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Vol. 12, No. 9 Week of March 04, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Cash, but no ownership

Alaska gas pipeline act has state investing up to $500M for certification

Kristen Nelson

Petroleum News

Alaska would contribute to upfront costs of an Alaska natural gas pipeline project, but would not be an owner, Gov. Sarah Palin said Feb. 28 from Washington, D.C.

The governor, in the nation’s capital meeting with key energy officials, provided a press briefing on the Alaska Gasline Inducement Act she plans to introduce to the Legislature March 2.

Palin said Alaska will provide a trained local workforce, predictable regulatory requirements and a state contribution to early development of the line. That contribution would be up to $500 million, on a 50/50 basis, of the estimated $1 billion it will take for a project to receive certification from the Federal Energy Regulatory Commission.

Palin met with FERC Chairman Joseph Kelliher Feb. 26, and said in a statement that it was an opportunity to walk Kelliher through her proposal. “I recognize, as does the chairman, that a natural gas pipeline is not only in the state’s best interest, but in the nation’s best interest as well,” the governor said.

Kelliher said he believes the governor’s plans “ represent the best hope for building a pipeline to bring Alaska’s vast natural gas resources to the energy-consuming Lower 48 states.” He said the commission stands “ready to help to the extent we can.”

The governor also met with Interior Secretary Dirk Kempthorne, Energy Secretary Sam Bodman and Alaska’s congressional delegation.

One-stop regulatory shopping

Marty Rutherford, deputy commissioner of the Department of Natural Resources, and head of the administration’s gas pipeline team, was also in Washington for the meetings. She said the $500 million capital match will be toward the cost of obtaining a FERC certificate and could not be rolled into the tariff, so it would result in a lower tariff for all shippers. Over 25 to 30 years the state would recoup a good deal of that $500 million because of lower tariffs.

The state will mimic what the federal government has done and provide a single point of contact, a state pipeline coordinator, for coordinating among state regulatory agencies on permitting. Rutherford said the federal government has indicated it is willing to integrate its regulatory process with that of the state. The goal, she said, is to provide one-stop shopping for state and federal regulatory processes.

On the upstream side of the project, the state would reward producers making commitments to ship in a first open season with a contractual commitment that if the Legislature changed the production tax rate for gas in the first 10-year period, the producers would be reimbursed the difference as a tax credit. Rutherford said the state will change its existing lease provisions to provide predictability in how royalty rates are determined. The formula used now is complicated, she said, and the state would make the formula more certain for producers who commit gas into the project. The state will also change lease provisions on how it switches between royalty in value and royalty in kind to give producers longer notice and will take the transportation commitment to market for RIK.

All of this, she said, is intended to provide some elimination of risk for parties who will develop natural gas.

State wants commitments

What does the state want?

Rutherford said applicants would have to commit to hold an open season within three years of a licensee being determined and commit to a firm date for an application to FERC. Applicants would have to identify interim steps they intend to take and timing within the application and would need to tell the state how they intend to use matching funds.

The state wants financial provisions that will ensure that the tariff rate is low for all upstream companies and a commitment to solicit for expansion demand on the pipeline every two years and, when reasonable, to expand the pipeline.

The state also wants applicants to indicate how they intend to deal with the risk of cost overruns, and how they might take on some of that risk in the tariff structure. The state wants at least five off-take points within Alaska and a commitment to hire Alaskans to the degree allowed by law.

The state wants to make sure, Rutherford said, that applicants are able to perform commitments they are making to the state. The purpose of AGIA is to move the project forward and put Alaska skin in the game so the nation and applicants know the state is willing to share some of the risk, Rutherford said.

The administration will ask the Legislature to pass AGIA this session and hopes to have a request for proposals out by June or July, with applications due Oct. 1. Rutherford said the timeline would be for state and public review and a written decision to the Legislature by the end of January 2008, with a goal to have a license issued April 1, 2008, so that field work can begin in the summer of 2008.

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