest finding will go out for a public review process “that the governor has said will be longer than the 30-day minimum that the law requires” and there will probably be public hearings held around the state, Clark said.
The administration will then spend 30 days assembling the comments and determining “what if anything from the comments might require another round of negotiations with the sponsor group.”
Once the contract is complete it will be presented to the Legislature, which will “give us a thumbs up or thumbs down on what we’ve proposed.”
Is government take fair?
On the issue of government take, Clark said that when the contract is presented for public comment the administration will also be presenting “all of what we’ve produced in-house,” comparing government take under the status quo with government take under the contract.
“But the problem is that we really needed to be an equity investor and to take our gas, both the royalty and tax gas, to make this thing work. This is a low rate-of-return project worldwide and in order to push this over the top we needed to make an equity investment to get a gas line,” he said.
Because the state is not proposing the status quo, but instead is taking an equity interest in the project, Clark said it is worthwhile to compare Alaska’s take with what other governments get in international projects. Clark referred to remarks made by Pedro van Meurs, comparing the government take in the proposed contract favorably with other frontier gas projects (see story on van Meurs’ remarks in Oct. 16 issue of Petroleum News).
Clark said he’s sure people will say “if I’d negotiated the contract I could have gotten a little bit more here and a little bit more there,” but overall, “I think the people of the state will be pretty pleased when they see how we did … compared to … the numbers that are achieved by other similarly situated states around the world,” such as the Mackenzie Delta, Nova Scotia, Venezuela and Tobago. These are what van Meurs called “the frontier areas, where there’s a long distance from the resource to market,” Clark said.
Capacity risk
There are a number of other factors, such as risk that need to be considered, Clark said. “There is the risk of taking capacity” in the gas pipeline, a risk that he said has to be managed well.
The state will make a firm, long-term transportation commitment when it takes capacity. “It’s a big deal and it has to be carefully managed.”
Then the state has to market its gas. “We’re going to need to enter into marketing arrangements that will assure that we can do that.” Clark said he couldn’t go into details, “but we have begun preliminary plans that probably will work out in several phases.” Initially the state will probably be looking for a lot of help with marketing; then it would “develop some expertise in-house and look to do it in-house over time.”
Those are risks, he said, “that Alaskans are going to have to carefully evaluate when they look at this contract.”
While focus is now on negotiating the contract, Clark said the administration is also taking some implementation steps that will “show up in legislation associated with the contract,” but he said “we have not got all the pieces on that … together at this moment.”
The governor’s Alberta vision
There need to be assurances that the explorers — companies without current gas reserves — will have access to a gas pipeline to move gas they discover in the future. Clark said the state believes it was successful with the Federal Energy Regulatory Commission on the open season issue, “but those are something I think you’ll want to review in terms of getting an idea of what the access provisions would be for the state.”
The governor’s vision, Clark said, is that, over time, the North Slope would resemble Alberta, “with many, many explorers, with a real thorough effort to extract Alaska’s oil and gas.”
With thorough exploration, more oil could be found, as well as gas, so one of the ways the agreement needs to be evaluated is: “Have we set up a good enough system so that new explorers that come in will be encouraged to find gas?” And perhaps also find oil?
Clark said the work commitment provisions will be a disappointment to some, because it isn’t possible to mandate a start date for the project. “The reality is that no big project gets built that way. What you need to do is figure a way that allows the first step to be taken, to determine whether you have a project at all.”
Fiscal certainty from Alaska is “just a step,” Clark said.
Next the sponsor group has to go through the design engineering and determine the costs and if they can be reduced “to make sure we have a project.”
Then applications have to be submitted to the Federal Energy Regulatory Commission and Canadian regulators “to see whether or not we can get the necessary permits, what the conditions are, and what that will do to costs. Only when you get that far do you know whether you have a project at all, and then we can move forward and talk about getting it constructed.”
Legislative response
Clark said a number of legislators have signed the confidentiality agreement “that allows us to go through the provisions of the contract with them and obviously it’s in our interest to make sure that they’re informed as we go so that we don’t provide them any surprises and that we learn as we negotiate of anything that’s going to make the contract dead on arrival.”
He said legislators have worked with the administration to identify things that they believe won’t work.
“And I’ve been … absolutely unhesitant going back to the bargaining table and saying this isn’t going to work and there’s no point in us moving on a contract that we’re not going to be able to get past the Legislature.”
But that, he observed, is just an “initial screening.” The Legislature certainly hasn’t said what the administration has done is okay. “They’ll make an independent evaluation of that,” Clark said.
He said he has no doubt “that this will get a fair hearing and an independent hearing just as it should when it gets to the Legislature.” Clark said he believes the administration “can make a compelling case to the Legislature why this is in the state’s interest and I’m perfectly comfortable in abiding by the decision that the Legislature makes…”
Clark: negotiations ‘fun’
“This has been fun, because this is like negotiating on several levels,” Clark said.
First there is negotiating with the state’s team: various viewpoints have been “passionately expressed within our own team” and that has made for a better product. “I’m very proud of the independence of the various team members who’ve contributed their views: They’re smart, they’re hardworking and they’ve done a lot to help formulate a combined view…”
Clark said he also has had “to negotiate with the governor from time to time” as he contributes ideas to the process.
And there is negotiation with the Legislature.
“We do all that before we even get to the negotiating table with the sponsor group, which has made life very interesting.”
