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Non-negotiated changes will be proposed Clark tells legislators sponsor group doesn’t want to negotiate with Murkowski administration because ‘you guys are leaving’ Kristen Nelson Petroleum News
Even though the Murkowski administration won’t be in office to complete a North Slope gas fiscal contract, it has responded to public comments on the contract and discussed those comments — and contract changes it will propose later in November — with legislators in Anchorage Oct. 27.
The recommendations for changes to the contract the administration negotiated with the Alaska North Slope gas pipeline sponsor group, and released to the public in May, will be in an interim fiscal finding to be released in mid-November.
The changes are known to the sponsor group, but “we have not negotiated those changes with them,” said Jim Clark.
Clark, Gov. Frank Murkowski’s chief of staff, told a meeting of the Senate and House Resources committees that while the sponsor group and state negotiators have “worked hard and well together over a long period of time,” the sponsor group has said it doesn’t want to negotiate changes with the Murkowski administration because “you guys are leaving.” Clark said the sponsor group feels that if it starts negotiating changes with the present administration, it’s “going to be duck-bitten to death” because the sponsor group won’t know what the new administration will want vs. what the present administration wants.
The route a concern Bob Loeffler of Morrison, Foerster, counsel for the state on the gas line, said there was public comment concern that the project could take a route other than the southern or Alaska Highway route. He said he thinks the contract is clear on this issue, but because it is a concern “we would add language that would make it even more clear that it’s the southern route.”
The Legislature would also be given the opportunity “to disapprove any amendment on a number of key provisions, one of which was the southern route and the other was the key fiscal terms of the contracts,” he said.
There was a lot of comment on fiscal certainty, Loeffler said, and the “administration is quite sensitive to the views of the Legislature and the public” on fiscal certainty, particularly to the bill that came out of the Senate Special Committee on Natural Gas Development, “and is prepared to propose a shortening of the period of fiscal certainty.”
It’s an oversimplification, he said, but basically fiscal certainty for gas would have 10 years cut off it.
For oil, there would be no fiscal certainty until project sanction. “Also we would freeze whatever that scheme of oil fiscal certainty is as of the end of the legislative session in 2011,” when a report on how the production profits tax is working is due, “or the FERC application date, whichever is later.”
There would be oil fiscal certainty for a 14-year period beginning with project sanction, and then a small period at the end with a balancing clause.
Loeffler said “we have not attempted and not been able to have discussions with the companies on this to see whether it’s in the ballpark,” but the main “idea is that there’s an overall shortening of the gas period of fiscal certainty and a different kind of fiscal certainty on oil that starts much later.”
“I don’t think the Legislature’s going to wait until 2011 to review whether the PPT is working or not,” Sen. Tom Wagoner, R-Kenai, chair of Senate Resources, told Loeffler. Wagoner said he’s asked for a quarterly report on how the tax is working from the Department of Revenue through Legislative Budget and Audit.
Work commitments also an issue Loeffler said work commitments — commitments on the part of the sponsor group to move forward with the project — received a lot of public comment. He said the administration looked at the comments and “felt that the balance struck in the original work commitments clause was sensible and could work.”
Loeffler said he thinks concern about the diligence standard, “advancing the project as diligently as is prudent under the circumstances,” is because people saw this as being applied in a vacuum, without any reference points.
Loeffler said first, the project summary from the companies will be incorporated into the contract. It contains the time for steps in the process, commencing after the contract is signed.
“Second of all, it’s well understood in my line of work, what happens when you put together a project.” FERC has pre-filing requirements — before the open season, and before the FERC application process. He said “you hook up with FERC early and … there are regulations about what you have to do.” The state would be inside the pipeline limited liability corporation and would know if progress was not being made. “We can tell if you’re not complying with this yardstick. It’s not something we have to invent.”
The activity required by the contract: project planning phase; pre-filing phase; open season phase; and FERC application process — “is activity that is … understandable and measurable and we thought that with the additional explanation that we might convert at least some people to an understanding of why we adopted the diligence standard,” Loeffler said.
