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Vol. 19, No. 11 Week of March 16, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

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Senate Finance ups state equity percentage; drops AGDC subsidiary in AKLNG role

Kristen Nelson

Petroleum News

The Senate Finance Committee is nearing completion of its work on Gov. Sean Parnell’s enabling legislation for state equity participation in the Alaska LNG Project. Once the bill comes out of Senate Finance and is approved by the whole Senate, it goes to House Resources.

Senate Bill 138 would have the state take an equity share — along with BP, ConocoPhillips, ExxonMobil and TransCanada — in a project to move North Slope natural gas to Asia as liquefied natural gas, requiring a gas treatment plant on the North Slope, a pipeline and a liquefaction facility at tidewater.

A committee substitute for SB 138, adopted as a working draft March 11, increases the state’s gas tax take from 10.5 percent to 13 percent, which ups the state’s equity share in the project from 20 to 25 percent. The equity share is a combination of the state taking its gas tax as molecules and taking its royalty as molecules.

The CS also eliminates a provision in the governor’s bill creating a new subsidiary within the Alaska Gasline Development Corp. to handle the state’s interest in the LNG project. Under the CS, that duty is given directly to AGDC. The CS provides that funds for the LNG project be kept separate from funding provided to AGDC for an in-state gas pipeline, AGDC’s original charge.

The CS was amended in committee to direct the AGDC board to “appoint a program director for an Alaska liquefied natural gas project” serving at the pleasure of the board and reporting to the executive director of AGDC.

The CS had provided that the commissioners of the departments of Natural Resources and Revenue could not serve on the AGDC board; this section was eliminated in committee.

Sen. Anna Fairclough, R-Eagle River, who introduced the amendment eliminating this provision, said it was her intent to allow DNR and Revenue to bring their expertise to the AGDC board.

DNR Commissioner Joe Balash told the committee the provision prohibiting the commissioners from serving on the board was not in the original bill. He said the commissioners can’t serve on the AGDC board as long as there is license in place under the Alaska Gasline Inducement Act and the expectation was that AGIA would go away, allowing the DNR and Revenue commissioners to be on the board.

Under the memorandum of understanding between the state and TransCanada, which holds the AGIA license, one of the project documents announced by the governor in early January, upon passage of enabling legislation the state and TransCanada would transition from the AGIA license to a commercial arrangement, eliminating AGIA constraints.

Tax concern from municipalities

Municipalities raised a concern with the bill, telling legislators they wanted a role in negotiations because municipalities would be impacted by decisions on how property tax on the project is collected.

That concern was echoed by committee members.

The heads of agreement, the document between the state, the North Slope producers and TransCanada, specified payments in lieu of property tax, and intent language in the CS provides that “the interests of the state and local governmental entities must be considered in contract negotiations to protect the financial and other interests of the state and these local governmental entities,” but municipalities along the route of the project have told legislators that isn’t enough.

An amendment by Sen. Donny Olson, D-Nome, included in the CS added a section requesting that the governor establish “an interim advisory board” which would “advise the governor on municipal involvement in a North Slope natural gas project,” and would include representatives of municipalities, the DNR and Revenue commissioners, representatives of “oil and gas and gas only lessees on the North Slope, and representatives of other persons expected to be directly involved in the development of a North Slope natural gas project.”

Energy for all of Alaska

A concern expressed in the committee by Sen. Lyman Hoffman, D-Bethel, was that many areas of the state would not benefit from a gas pipeline and an amendment from Hoffman addresses that issue in the CS.

A new section says the Alaska Energy Authority, in consultation with AGDC, the Alaska Industrial Development and Export Authority and the Department of Revenue, “shall develop a plan for developing infrastructure to deliver more affordable energy to areas of the state that are not expected to have direct access to a North Slope natural gas pipeline,” identifying ownership options, different energy options and describing and recommending “the means for generating, delivering, receiving, and storing energy in the most cost-efficient manner.” The provision says AEA “may consider the development of regional energy systems that can receive and store bulk fuel in quantity and distribute that fuel as needed within the region.”

The provision added in Senate Resources requiring a plan from the Department of Revenue for how Alaskans could participate in pipeline ownership has been revised based on amendments from Fairclough and Olson to include local governments and Native corporations as potential owners.

An amendment from Olson adopted in the committee restricts subsequent employment by a public officer “who negotiates a contract or develops terms for inclusion in a proposed contract associated with a North Slope natural gas project.” As originally introduced, this was a 10-year restriction, changed in committee to three years, prohibiting a person who was party to contract negotiations for the project as a public officer from representing, advising, assisting for compensation or accepting employment from a person who was a party to the contract.

TransCanada

DNR and Revenue put out a white paper March 11 summarizing the value to the state of TransCanada participation in the AKLNG Project.

The commissioners said partnering with TransCanada will reduce the state’s cash outlays, protecting cash reserves and credit rating; help maintain momentum on the project; bring in “a preeminent pipeline company with northern pipeline experience”; and bring “in a third party whose interests lie in facilitating access and expansions.”

It has been suggested that the state should not just continue with TransCanada but request proposals from pipeline companies. The commissioners say in the white paper that “the time necessary to complete such a process would likely have an adverse impact on the momentum of the AKLNG project,” and cite consultants who have said each year of delay would cost the state $800 million in net present value — compared to a possible reduction in return on equity of 1 percent from a new partner (valued at $100 million) or reducing the equity portion of the capital structure by 5 percent (valued at $200 million).

Under the terms of the MOU, TransCanada would hold the state’s interest in the gas treatment plant and the pipeline and the state would hold just its interest in the LNG facility (the role envisioned for AGDC). With TransCanada as a partner, for example, the state’s share of the pre-FEED stage (front end engineering and development) of the project would be $35 million, compared to $87 million if the state went it alone; in the FEED stage the state’s investment with TransCanada as a partner would be $144 million, compared to $360 million for going it alone; and in the construction stage the state’s share with TransCanada would be $5.4 billion compared to $10.6 billion without TransCanada.

The committee was preparing to review fiscal notes and final amendments as this issue of Petroleum News went to print March 13.



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