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Vol. 13, No. 27 Week of July 06, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Galvin on mediation

McGuire wants mediation; Revenue chief says Alaska first has to have position

Kristen Nelson

Petroleum News

Alaska legislators are hearing from a number of constituencies as they debate, and approach a vote on, a TransCanada Alaska license under the Alaska Gasline Inducement Act.

Many Alaskans want natural gas for in-state use — and they want it in a shorter timeframe than a main pipeline to market would provide. Many people still favor an all-Alaska liquefied natural gas project. Others believe the state should not spend money on an AGIA license, which would provide up to $500 million in matching funds in exchange for meeting state requirements for the line, but should instead back the Denali pipeline proposal put on the table earlier this year by BP and ConocoPhillips.

Sen. Lesil McGuire, R-Anchorage, responding to public testimony, suggested at Anchorage legislative hearings June 19 that the administration should call a halt to the AGIA license approval process and talk to all the parties. She said at public testimony the previous day one man was concerned “that we are not facilitating, we’re not doing enough to facilitate bringing all the parties together to try and figure out what we can do as a team to move the gas line forward for Alaska.”

She asked Commissioner of Revenue Pat Galvin if the administration would consider calling a halt to the AGIA process and using a mediator to try to bring the parties together.

McGuire said people in her district, who have worked for ConocoPhillips for 15-20 years or for BP for 30 years, have told her “they feel ... this vote is for them or against them. That’s how they feel.”

She said she believes the upcoming vote on AGIA “divides us.”

McGuire compared granting the AGIA license to TransCanada to marriage.

“Once the license is locked in, we are, we’re married. We’re all married.” Divorces can happen, she said, “but it’s pretty expensive and it takes a lot of time and by the time a lot of people who are divorced look back over the time value of their life for 10 years, the same opportunities don’t exist.”

Concerns with AGIA

Some of the results of AGIA are good: “I like the pressure on the producers: I think it’s good,” McGuire said.

But, she said of the $500 million in matching funds: “We don’t know if we need it or not. We don’t know if that is the thing that we need to put into the equation to get it going. There might be other ways.”

McGuire said she is concerned that the language in AGIA disallowing actions that could be construed as supporting another pipeline could get the state in legal difficulties. She said in spite of administration assurances that the statute was clear on the issue of what the state can and can’t do in support of another project without being required to pay treble damages, “I have seen statutes interpreted in bizarre ways and I have seen judges agree with those bizarre interpretations. And I’m uncomfortable.”

And approval of an AGIA license is “a political thing,” she said, with 60 lawmakers, 50 running in the coming election, and “an incredibly popular governor: I mean, you cannot get in the way of this governor; she is very popular.”

She also said she is concerned that some of the difficulties between industry and the Department of Natural Resources over termination of the Point Thomson unit have “gotten personal.”

What about mediation

McGuire asked Commissioner of Revenue Pat Galvin if he would consider mediation.

Galvin told McGuire the issue she raised was the crux of the question of how the state gets from here to there.

The gas line is a commercial enterprise and the state is trying to “participate in a meaningful way,” he said.

But it’s difficult for a representational form of government to participate in the same way a business does, Galvin said.

“Frankly, we have to take a position; we have to make decisions on an ongoing basis in order to be able to ultimately succeed.”

And the state can’t do that “in a way that’s very nimble and very real time, as you would hope to be able to do if you were in a purely commercial setting. And so we have to accept the fact that there’s going to be a little bit more structure or separation between the decisions than what we would normally see as an optimal way to get from here to there.”

Galvin said the state has to take a position. “We have to agree to it; we have to ... go through all the ... discussions, have all the pros and cons laid out and actually take a vote and you guys have to agree with the executive branch” in order for the process to go forward.

That’s what AGIA does, he said. It sequences the decision making and allows the state to reach the goal, “so we have to do it in a certain manner.”

Possible vs. not

One of the things that the state is establishing is “what’s in the realm of the possible; what are the things the state’s willing to do? But we’re also establishing what’s ... outside of the realm of the possible.”

The state has been defining the possible vs. the not possible over the past few years, he said, calling it a fairly disjointed process which takes the state a long time.

“But we’re doing that,” Galvin said.

“We’ve established to a certain extent what’s outside of the acceptable. And now we’re trying to identify what is within the realm of the possible and we do that both in our decision making and our discussion of it.”

He said it’s critical for the Legislature and the executive branch, together, “to establish what is the framework for further discussion. And we do that by approving this license and saying these are the terms that Alaska wants to operate within.”

If the state diverts from the process it is in — discussing and voting on an AGIA license — “it sets up an expectation that there is a whole realm of alternative possibilities and it expands the discussion beyond the ability for us to bring it back and actually find agreement ... get the parties to recognize what is the actual framework of the game, to reach consensus and conclusion and agreement within a relative period of time.”

