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Vol. 19, No. 9 Week of March 02, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

SB 138 out of Resources

Senate panel expands intent language, asks for plan for Alaskans to own portion

Kristen Nelson

Petroleum News

A committee substitute for Senate Bill 138, enabling legislation for state participation in an Alaska LNG project, was moved out of Senate Resources Feb. 24 and is now in Senate Finance.

The enabling legislation authorizes state actions specified in the heads of agreement and memorandum of understanding which the administration negotiated with the producers and TransCanada (the HOA) and with TransCanada (the MOU). On the state side, the commissioners of Natural Resources and Revenue are signatories with TransCanada on the MOU; the commissioners and the Alaska Gasline Development Corp. are the state signatories on the HOA.

Major Senate Resources’ changes to SB 138 include addition of intent language which broadly captures what is in the HOA, putting a floor of 12.5 percent on royalty rates where the DNR commissioner is authorized to negotiate fixed royalty rates for net profit share leases and leases with sliding scales and addition of a section calling for development of a plan for residents to participate in ownership of a North Slope natural gas pipeline.

Not below 12.5 percent

Senate Resources Chair Cathy Giessel, R-Anchorage, said the 12.5 percent base was a change requested by Sen. Hollis French, D-Anchorage, and Sen. Peter Micciche, R-Kenai. Micciche said the 12.5 percent base royalty is important because of royalty contributions to the Permanent Fund.

In discussion on the change French asked how, if the state receives its royalties in molecules rather than cash, one-quarter of the royalties get deposited into the Permanent Fund.

DNR Commissioner Joe Balash told the committee the department would continue to keep track of the state’s royalty interest, even when taken as gas, so 25 percent of the net royalty value would go into the Permanent Fund.

French also asked how higher royalties from Point Thomson leases would fit with a 12.5 percent base.

Balash said the bill doesn’t affect base royalty rates, but only substitutes a fixed rate for leases with a sliding scale royalty or net profit share leases. Those often have a 12.5 percent base, he said, so a fixed rate would have to be fair the state as the landowner as well as to the lessee. Where a sliding scale royalty has a range from 12.5 to 20 percent, Balash told the committee he’d be arguing “very strongly” for a number closer to 20, while the lessee would be arguing for a number closer to 12.5 percent.

Leases at Point Thomson without a sliding scale or net profit share won’t be affected, Balash said. The state will retain the higher royalty interest at Point Thomson.

Original leases at Prudhoe Bay had a 12.5 percent royalty, Balash said, while Point Thomson leases generally have a higher rate. In the long run about 75 percent of the gas is projected to come from Prudhoe Bay and 25 percent from Point Thomson, and a blended royalty rate of about 13 percent is expected, he said.

A balancing agreement will be required to ensure that if one field or another is producing more or less than expected, that there’s an accounting for the gas and a make-up provision. Balash said that will be important for both the state and the producers, to ensure that no party is stuck with too much or too little capacity.

The ownership option

Sen. Lesil McGuire, R-Anchorage, authored the amendment requiring the commissioner of Revenue to present a plan and suggested legislation allowing residents of the state to participate as co-owners in a North Slope natural gas pipeline.

McGuire said this was discussed in 2008 and 2009 when legislators did omnibus energy work.

She said her generation, which grew up in Alaska, was in “instinctive alignment with industry” because they were here before the trans-Alaska oil pipeline was built and got to see Alaska with and without the benefits the industry brought.

Today, McGuire said, more than 60 percent of residents have lived in the state for 7 years or less. Perhaps we’re lacking alignment in recent years, she said.

Alaskans need to know they’re getting something out of the partnership with industry and start feeling it in a meaningful way, she said, and an opportunity for ownership would create alignment moving forward.

Because there are Securities and Exchange Commission issues, requiring the Revenue commissioner to present a plan when the commissioner of Natural Resources submits the first contract to the Legislature for approval provides Revenue a chance to figure out how such a plan would work.

McGuire said her thought was that the “pick, click, give” option on the Permanent Fund would be a way for Alaskans to invest and the amendment provides that investment may be by designation of “an amount of a permanent fund dividend to be deducted for the investment.”

Other issues

Issues which had been discussed but were not added to the committee substitute for SB 138 included rebidding for a pipeline partner rather than continuing with TransCanada, which holds the AGIA license. The MOU provides a transition from AGIA to a more traditional commercial arrangement between TransCanada and the state.

The HOA provides that the state will consult with communities on payments in lieu of property taxes or PILT to provide fiscal surety for the project. This drew objections from communities which would be affected by the project.

Giessel said intent language in the bill provides that concerns of municipalities must be considered and said the committee had heard from municipalities that they wish to be part of negotiations. Micciche, a former mayor, said Alaska municipalities must retain the ability to tax and said he thinks that will occur during negotiations.

Sen. Anna Fairclough, R-Eagle River, a former member of the Anchorage Assembly, said she wanted to see a process where municipalities would negotiate as a group.

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