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House Resources moves toward amendments Committee hears issues from consultants; gets answers from producers, administration; mayors want assurance on oil infrastructure Kristen Nelson Petroleum News
House Resources is addressing a number of concerns as it moves toward amending the committee substitute for Senate Bill 138 it has been working since the week of March 17, when the bill was passed by the Senate.
SB 138 is Gov. Sean Parnell’s enabling legislation for state equity participation in the proposed Alaska LNG Project, which would pipe North Slope natural gas to Nikiski for liquefaction and sale to the Far East as liquefied natural gas, with natural gas available along the pipeline for in-state use.
SB 138 would allow state equity participation in the project, and is the result of the heads of agreement between the North Slope producers — BP, ConocoPhillips and ExxonMobil — TransCanada and the state, and the memorandum of understanding between TransCanada and the state announced by the governor in January. The MOU provides an exit from the Alaska Gasline Inducement Act license held by TransCanada to a commercial agreement.
PILT concern The HOA provides for payment in lieu of taxes, a PILT, rather than property taxes on the project, something that has been a concern for municipalities.
Parnell established the Municipal Advisory Gas Review Board and said in a March 25 statement that the board “will provide a meaningful venue for mayors, communities and my administration.”
But mayors — led by those whose boroughs will be impacted by the project — told House Resources April 1 that they still have concerns.
Kenai Peninsula Borough Mayor Mike Navarre said the mayors have legislator support for amendments to the bill. He said concerns include confidential negotiations and called the proposed PILT a significant departure from existing tax policy.
North Slope Borough Mayor Charlotte Brower said if municipal taxing authority is going to be modified to provide fiscal certainty, the municipalities must be a part of the process up front, and said the mayors are also concerned that enabling contracts would be used to reclassify properties the municipalities currently tax.
Fairbanks North Star Borough Mayor Luke Hopkins also raised the issue of changing taxes on existing oil and gas infrastructure and said while the majors had met with the governor and the commissioners of Revenue and Natural Resources, he didn’t feel complete assurance that existing oil and gas taxes would not be modified.
Both Hopkins and Mayor Dave Cobb of the City of Valdez cited provisions in former Gov. Frank Murkowski’s Stranded Gas Development Act contract — never approved by the Legislature — which would have required PILT payments on both new gas infrastructure and existing oil and gas infrastructure.
TransCanada The committee heard from economist Roger Marks March 27 on the study he did under a Legislative Budget & Audit contract. Marks said it’s far from certain the project will happen because of competition, changes in natural gas pricing in Asia and the size burden of the project. He suggested one option open to the state was to wait until project sanction to buy in, rather than participating in the development stages and also said the state could require the producers to sell the state’s natural gas at the same price as they sell their own.
Marks addressed a number of other issues, including whether the state needs TransCanada as a partner. He said the producers and the Alaska Gasline Development Corp., AGDC, both bring expertise to the project and if the state needs a cash partner — under the proposal TransCanada would put up money and the state would reimburse it through tariffs once gas shipment begins — it could get a general investment partner.
In a March 31 hearing Natural Resources Commissioner Joe Balash told the committee the state decided to get in during the pre-FEED (front-end engineering and design) phase because the state wants input in off-take from the line and a design that will accommodate as many expansions as possible. The state’s risk on the development side of costs would be lessened by only getting in after a final investment decision, Balash said, but the state thinks there would be opportunity lost by not participating on the front end.
As for company expertise, he said he’s not sure if we’re just supposed to trust the North Slope producers or be an owner state and look out for our own interests. That’s the angle the state is looking at, he said, being in the room when decisions are made, and said he was hard pressed to put a dollar volume on that value.
Revenue Commissioner Angela Rodell said from a capital and human resources perspective she can’t build the human resources infrastructure TransCanada has in place. Without TransCanada, she said, the state would also lose out on the value of having an expert partner during negotiations.
Balash told the committee the value of what TransCanada brings to the table is far more than the state could get from a bank. He said they discussed what percentage TransCanada would hold, and found that while the company would be happy to be in the project for a small single digit position, they wouldn’t dedicate many people to the project. Balash said the state wanted that human capital, that expertise you just can’t find on the street.
On the possibility of getting pipeline expertise from engineering or consulting firms, Balash said that wouldn’t be cheap — and he also said it would be a different type of support than the state would get from a partner in the project.
On the issue of going out to bid for a pipeline partner, Balash said not many companies have the expertise and capital, and TransCanada’s commitment to a 75/25 debt/equity split for ratemaking purposes is something you don’t see often because pipelines make their money from equity investments, not from debt.
He said the state looked at what TransCanada brings to the table and opportunities and benchmarks and believes it a fair deal for the state.
Alignment BP, ConocoPhillips, ExxonMobil, TransCanada and AGDC answered committee questions March 28.
Marks had suggested there was no hurry to do a project and the state should wait for better terms.
Dave van Tuyl, regional manager for BP in Alaska, agreed that it’s never a good idea to be in a hurry on a megaproject, but said BP believes it’s important to advance the project, to get certain data and permits, to get to the next phase. He said BP believes the project can compete in Asian markets today and said BP wants to monetize North Slope natural gas and to do that requires maturing cost estimates and obtaining permits.
Bill McMahon, a senior commercial advisor with ExxonMobil, said the project would be underpinned with commitments from LNG markets and that those markets saw a strong signal with the signing of the HOA. As we move forward those markets will be watching, he said and moving forward will increase the projects credibility, while pauses in the project will send messages as well.
Pat Flood, who supervises the North Slope gas development team for ConocoPhillips, said ConocoPhillips is prepared to go into pre-FEED and thinks the project is ready to move into pre-FEED and the next step is to do that. The longer it takes to go into pre-FEED, the longer it takes to do the project, it said.
Dan Fauske, president of AGDC, cited a cost to the in-state project of more than $200 million from a previous one-year delay in legislation, and said while it’s important not to skip steps, inflationary factors are significant cost drivers.
Tony Palmer, vice president of major developments for TransCanada, said the markets are watching and will look for a sign that Alaska is ready to place its gas. The market seems ready to take that gas, he said, and to pause now would have the affects other speakers had addressed.
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