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Vol. 15, No. 13 Week of March 28, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Gas storage bill passes

Alaska House votes 38-0 for act to encourage Cook Inlet gas storage, exploration

Wesley Loy

For Petroleum News

The Alaska House of Representatives on March 24 passed the Cook Inlet Recovery Act, which provides tax credits for construction of natural gas storage projects plus incentives for gas explorers.

The legislation, House Bill 280, could emerge as one as one of the state Legislature’s top energy initiatives for the session, which ends April 18.

The bill addresses a major and increasingly popular concern — a looming shortage of Cook Inlet gas, long the primary fuel for heating homes and businesses and for generating electricity for the state’s main population center including Anchorage.

The vote in favor of HB 280 was a resounding 38-0 with two House members absent. The prime sponsor was Rep. Mike Hawker, R-Anchorage.

The bill now moves to the Senate, where similar legislation is pending, Senate Bill 203. Its sponsor is Anchorage Democrat Sen. Hollis French, who is part of the Senate’s bipartisan majority.

The bill’s main features

The 18-page HB 280 has two major components, one providing tax credits and other incentives for development of gas storage capacity and another offering incentives to explorers.

The bill also contains important provisions pertaining to the Regulatory Commission of Alaska, including language mandating that RCA regulate gas storage facilities. The RCA in January said it was unsure of its authority with respect to storage.

Hawker and other proponents believe gas storage is crucial for ensuring the region has enough supply during cold winters. Where Cook Inlet producers once had no problem delivering enough gas to cover demand, deliverability has become strained in recent years.

“A critical and universally recognized part of the solution is large-scale gas storage, allowing utilities to purchase gas during lower demand periods; hold the gas in storage; then withdraw it when needed,” Hawker said in his sponsor statement for HB 280. “Establishing gas storage is crucial, and the state needs to promote the rapid development of storage facilities.”

With respect to storage incentives, the bill creates a new corporate income tax credit of $1.50 per thousand cubic feet of new gas storage capacity opened during 2011-15.

The maximum credit per facility would be $15 million. To qualify for a credit, a facility would need a working storage capacity of at least 500 million cubic feet of gas, and a minimum daily delivery capability of 10 million cubic feet.

The bill also offers new storage operations a 10-year exemption from any state land lease fees or rents.

As for exploration incentives, the bill would sweeten existing Cook Inlet tax credits by providing a straight 40 percent credit against production taxes for exploration expenses. Under the current statute, the credit is 30 to 40 percent, a bill summary from Hawker’s office said.

The bill also allows explorers to use the full value of their earned Cook Inlet credits in other parts of the state, such as the North Slope. The current statute generally allows those credits to be used only against taxes paid on Cook Inlet production, Hawker’s office said.

Finally, HB 280 allows Cook Inlet explorers to take their full production tax credit in one year, rather than over two.

Hawker said his bill is structured so that “any financial incentives are required to pass through the supply chain to utilities and, in turn, to their customers.”

Administration is wary

While the administration of Gov. Sean Parnell is supportive of developing Cook Inlet storage capacity and encouraging exploration, it has some misgivings about HB 280.

Of particular concern is a late amendment the House Finance Committee added that says state officials “may not deny an application for a lease or assignment of a lease of state land for the development and operation of a gas storage facility solely because the gas storage facility would be used exclusively or primarily to store gas owned by the owner or operator of the gas storage facility.”

Hawker said he offered the amendment at the behest of oil and gas companies who want to be able to hold gas for purposes of managing their inventory and fulfilling supply contracts.

Kevin Banks has a different perspective. As the state’s oil and gas director, he has the power to approve or deny storage leases.

Banks believes a storage lease carries a public service obligation, and so a storage facility should be available to third parties such as new Cook Inlet explorers who don’t have any storage capacity of their own.

Typically, depleted gas reservoirs are used to store gas, and the established oil and gas producers control these.

“There isn’t an empty gas field out there whose leases have been handed back to the state that I could offer on a competitive basis as a storage lease,” Banks told Petroleum News on March 23.

During a House Finance Committee hearing on March 17, legislators discussed who might take advantage of HB 280’s incentives for gas storage.

Hawker said a public utility might construct its own storage capacity, or contract with a third-party storage provider.

But producers simply warehousing their own produced gas for purposes of meeting delivery contracts later wouldn’t qualify for the storage development tax credits, Hawker said.

Chevron’s about-face

Chevron surprised state officials on March 23 with a letter to Natural Resources Commissioner Tom Irwin saying the company was withdrawing its application for a state lease to store natural gas in the Ivan River unit on the west side of Cook Inlet.

The letter gave no reason for the application withdrawal, and Chevron wasn’t able to provide more information to Petroleum News before this story went to press.

Chevron already has considerable Cook Inlet gas storage capacity, holding a state lease in the Pretty Creek unit and a federal lease in the Swanson River field.

The only other Cook Inlet gas storage lease belongs to Marathon, in the Kenai gas field.

These three storage operations have a combined capacity of 32.8 billion cubic feet.

By comparison, total Cook Inlet gas consumption annually exceeded 200 bcf over most of the past decade.

A venture called Cook Inlet Natural Gas Storage has proposed an 11 bcf storage project in the Cannery Loop gas field on the Kenai Peninsula. CINGS is a subsidiary of pipeline company TransCanada. It has the support of Enstar Natural Gas Co., the main gas utility for Southcentral Alaska.

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