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Vol. 12, No. 17 Week of April 29, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

AGIA moves in House

Resources CS has contractual tax freeze, vouchers, multi-tier projects

Kristen Nelson

Petroleum News

It was a hard night’s work, but shortly after 11 p.m. April 24 House Resources agreed on a committee substitute for the Alaska Gasline Inducement Act. House Finance is scheduled to begin hearing the bill April 27.

Senate Finance began hearing the companion bill April 23, so both bills are now before their final committees.

The House Resources committee substitute included a number of changes recommended by the administration and changes incorporated from the Senate Judiciary version as well as amendments proposed by committee members. The bill, 21 pages when the administration introduced it in early March, is now more than 30 pages.

The incorporation of some Senate changes in the House version reflects an interesting phenomenon.

Unlike last year’s big oil and gas bill, the petroleum profits tax or PPT, this year’s big bill has been somewhat a collaborative effort between House and Senate. Twice the dueling versions of PPT couldn’t be resolved in conference committee to the satisfaction of one or the other and House and Senate took turns rejecting conference versions.

It took three tries and a third special session before PPT passed.

This year’s more collaborative attitude was reflected April 19 when Senate Judiciary Chair Hollis French, D-Anchorage, and Sen. Lesil McGuire, R-Anchorage, gave House Resources an update on the approach Judiciary took on constitutional issues in the bill.

The constitution prohibits the Legislature from giving away taxing power, but, recognized that it might be necessary for the state to entice new industry, the constitution’s framers added “except as provided in this article,” an exception primarily seen in property tax. But the constitution also provides that other exemptions of like or different kind may be granted by general law.

French said that it is his belief that “general law means statute … (and) statute … is subject to change anytime the Legislature says.”

House Resources chose to go with the administration’s interpretation that a tax-freeze would be constitutional as a contractual provision, and included the contractual description of the tax freeze from the House Oil and Gas version of the bill.

Voucher provision

Two notable changes from the House Special Committee on Oil and Gas version were deletion of the gas utility revolving loan fund added by amendment in Oil and Gas and addition of inducement vouchers.

The administration, represented by Revenue Commissioner Pat Galvin and Revenue Deputy Commissioner Marcia Davis, opposed the revolving gas utility loan fund added in Oil and Gas because it does not directly relate to the purpose of AGIA, which is getting a gas pipeline built from the North Slope.

The gas utility revolving loan fund would have made loans to gas utilities for constructing or extending new gas service within the state; the interest rate was mandated at 2 percent.

The inducement vouchers apply to those — presumably utilities — acquiring firm transportation capacity in the first binding open season that do not hold oil and gas leases on the North Slope, and allow such purchasers access to the same inducements that would be available to a producer taking a firm transportation commitment in the initial open season.

The voucher, to be issued by the commissioners of Natural Resources and Revenue, entitle the recipient to the royalty and tax-freeze inducements in AGIA, “for gas shipped in the firm transportation capacity acquired by the person applying for the voucher during the first binding open season and described in the voucher.”

While the voucher has no direct value to a utility, it would presumably figure in a gas purchase negotiation, as it may be “transferred to a gas producer that has a binding obligation to sell gas to the person transferring the voucher under a gas purchase agreement.”

The producer may then claim the resource inducements for the gas shipped in the firm transportation capacity described in the voucher on gas produced and delivered to the purchaser on the North Slope.

The inducements are good until the expiration of the binding gas purchase agreement or the inducements — whichever occurs first.

Multiple design proposals

The committee accepted a conceptual version of an amendment proposed by Rep. Bob Roses, R-Anchorage, adding to the detailed description of the project that it “may include multiple design proposals, including different proposals for pipe diameter, wall thickness and transportation capacity.”

Roses said he was concerned that if a proposal included multiple sizes of pipe, the bid might not be considered. Rose asked producers if they would submit a bid including more than one size and he said two of the three said if they were going to submit bids they probably would submit various sizes because they wouldn’t know what the commitment would be for the gas.

“But my concern was, would it be considered a bid that would be noncompliant because it didn’t specify one size pipe.”

Galvin said an application would have to include an indication of which of multiple proposals was the primary project “and what are they going to use to determine which of … the designs is going to go forward.” He said he imagined the scenario would be tied to the amount of gas committed at an open season, “and we would evaluate the project based upon our expectation of the likelihood of each of those scenarios.”

Galvin said the applicants would be providing alternatives and also providing the state “with the conditions upon which they would be making that determination.” The state would then be able to evaluate the ultimate value of the proposal to the state.

Concerns about multi-tiered proposals

David Guttenberg, D-Fairbanks, said he was concerned about multiple-proposal applications where, after selection and an open season, it becomes evident that one of the non-selected applicants had a better focus on the actual project, based on gas committed. Would that, he asked, provide grounds for a challenge?

Galvin noted that limitations on challenges are included in the bill.

“But we do recognize the need to provide a fair competition,” he said, “so that we don’t end up in a situation where the best liar wins.” He said the administration is trying to strike a balance, “allowing the applicants to provide us with a complete picture of what they’re considering as they move forward and as more information becomes available to all of us, so that we can maximize our opportunity to have the greatest value.”

Guttenberg asked Galvin if he would prefer a single-tier or multi-tier project.

Galvin said if a multi-tiered application has “a legitimate possibility of coming in with a higher-value project,” then applicants need to make provision for potential success. “If they come in with basically three options and two of them, of the high-value side, are really just pie-in-the-sky, little chance of it succeeding — it doesn’t provide any value,” and those higher-end, pie-in-the-sky options would not be viewed favorably. “It might even actually be detrimental because they might be diverting their attention to something that’s not going to happen.”

“We always considered the multi-tiered approach to be something that would likely be reflected back through the application process,” Galvin said.

The state recognized from the beginning that there could be a problem if the gas wasn’t there for the licensee’s project, because, he said, the commissioners don’t have the ability to accept a scaled-down revision since it would lessen the value to the state.

“And therefore we assumed from the get-go that there would be a step-down opportunity that would be presented in the proposal by the applicant so as to avoid that outcome of the license actually having to be withdrawn” after a significant amount of money had been spent because only a smaller design pipe would succeed.

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