|
Gas condemnation a quick headline for Young, Stevens State of Alaska likely producers’ next stop in determining gas line economics Larry Persily Petroleum News Juneau Correspondent
Although the headline-grabber was congressional talk of possibly taking North Slope natural gas by condemnation to supply a government-led pipeline, the more likely option for getting the gas to market could be state-producer negotiation of an overall tax package for a private-sector project.
Rep. Don Young, R-Alaska, started the talk of taking the gas by imminent domain, much like a government takes property for a highway right of way, with Sen. Ted Stevens, R-Alaska, adding his support for at least considering the move as an option for getting a gas pipeline built.
They made their comments to reporters asking about the apparent failure to win federal tax credits in the energy bill to protect producers from the possibility of low gas prices, a provision two of the three major North Slope producers say they need before risking billions of dollars on the project.
Young suggested in comments Nov. 5 on the Alaska Public Radio Network that maybe it’s time to push harder on the producers to commit to building the gas line. He said the first step would be a federal study to determine if it’s in the nation’s security and economic interests to send North Slope gas to the Lower 48 states. Condemnation ‘a hammer’ “And if it comes out that, yes, this is a national issue, then there would be the process where the federal government would condemn the gas and build the pipeline for the nation as a whole,” Young said. “There is some question whether this is the appropriate thing to do. But it is a hammer.”
Under condemnation proceedings, governments generally are required to compensate owners for the property’s fair market value. Lower 48 producers have recently sold proven reserves at around $1.25 per thousand cubic feet, and the slope holds 35 trillion cubic feet of proven reserves. Though perhaps the federal government could argue North Slope gas is worth less because of the producers own statements that the pipeline’s economics are marginal.
In addition to the cost of taking the property, the federal government would have to figure out how to condemn the gas without affecting the existing oil flow from the same lease areas.
Stevens said he had seen Young’s proposal, and told the Fairbanks Daily News-Miner, “I would have no problem with it, providing it was well-articulated.” Perhaps, he said, the solution to building the project is “a consortium of state and federal and private people, and Native organizations, getting together to build the line.
“Then one of the governments, either the state or the federal government, would have to condemn that gas if the producers didn’t want to sell it.” Young, Stevens ‘get excited’ to make a point Young and Stevens are “passionate” in their advocacy for the state, said Justin Stiefel, chief of staff to Alaska’s other senator, Republican Lisa Murkowski. Alaskans have long seen Young and Stevens “get excited at times” to make their point, said Stiefel, who worked for both members of Congress before joining Murkowski’s staff this year.
“You probably noticed that Sen. Murkowski hasn’t made any comments on this,” Stiefel said. “She has said her No. 1 job is to get a project built.”
Regardless of the talk of condemnation, the lack of federal price supports for the gas could put the state in the position of deciding if and how much it is willing to share in the producers’ financial risk.
ConocoPhillips, BP Exploration (Alaska) and the state have tried for two years to win congressional support for federal tax credits to provide a price guarantee for North Slope gas feeding the mid-America market. Other gas pipeline provisions in energy bill The federal energy bill, to be unveiled no sooner than the week of Nov. 17, is likely to contain several other federal tax incentives for the $20 billion pipeline project but not the so-called commodity risk provision. Supporters expect the legislation will include accelerated depreciation, a federal loan guarantee for any bonds sold to finance the project, and tax credits for the gas treatment plant on the slope.
The measure also will include enabling provisions to speed up federal permitting for the project.
The job for the state could be to see if it can add to the federal package in hopes of convincing the companies to build the line. BP and ConocoPhillips fear that low gas prices in times of a down market could cost their companies a lot of money after paying the bill for moving gas through the expensive pipeline.
And although the federal loan guarantee would protect bondholders from possible default, it would not come into play to ease producers’ worries about their own cash flow during low prices. The price support mechanism would have kicked in if the wellhead value of North Slope gas dropped below $1.35 per thousand cubic feet.
Stevens says federal tax credit unnecessary Stevens said Nov. 6 he understands the opposition to the price support provision. “They say, look, the state of Alaska has a severance tax, they have a royalty and this is gas that’s produced on state lands,” he told the Anchorage Daily News.
He said opponents ask, “Why should we use a federal tax credit to guarantee in effect that the wellhead price would be maintained as high as it would be with that tax credit?
“I now believe that it (federal tax credit) is not absolutely necessary,” Stevens said.
Alaska’s Stranded Gas Development Act allows the governor to negotiate a contractual set of payments with North Slope producers in lieu of state and municipal taxes on a gas project. That flexibility for the state to adopt a predictable schedule of payments in lieu of taxes could play a key role in whether the producers decide to move ahead with the project.
Stranded Gas Act comes next “The Stranded Gas Act will come into play at some point or another,” Stiefel said. The first item is to see exactly what is contained in the federal energy bill, said Sen. Murkowski’s chief of staff. Looking at what the state could do to augment the federal enticements would come second.
Although the state had expected a project application under the Stranded Gas Act before this fall, the producers have not submitted an application and are not saying when it might happen — nor is the governor’s office making any predictions.
“We don’t have any dates at this point nailed down,” said John Manly, press secretary for Gov. Frank Murkowski.
The governor still expects an application, and talks with the companies about the application process are ongoing, Manly said, adding that Murkowski has met with the producers over the past few weeks. Any producer can start negotiations Under the law, any one of the major North Slope producers may submit an application to start the formal negotiations. The Stranded Gas Act does not require all three producers to submit a joint application. Whereas BP and ConocoPhillips have pushed for federal incentives for the pipeline, ExxonMobil has maintained its position that it does not want federal financial support for the project.
Stranded Gas Act negotiations would be the appropriate place for any discussions of state assistance in overcoming the project’s financial risk, said Dave MacDowell, spokesman for BP in Anchorage. “Obviously, decisions will be made on the state’s side during negotiations.”
The contractual payment plan could replace any or all state and municipal sales, production or corporate income taxes. Legislative approval would be required of any contract negotiated by the administration. Producers condemn condemnation While supportive of the Stranded Gas Act, the industry had no kind words for the talk in Washington, D.C., of possibly condemning North Slope gas for a government-led project.
“Condemnation of resources would create a very uncertain environment for any future investment and would not be helpful to Alaska,” MacDowell said.
ExxonMobil is of a similar opinion. “This would obviously set a very dangerous and disturbing precedent,” said company spokesman Bob Davis of Houston. “It would amount to a government seizure of private property, and call into question the predictability and sanctity of contracts and agreements made with the state of Alaska.”
The first the governor heard of the idea was when he read it in the newspaper, his press secretary said. “The governor questions why in the world you would enter into this kind of course of action,” especially the years of litigation that likely would result, Manly said. Governor says condemnation not first option And even if the state wanted the gas for its own pipeline project, Manly said, it would make more sense to first try negotiating to purchase the gas from producers.
The Alaska Natural Gas Development Authority is looking at a state-owned and operated pipeline to supply North Slope gas to a liquefaction terminal at Valdez, where LNG would be exported to U.S. West Coast and Asian markets. Reaching a supply deal with North Slope producers is essential to the state-owned LNG project.
The condemnation talk may just come down to frustration over the producers’ reluctance to commit to the project without the financial assurances they see as necessary to undertaking the risk. “I just know the governor pretty well. I’m not going to put him in a spot,” Young said. “But he’s pretty determined to build this pipeline and if not, he’s going to make them pay for it, as he should.”
| 