A decision on the license is a statement from Alaska on what the framework of the discussion will be, Galvin said.

Coming together

Galvin said he does not see the process “as erecting barriers in our ability to bring the parties together. In fact I think that it will be a major advancement in our ability to get the parties to come together because we will again shear off and eliminate what is ... now outside the realm of the discussion.”

What remains is “the makings of our deal.”

Could there be a possibility of an impasse in the future that might require mediation?

There is that possibility, Galvin said.

“We’re not there yet. We’re not at that point.”

That’s because the discussion hasn’t been framed enough “to identify that we are at an impasse and we need to have somebody come in and help us see things differently.”

He said the administration is not trying to drive a wedge between the producers and the state on the gas line.

“We’re trying to advance this project” and getting TransCanada going on the project “provides the framework for the discussion” that can eventually bring about alignment, Galvin said.

“We believe that there is tremendous opportunity, once the license is issued, to bring the parties together” and identify a deal, Galvin said June 25 at a Senate Judiciary Committee hearing. “But until we get to that point, we don’t have a foundation upon which to have that discussion that we believe is solid enough to actually engage in meaningful mediation or negotiation or whatever term you want to use.”

He also said a sense of momentum has been created over the last year and if the Legislature doesn’t make a decision, “we end up losing that momentum.”

Galvin said he thinks “we have done what we need to do in order to create the atmosphere for resolution. And we need to hit that home by having the Legislature make a decision on this.”

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Definition, not mediation, please

While Sen. Lesil McGuire, R-Anchorage, has asked the administration to consider mediation before the vote on the Alaska Gasline Inducement Act license application by TransCanada Alaska, fellow Anchorage senators, Democrats Hollis French and Bill Wielechowski, have asked Denali pipeline — the line proposed by BP and ConocoPhillips — to specify how its line would compare on AGIA requirements met by TransCanada, and to do so before the Legislature reconvenes July 9.

“In the interest of transparency and full disclosure from all parties, we seek to get more information on the table about your proposed alternative, so Alaskans can fully consider all options,” the two said in a June 30 letter to Denali President Bud Fackrell.

BP and ConocoPhillips said Fackrell would respond.

ConocoPhillips Alaska spokeswoman Natalie Lowman told Petroleum News in a June 30 e-mail that ConocoPhillips understands that Fackrell, president of Denali — The Alaska Gas Pipeline LLC, “will be prepared to respond to the issues raised in the letter when he testifies before the Legislature in July.”

BP sent a response from Fackrell in a July 1 e-mail:

“We are more than happy to talk about the Denali project. I will be testifying before the Legislature next week, and will be prepared to address the topics raised in the senators’ letter,” Fackrell said.

Questions based on AGIA

French and Wielechowski asked how Denali would meet the AGIA requirements met by TransCanada. They specifically asked if Denali would:

• Commit to hold an open season for firm shipping commitments within two to three years?

• Commit to a firm date for an application to the Federal Energy Regulatory Commission (Denali received FERC approval of a pre-filing request from FERC June 25)?

• Commit to financial provisions to keep the tariff low, including a debt-to-equity ratio on construction of not more than 70 percent debt to 30 percent equity?

• Commit to soliciting demand for a pipeline expansion at least every two years, to expanding when there is sufficient need and to using rolled-in rates for expansion costs up to 115 percent of initial rates?

• Commit to at least five delivery points in Alaska with distance-sensitive rates?

• Commit to capital cost overrun measures that protect the state and shippers from an unreasonably high tariff?

• Commit to hiring qualified Alaskans for construction and operation of the gas pipeline and to signing project labor agreements to ensure that as many Alaskans as possible help construct the gas line?

• Define the fiscal terms that would be requested from the state.

State offers 10 years

AGIA promises 10 years of fiscal stability to shippers committing gas at an initial open season, including 10 years of contractual stability on gas royalties and 10 years of statutory stability on gas production taxes following the beginning of gas shipments, French and Wielechowski wrote.

“If the license is issued to TransCanada, AGIA will prevent the Legislature from extending that fiscal stability, or any other preferential royalty or tax terms, to any other entity. Those provisions will make it difficult and expensive for the Legislature to ever grant fiscal stability to gas shipped through your proposed Denali pipeline,” they said.

Producers have indicated that fiscal terms must be negotiated with the state before gas is shipped, but “there has not been a clear articulation of what those terms are. It is time for all parties interested in constructing a natural gas pipeline to be forthcoming and tell Alaskans what they are willing to do and on what terms,” the two said. “To not be upfront about those terms risks misleading Alaskans about the costs and benefits of each of the proposals under consideration. We ask for your cooperation in helping to inform all Alaskans about the Denali proposal and the fiscal terms you will require. In short, it is time for you to put your cards on the table.”

—Kristen Nelson