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Muni gas line trio settles dispute Municipal port authority agrees North Slope Borough can withdraw Larry Persily Petroleum News Government Affairs Editor
Looking to avoid a contentious breakup, the three municipalities that comprise the Alaska Gasline Port Authority have agreed to a plan for letting the North Slope Borough pull out of the effort to build a publicly owned Alaska natural gas pipeline.
“Both sides saw they could get what they wanted if they both took a step back,” said David Harding of the North Slope Borough mayor’s office.
The borough wants out and the port authority is looking for an orderly transition and also formal ratification by the entire membership of action taken at an early May meeting disputed by North Slope officials.
The full port authority met May 24 and settled enough of their differences, including directing their attorneys to draft the paperwork needed for the North Slope Borough to withdraw. “It was agreed that we do it as expeditiously as possible,” said Dave Dengel, Valdez city manager and executive director of the port authority.
“The goal is, if we can, to reach that,” though there is no timetable for formal action, Dengel said June 7.
“It’s probably everybody’s position that it got a little messy,” Harding said.
Meanwhile, the authority’s two remaining members — the Fairbanks North Star Borough and city of Valdez — are continuing to negotiate with San Jose-based Calpine Corp. as a potential buyer for Alaska natural gas.
The port authority wants to line up purchase deals with North Slope producers, negotiate contracts to sell the gas and obtain debt financing to build a $26 billion project that would take more than 6 billion cubic feet of gas a day from the slope. About half would go by pipe through Canada on its way to Lower 48 markets. Almost 2.7 bcf per day would move to Valdez, where it would be liquefied for shipment to Far East and U.S. West Coast markets. Borough wanted out in March The three municipalities joined together in 1999 to create the port authority but the North Slope Borough in March said it wanted out — citing a couple of reasons.
The borough had signed up as a partner in the effort by Berkshire Hathaway Inc.’s MidAmerican Energy Holdings Co. to put together an Alaska gas line deal, and borough officials said it would be a conflict to cooperate with partners on a privately owned project while also working on a publicly owned project to move the same gas to much the same market.
And although MidAmerican later dropped the project, the North Slope Borough still believed it needed to leave the port authority so it could protect its property tax revenues in fiscal negotiations between the state and North Slope producers.
The producers, who are working separately from the port authority to build a gas line, have been negotiating under Alaska’s Stranded Gas Development Act since February for a long-term contract for payments in lieu of all state and municipal taxes on the proposed project. The contract would not include a firm commitment to build the line, but rather a structure for payments if the companies decide to go ahead with the project.
Alaska Department of Revenue estimates from 2002 show the borough could receive as much as $1.7 billion in property tax revenues over 35 years from a gas line project. Negotiating payments in lieu of that much tax revenue is more important than continuing as a member of the port authority, the borough said. North Slope worries about property taxes “The stranded gas negotiations have the potential for devastating effects on the North Slope Borough’s taxing authority and we simply cannot have our time and attention diverted from this critical issue by continued participation in the Alaska Gasline Port Authority,” said Borough Mayor George Ahmaogak Sr. in a May 19 letter to Fairbanks and Valdez officials.
“I want the borough’s position to be clear and focused at all times. This will not happen as long as we are wearing several hats and taking multiple positions because of our involvement with the port authority,” Ahmaogak said in an opinion column in the May 14 edition of the Arctic Sounder newspaper.
The port authority, which is exempt from property taxes, has proposed setting up its own system of payments to municipalities.
The mayor also said the borough had grown distrustful of the other port authority members. “Behind the scenes, they have attempted to stall or block any action that would formalize our withdrawal,” he said in his newspaper column.
The North Slope Borough also accused the other port authority board members of accepting a deal with Calpine at a meeting that lacked a legal quorum. “They have even taken board action to approve these agreements when no board member from the North Slope Borough was present, which is a violation of their own bylaws. This is not honorable,” Ahmaogak said in the newspaper column. Port authority disputes allegation Dengel disputed that the meeting without the North Slope Borough violated the bylaws, citing case law. The non-Alaska court rulings, Dengel said, state that a quorum is not required if a member’s sole purpose in staying away from the meeting was to disrupt the organization.
Ahmaogak said in his newspaper column and letter that Fairbanks and Valdez were stalling in accepting the North Slope Borough decision to withdraw.
Fairbanks North Star Borough Jim Whitaker told KUAC-FM in Fairbanks in mid-May there was no intentional delay in acting on the North Slope’s decision, and that the port authority was only moving cautiously to ensure that the borough’s departure was not harmful to the authority.
“It must be accomplished without any damage to the port authority project,” Whitaker said June 7.
The state law that allowed the municipalities to establish the port authority does not set out a specific procedure for one member to withdraw, and attorneys for all three members are working on a solution, Harding said.
In exchange for getting out of the port authority, Harding said the North Slope Borough agreed May 24 to validate the authority’s agreement with Calpine. Officials from the company attended the port authority meeting by teleconference. Port authority pursues Calpine The port authority’s agreement with Calpine is a key step in trying to put together a sales contract for the California energy company to buy Alaska gas, delivered by LNG tanker or pipeline — or both.
But the company faces its own financial problems. Its stock closed at $3.77 a share on June 7, far off its $60 high in 2001 and down a further 20 percent from just six weeks ago. Its $17.8 billion debt exceeds its shareholder equity by an almost 4-to-1 margin. “We have substantial indebtedness that we may be unable to service and that restricts our activities,” it acknowledged in its 2003 annual report.
Calpine burns almost 2 bcf per day of gas at its electrical generating plants, with more than three-quarters of the supply coming from short- and long-term contracts. The company runs 85 power plants in the United States and Canada.
The port authority has about $60,000 left of the original seed money from Valdez, Fairbanks and the North Slope, and will need more money to finish putting together contracts and financing for the gas line project, Dengel said.
“We are working a deal … there should be an infusion of cash in the next month or so to help pay some of those costs.” He would not say where the money might come from, other than to emphasize it would not come from the municipalities. North Slope concerned about liabilities Ahmaogak, however, said in his letter to Fairbanks and Valdez officials that he was concerned about the port authority’s efforts to obtain the needed funding from Calpine and take on financial obligations with other parties.
“The North Slope Borough will in no way be responsible for any commitments from the port authority,” Harding said.
Dengel confirmed the port authority owes “contingent liabilities” to law firm O’Melveny & Myers, construction company Bechtel Corp. and financial consultant Taylor-DeJongh for planning work on the project, but he said the money would be paid only if the gas line goes forward.
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