On the other hand, the chairman of one of the sponsors testified that “his company would consider some sort of letter of credit scheme” so that if activity has not progressed after four or five years, “they would forfeit these large sums of money.”
Loeffler said this isn’t accepted by all the companies, “but the administration would be willing to pursue discussion of that concept because it was put forward and does appear to satisfy a number of public concerns,” although there is, he said, no way to forecast the outcome because the suggestion was put forward by just one of the companies.
Alaska dispute resolution Loeffler said the administration did have “a set of amendments” to propose in the area of dispute resolution, but said first he wanted to note that arbitration is widely used both domestically and internationally. “More important than that, every royalty settlement agreement that the state has entered into provides for arbitration, so the state, long before this project came into public focus, had adopted arbitration as the preferred way to settle … future royalty re-opener issues.” One case has proceeded to arbitration “and it’s been quite successful for the state,” Loeffler said, in contrast to litigation where lawyers have earned money over 10 to 20 years fighting over royalty and tax issues. And those cases haven’t been decided in the courts, he said: with a possible exception of one suit in the tax area, those cases have “almost always been settled” rather than resolved in litigation.
He said the other point he didn’t think he’d gotten across this summer was that since the state would take its royalty and tax gas in kind under the contract it wouldn’t have the disputes with the producers over the price the royalty gas was sold for.
There were a number of comments favoring the Alaska Arbitration Act. vs. the Uniform Arbitration Act which is in the contract.
The administration is going to propose going to the Alaska Arbitration Act, Loeffler said, and “would propose that the ruling would be enforceable only by appropriation from the Legislature or through … payments under the contract, not in court.”
Discovery limitations would be set by the arbitration tribunal — the contract spells them out — “to correspond to what you’ve got in court practice,” he said.
State-initiated expansion abandoned On the issue of expanding the pipeline, Loeffler said the contract has three methods: voluntary expansion, state-initiated expansion and FERC. Most of the explorers said they preferred “to rely on FERC’s new powers to order expansion and also the voluntary expansion provisions of the LLC. … We listened and we are prepared to drop the state-initiated expansion in favor of the voluntary expansion provision of the LLC,” which would allow any member, including the state, to put an expansion proposal to the LLC. Also, any prospective shipper outside the LLC could propose expansion to the LLC “if it thinks it would succeed in its case at the FERC. So it’s a shorthand to avoid litigation at the FERC.”
Greg O’Claray, commissioner of the Department of Labor and Workforce Development, said comments on Alaska hire provisions in the contract were primarily concerned that the language was not strong enough. The administration decided that “probably the easiest way to constitutionally guarantee Alaska hire was to promote the adoption and negotiation of a project labor agreement covering this particular project,” along with hiring halls in rural Alaska so rural Alaskans would have access to jobs and that negotiations on hire provisions “actually begin as soon as the contract has been approved.”
Capacity management requires FERC approval Acting Deputy Commissioner of Natural Resources Ken Griffin said the capacity management article in the contract “was essentially demanded by the state negotiators, recognizing that upstream we are not just like the producers. We don’t control development decisions; we don’t control production decisions; we don’t control exploration decisions — particularly if you consider moving off the state acreage onto federal acreage or even offshore.”
Griffin said the state wanted to be sure it could get its gas to market; that if down the road the pipeline was not completely full that the state wouldn’t bear additional risk of empty capacity; and that there is access to gas and capacity rights for in-state use.
There were suggestions that the state reserve capacity for explorers or for in-state shippers. Those suggestions, Griffin said, have “the effect of shifting some of this cost risk and the cost of reserving that capacity onto the state’s shoulders.”
They are also “inconsistent with the FERC requirements for the way capacity is managed by regulation,” he said.
Because FERC regulates capacity management, the capacity management provisions in the contract require FERC approval.
Rep. Paul Seaton, R-Homer, asked if the entire contract would fall if FERC doesn’t approve the capacity management article, “or is it totally severable?”
Loeffler said the capacity management article goes to the FERC early, “it doesn’t go with the application. It’s something we do in the next year. If it falls the whole contract remains; it’s severable.”
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