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Non-sponsors would get certainty Supplemental legislation will include upstream fiscal contract offering sponsor terms to those willing to commit to ship gas Kristen Nelson Petroleum News
Commissioner of Natural Resources Mike Menge told legislators May 12 that one of the challenges of negotiating a fiscal contract for a North Slope gas pipeline was to provide fiscal certainty for the sponsor group because of the huge investment a gas pipeline will require, while “at the same time not creating two classes of citizens on the North Slope,” the producers and all other companies. The solution, he said, will be part of the legislation package presented to the special session of the Legislature later in May, legislation allowing the state to offer essentially the same terms as those offered to the sponsor group in the fiscal contract.
The purpose goes beyond “the simple basic fairness of not wanting to create a monopolistic situation or create an uneven playing field,” he said: More gas needs to be found. The 35 trillion cubic feet of known gas reserves are not enough; more than 50 tcf are needed. While the North Slope is believed to contain plenty of gas, the state wants to provide incentives to ensure that the gas is found and developed.
The belief “on the street” is that the sponsors are “going to monopolize” the gas pipeline 25 years, but the Federal Energy Regulatory Commission will prevent that from happening, Menge said. FERC regulations also mandate pipeline expansion, for those companies who aren’t ready to bid for pipeline space in the first open season, he said.
Terms essentially the same The upstream fiscal contract that will be part of the gas pipeline legislation will make the fiscal stability benefits of the contract with the sponsor group available to other companies, although since these additional companies won’t be building the line their contracts wouldn’t include the project descriptions, work commitments and in-state-use elements in the current contract, he said.
Fiscal and contract administration terms would be the same. And the non-sponsors would be held to what Menge called a standard of development.
But, he said, since this contract will require taking out a firm transportation commitment, “there’s a tremendous incentive there to move forward very, very quickly” on development.
The contract terms for non-sponsors would require that they commit to a firm transportation contract: “We propose to extend the benefits — the fiscal stability benefits of the contract — to anyone willing to take an FT (firm transportation) commitment on the pipeline,” Menge said.
The commissioner’s slides said the contract would require a firm transportation commitment “if/when exploration is successful,” and Menge told legislators that the non-sponsor contract would require “upfront exploration.”
The open season, which will be two or three years into the process, is “not that far off,” he said. “It’s going to take a lot of courage to participate in that. But having done so, you will then have the capacity to move your product out.”
Menge said that once the Legislature has passed the upstream contract legislation, the commissioners of Revenue and Natural Resources will put together the contract. The state plans, he said, to retain the ability to participate in feeder pipelines from new developments.
The fiscal upstream contract will also include the oil portion.
Not open-ended Menge said the fiscal upstream contract will not be open-ended, but will end once the Revenue and DNR commissioners have determined that 70 tcf of gas has been “identified, committed and delivered to the system.”
He said the sponsor group was not in favor of the fiscal upstream contract.
“They would like to maintain as much control as possible,” but the upstream fiscal contract is “critical,” Menge said, “to ensuring our future participants get an even hand in the — in the ability to proceed forward.”
Pedro van Meurs, the petroleum economist consulting for the administration on the gas fiscal contract and the petroleum profits tax, told legislators May 16 that more exploration will help fill the gas line. The known reserves to some 35 tcf need to be expanded to 44 tcf to keep the line full for 30 years, to 51 tcf to keep the line full for 35 years and to 70-77 tcf to keep an expanded line full for 35 years.
Van Meurs said the main beneficiaries of an increase in throughput from 35 tcf to 44 tcf are the state and the affected municipalities because they receive income from a higher volume of gas transported at lower tariffs.
He said because of the beneficial impact of more exploration on filling the gas pipeline, fiscal stability for oil was structured in such a way to encourage new exploration for gas, and based on his evaluation he said a 30-year period of fiscal stability for oil would be reasonable because it would encourage gas exploration.
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