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Gas tax issue still in negotiation between state, AKLNG partners
With a special session of the Alaska Legislature set to gavel in Oct. 24, Gov. Bill Walker said in an Oct. 21 press briefing that the administration is still negotiating, trying to get agreement on a withdrawal provision with its AKLNG project partners, BP, ConocoPhillips and ExxonMobil.
If agreement can be reached, he said, the proposed gas reserves tax legislation would be withdrawn.
The governor’s concern, which he noted he has been discussing with AKLNG partners since he took office last December, is that there be a provision which would ensure North Slope natural gas is available from all the producers, should one or more of them withdraw from AKLNG.
The administration had originally scheduled a briefing on its proposals for the first afternoon of the session, but legislative leaders said in an Oct. 21 statement that they wanted to get started with committee meetings, and said House and Senate Resources will meet Oct. 24 to consider a gas reserves tax proposal, and House and Senate Finance committees will meet that same day to consider the TransCanada buyout.
The administration has rescheduled its briefing to 8 a.m. Oct. 24, and cut it from five hours to two and a half. The House and Senate are scheduled to gavel in at 11 a.m. Oct. 24.
Majority leadership said committee meetings will continue daily until the work of the session is completed.
Two bills will deal with the TransCanada buyout - one to reimburse TransCanada for work done to date and the second to provide funding to the Alaska Gasline Development Corp. and state agencies to carry on the work TransCanada has been doing.
B&V TransCanada report A report prepared for the state by Black & Veatch argues that without various enabling agreements for the AKLNG project, it would be “premature and risky” for the state to commit to a long-term firm transportation services agreement with TransCanada by the end of the year.
The issue, Black & Veatch said in a Sept. 30 report, is that the state doesn’t have guarantees of gas in kind and without guarantees of the volume of gas it could ship, cannot commit to a long-term transportation agreement.
There is also the state’s desire to have greater control by having a direct investment in the midstream portion of the project - TransCanada holds the state’s interest in the gas treatment plant on the North Slope and the pipeline - and higher revenues to the state once the project goes into operation.
On the sovereign side, Black & Veatch said that buying out TransCanada would result in better project alignment - each partner with a proportion based on the natural gas it brings to the project - and direct voting rights for the state in the midstream. The state would also be in a better position to facilitate midstream expansion, the report said.
Black & Veatch also said that while the state would be responsible for paying the portion of midstream costs now paid by TransCanada, it would have higher operational cash flows of some $400 million a year and a lower risk of experiencing negative netbacks because the state would not be paying TransCanada’s return on equity.
Advantages to the state A benefit of the state’s agreement with TransCanada on the midstream is that the state had more time during the pre-front end engineering and design phase to begin developing in-house expertise and to assess its ability to finance its share of AKLNG without TransCanada, the report said.
Timing was also a factor - there was an expectation that project enabling agreements would be defined before December 2015, enabling the state to evaluate TransCanada’s role going forward.
Under the Alaska Gasline Inducement Act TransCanada had certain rights, which were dealt with in the AGIA termination agreement, and the agreement also gave the state “a clean off-ramp” with TransCanada in 2015. The state is required to pay for TransCanada’s pre-FEED development costs, “but such costs are ultimately unavoidable” Black & Veatch said.
Under the termination agreement TransCanada owns the state’s 25 percent share in the gas treatment plant and the pipeline and the state is required to commit to a 20-25 year transportation agreement with TransCanada by this December. While both the state and TransCanada have milestones and off ramps, the state is responsible for TransCanada’s costs, regardless of off ramps.
If the state terminates the agreement, TransCanada exits or the project terminates, the state replays TransCanada’s costs. If TransCanada stays in the project, the state replays TransCanada’s costs as long-term tariffs on use of the gas treatment plant the shipment through the pipeline.
Economic impacts Without TransCanada the state has to pay TransCanada’s costs to date and is responsible for near-term cash calls for the midstream currently met by TransCanada. Long term, cash flows to the state but there is also risk exposure for the state.
Financing is also an issue, because if the TransCanada arrangement is terminated the state will have to pay termination costs and remaining pre-FEED, FEED and construction costs.
Without TransCanada, the net present value to the state could be as much as $1.2 billion over 20 years at a 5 percent discount rate, a proxy for the state’s cost of borrowing.
If TransCanada stays in the midstream, the state could be exposed to negative netback if revenue from its sale of royalty-in-kind gas and tax as gas is insufficient to cover its cost obligations as a shipper. While many of the state’s costs remain the same whether it or TransCanada owns its share of the midstream, there would be differences based on how the project is financed, income tax, property tax and return on equity.
Black & Veatch said that without TransCanada, the state’s midstream cost obligations are expected to be about $7.30 per million British thermal units; with TransCanada, those cost obligations are expected to be some $8.20 per million Btu.
The differences arise because with TransCanada the state pays TransCanada’s weighted cost of capital, and the tariff includes TransCanada property tax and income tax obligations, payments which the state doesn’t make.
- KRISTEN NELSON
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