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Vol. 19, No. 12 Week of March 23, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

SB 138 in House

Governor’s proposal for state equity in LNG project passes Senate 15-5

Kristen Nelson

Petroleum News

Senate Bill 138, Gov. Sean Parnell’s legislation enabling the state to take an equity share in the Alaska LNG project, has passed the Senate. Hearings began in House Resources March 19.

The 15-5 Senate floor vote on SB 138 came March 18 following hours of debate on amendments proposed by minority Democrats, none of which passed. The Senate did approve, without objection, an amendment by Sens. Mike Dunleavy, R-Wasilla, and Lyman Hoffman, D-Bethel, to change the name of a fund established in the bill. The rural capital energy fund became the Alaska affordable energy fund, which Dunleavy said in introducing the amendment reflected the intention that all sections of the state would benefit.

The fund, which Hoffman added to the bill in Senate Finance, would use 10 percent of revenue from state royalties transported in an Alaska LNG project — after payment to the Alaska permanent fund — to address the energy needs of Alaskans. If we can’t address the energy needs of Alaskans, what good are we doing? Hoffman asked in Senate Finance March 14, the day the committee moved the amended bill.

Senate Finance had earlier amended the bill to direct the Alaska Energy Authority to develop a plan extending energy infrastructure to parts of the state without direct access to a North Slope natural gas pipeline. The Dunleavy-Hoffman amendment also added direction that for citizens with no economically viable infrastructure available, the AEA plan must recommend means for underwriting energy costs to make energy more affordable. The AEA plan is due to the Legislature in January 2017.

Equity at 25%

Senate Finance amended the bill to increase the tax on gas from 10.5 percent to 13 percent. That tax, combined with the state’s royalty, would give the state a 25 percent equity stake in the project. Both production tax and royalty would be paid in molecules, based on negotiated changes to leases, giving the state a share of natural gas matching its share in the project.

The bill gives the administration authority to negotiate contracts with the parties to the heads of agreement and memorandum of understanding announced in January. The HOA is between the state, the Alaska Gasline Development Corp., BP, ConocoPhillips, ExxonMobil and TransCanada and is the first step to legally binding contracts for an Alaska LNG project. The MOU, between the state and TransCanada, is a step away from the license which TransCanada holds under the Alaska Gasline Inducement Act, and provides for negotiation of a commercial agreement between the state and TransCanada under which TransCanada would hold the state’s interest in the gas treatment plant on the North Slope and in the pipeline, and invest necessary monies for the pre-FEED (front-end engineering and development) and FEED phases of the project. AGDC would hold the state’s interest in the LNG facility.

The project would be phased, with any party able to step aside after pre-FEED and again after FEED, before a final investment decision is made.

Under the bill the Legislature will review and approve contracts for the project and confidentiality provisions allow legislators to be briefed and provide input as the administration works on agreements so that contracts presented for final approval do not fail, as was the case with the agreement negotiated by the Murkowski administration under the Stranded Gas Development Act.

No AGDC subsidiary

Senate Finance also changed the governor’s bill to eliminate a proposed AGDC subsidiary for the LNG project, instead giving that authority directly to AGDC, with separate funds for the in-state gas pipeline AGDC was charged with last year and its work on the AKLNG project.

The AGDC board is also instructed to hire a project manager for the LNG project.

Other changes included a request that the governor establish an interim advisory board to advise on municipal involvement in a North Slope natural gas project. The HOA calls for PILT, payments in lieu of property tax, based on the volumes moving through the gas pipeline. The trans-Alaska oil pipeline is taxed based on value of the line and there has routinely been litigation over the value of the line.

Under a proposal by Sen. Lesil McGuire, R-Anchorage, Senate Resources amended the bill to allow individual ownership in the line, and requiring the Department of Revenue to report on how that might be done. Senate Finance added local governments and Native organizations to those who could have ownership portions.

Sen. Click Bishop, R-Fairbanks, sponsored amendments in Senate Finance to strengthen training for Alaska workers to ensure that Alaskans will be trained and available for jobs on the project.

The three ‘Ps’

“I applaud the Senate for voting today to advance the Alaska LNG Project and ensure Alaska’s gas is maximized for Alaskans’ benefit,” Parnell said in a statement following passage. He said the legislation “paves the way for Alaskans to become owners in the project and ensures an open, public process going forward.”

Sen. Anna Fairclough, R-Eagle River, who led debate in favor of the bill on the Senate floor, said in a statement following passage: “The Senate took into account three principles as it considered this legislation: Should we participate? If so, at what percentage? And lastly, what will be the process to advance Alaska’s LNG project.”

Fairclough said she believes that with the work the Senate did on the bill, “we are looking at the right gas at the right time,” and said the project would “bring affordable energy to Alaskans” while fortifying the treasury and economy “for generations to come.”

Senate Resources Chair Cathy Giessel, R-Anchorage, said the bill “allows us to develop the project engineering and construction plans, while the fiscal details are also scrutinized.”

“Business as usual has prevailed in our effort to get gas from the North Slope. But business as usual has gotten us no gas,” said Finance co-Chair Pete Kelly, R-Fairbanks. “That’s why I like the approach of SB 138. It’s different from anything we’ve done and I think it will work.”

Sen. Peter Micciche, R-Soldotna, a former Soldotna mayor, said the advisory board addresses “concerns we heard from affected municipal leaders along the route of the project from the North Slope to the Nikiski terminus.”

McGuire said she believes the individual ownership proposal “will get Alaskans reinvigorated about our robust oil and gas industry by allowing them the opportunity to have an equity share in the project, or, in other words, own a piece of the pipe.”

On job training Bishop said the state learned an important lesson from construction of the trans-Alaska oil pipeline: “And that was if we want to hire Alaskans, we have to train them for the jobs."

Opposition to the bill

In 16 proposed amendments — none of which passed the Senate — Senate minority members argued a number of points: that the state should have a majority ownership position (Sen. Hollis French, D-Anchorage); that leaseholders are required under the terms of their leases to develop hydrocarbons (Sen. Bill Wielechowski, D-Anchorage); that the state needs to go to open bidding for a pipeline partner, rather than partnering with TransCanada (French); that any contract should be subject to a 90-day public comment period (Sen. Berta Gardner, D-Anchorage); and that contracts not authorize payments in lieu of taxes to a municipality (Sen. Johnny Ellis, D-Anchorage).

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