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Continuing question of fiscal certainty Locking taxes has been a long-standing issue for North Slope gas line; what is it, how could it be done and does it still matter? ALAN BAILEY Petroleum News
For many years a central discussion point in negotiations between the state of Alaska and the North Slope oil producers over major sales of North Slope gas has been the question of fiscal certainty, the locking in of tax provisions that would apply to the commercial arrangements for the gas sales.
In a talk to the Law Seminars International’s Alaska Energy Markets and Regulation conference on Dec. 12 attorney Craig Richards, a previous state attorney general under the Walker administration, reviewed the history, meaning and significance of the fiscal certainty question. Characterizing fiscal stability as a continuing “800-pound gorilla in the room” when it comes to negotiations over a potential North Slope gas line, Richards said that the issue has been a running theme in those negotiations since at least the mid-1990s.
With the state taking over the gas line project and the producers no longer anticipating investing capital in the infrastructure required for the project, the fiscal certainty question has faded recently. But clarity over the issue continues to be critical, given the risk that the issue poses to the project, especially in terms of project delays that could result from having to resolve any legal issues triggered by a fiscal agreement between the state and the oil companies, Richards argued.
Addressing fiscal risk In the past the oil companies have sought fiscal certainty in relation to major gas sales to eliminate the fiscal or political risk associated with investing major capital in a North Slope pipeline project. That certainty, which would involve the freezing of tax and royalty rates for companies marketing North Slope gas, could take three different forms, Richards suggested. The state government could contractually bind itself not to change the terms of the taxes. Alternatively, some form of government oil company could compensate the producers for any tax changes. Or a government oil company could pay the producers’ government take out of the government company’s share of production profits.
And there are other issues relating to exactly how fiscal certainty could be achieved, including the duration of the tax freeze arrangements and the total scope of the taxes covered. For example, would property taxes, as well as production taxes and royalties be included? And would taxes on oil be frozen, as well as those on gas?
Is it constitutional? But, by whatever means the fiscal certainty is achieved, a question arises over whether the state Legislature setting up some special contractual arrangement for oil and gas taxes would be legal under the state constitution. In common with a number of other states, Alaska’s constitution says that the state’s power of taxation shall never be surrendered, Richards said. The constitution also says that this power shall not be suspended or contracted away, except in certain circumstance relating to tax exemptions.
When he was attorney general, Richards had expressed an opinion that these terms within the constitution would render a fiscal certainty deal unconstitutional. However, different attorney generals have in the past expressed different views on this question, Richards commented.
If a fiscal certainty deal is needed for gas exports, the constitutionality issue would need to be dealt with by one of two routes: Enact an appropriate amendment to the state constitution, or send the terms of the deal to the state court system for a ruling. And either of these routes would entail project risk in terms of the timing and outcome. A constitutional amendment can only be enacted in a general election, the next of which will not take place until 2018. The judicial route would be subject to the time ramifications of the court process.
Project risks Without a resolution of the fiscal certainty question within a pipeline plan, the timing of the project will be at the mercy of the timing of a constitutional amendment or the timeframe of a judicial review, Richards suggested. And, without clarity on the issue, would investors be willing to put capital into the project, he wondered.
Given the uncertainty over the constitutionality issue, there now appear to be four possible ways of dealing with fiscal certainty as the gas pipeline project moves forward, Richards suggested.
First, no fiscal deal may be needed, given that the state rather than the oil companies now plans to build the project infrastructure. Second, the project could try moving ahead with a fiscal certainty agreement but no constitutional amendment, with the courts then having to adjudicate on the legality of the situation. A third option would be to enact a constitutional amendment prior to the start of the project front-end engineering and design, or FEED, thus delaying the start of that phase of the project to 2018 at the earliest. And a fourth option would be to enact a constitutional amendment before the North Slope producers need to form commercial agreements for gas sales.
A long history Richards recounted how thinking over how to deal with fiscal certainty has evolved over the years.
The Stranded Gas Development Act, passed in 1998, provided a mechanism for the state to negotiate a fiscal contract with the gas producers and culminated in a gas pipeline contract that then Gov. Frank Murkowski agreed to with the producers in 2006. That contract, which committed to a freeze of tax terms for all forms of tax relating to both oil and gas production and would have required a constitutionality ruling through the courts, was not agreed to by the Legislature. Subsequently, Murkowski was not re-elected as governor.
Then came the Alaska Gasline Inducement Act, or AGIA, under Gov. Sarah Palin. AGIA moved the start of technical work for the pipeline plan ahead of fiscal certainty negotiations but eventually became uneconomic because of the emergence of shale gas development in North America. The Alaska Gasline Development Corp., the state’s internal initiative for the development of a “bullet line” from the North Slope, tried a similar fiscal certainty approach to AGIA but has not reached a fiscal agreement, Richards said.
Senate Bill 138, the bill that triggered a gas pipeline project involving the state partnering with the producers, required discussions over fiscal certainty in parallel with the pre-FEED stage of the project. The concept was to have fiscal terms in place prior to embarking on the FEED stage, with the North Slope lessees then being in a position to evaluate the commerciality of the project, Richards said. The state administration was pushing for a constitutional amendment to be on the general election ballot in November 2016, a move that would have required commercial agreements to be in place by March 2016. But negotiations over commercial terms broke down, with the state subsequently transitioning into taking over the project, Richards said.
So where from here? It is critical to include a resolution of the fiscal certainty question within any plan for the gas pipeline, Richards suggested.
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