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Gas negotiations: two different views Irwin, Rutherford, Myers say gas line talks raise concerns; governor says Legislature must approve oil tax changes, balance sought Kristen Nelson Petroleum News Editor-in-Chief
Two compass pieces in the Dec. 7 Opinion section of the Anchorage Daily News give a flavor of the discussion likely to take place when an agreement between the State of Alaska and the North Slope producers is reached and a gas pipeline contract becomes public.
One column was written by three former administration officials, the other by Gov. Frank Murkowski.
Tom Irwin was commissioner of the Department of Natural Resources until dismissed by the governor in late October. Marty Rutherford was one of the department’s deputy commissioners and Mark Myers was director of the department’s Division of Oil and Gas. They were among the six department officials who resigned after Irwin was terminated, citing concerns with the direction of the administration’s gas pipeline negotiations.
The governor has been pursuing a gas pipeline contract with the major holders of known North Slope natural gas — BP, ConocoPhillips and ExxonMobil — for two years. Negotiations have been intense since the summer and in October the state reached a basic agreement with ConocoPhillips. That contract, along with terms being discussed with BP and ExxonMobil, remain confidential, but the governor has made a number of the state’s goals public. The governor also released an October memo by Irwin asking Alaska Attorney General David Marquez for legal clarification on a number of the issues under negotiation. Oil tax structure being negotiated In their Dec. 7 compass piece, titled “Gas line talks raise several concerns,” Irwin, Rutherford and Myers said the Alaska Stranded Gas Development Act “allows for limited changes to Alaska’s fiscal terms on gas only,” while the proposed contract “greatly exceeds the act by making far-reaching changes to Alaska’s gas and oil fiscal structure.”
The governor’s Dec. 7 compass piece, titled “Gas pact rests on tripod of dollars, exploring, in-state use,” was written in response to questions raised by the Daily News Dec. 5, Murkowski said, questions left over from the late November forum on the gas contract sponsored by the University of Alaska Anchorage’s Institute of Social and Economic Research.
The first question, the governor said, was: “Which is harder to negotiate, taxes and royalties for the proposed gas line or a rewrite of oil taxes?”
“Fiscal certainty on oil was not included in the Stranded Gas Development Act,” the governor said, “so we will need the Legislature’s authorization to include it in the gas line contract.” The governor went on to say that oil tax certainty is important to the producers “because they do not want the fiscal terms they negotiate on gas effectively reduced by new taxes on oil.” The producers remember, the governor said, that after construction began on the trans-Alaska oil pipeline, the Legislature “revamped oil taxes.” ELF revenue declining The governor also said the economic limit factor formula in the state’s severance tax on oil will result in the severance tax only applying to 19 percent of the barrels produced in 15 years. Murkowski said “the state needs to change oil tax laws now. We are simply taking advantage of the fact that the producers also have reason to negotiate this issue as part of the gas line contract.”
The governor said the state “will not agree to a change in the oil tax system that does not advantage the state today and going forward,” and said the negotiations are over “the premium the state is demanding during periods of high oil prices.”
Irwin, Rutherford and Myers said: “Changes in how the state manages its oil and gas should be legal (including constitutional), fair to all parties, and continue to provide the state with a stable, secure and enhanced revenue stream.” Gas in kind a concern Irwin, Rutherford and Myers said they are concerned that the proposed contract will require the state to take its gas, both royalties and in lieu of severance tax, “as gas rather than receiving its cash value from the producers.” The three said they believe the state will lose money by doing this, because it will “have to pay billions in production taxes” which it wouldn’t have to pay if it took the cash value of the gas and will have to pay “over $10 billion” up front in firm transportation fees.
The state will also, the three said, have to compete with the producers in marketing natural gas “in markets they currently dominate.”
The risk is compounded, they said, because the state won’t control the volumes of gas it receives — the producers will control those volumes.
The pipeline is economic “without the state taking this unnecessary risk, and the state can still be a pipeline owner,” the three said. They said that under the proposed contract terms the state would “surrender billions of dollars of revenue we are currently entitled to receive.” Other issues The governor also responded to a question on how the administration was factoring in “indirect benefits and economic development in analyzing the value of a gas project, rather than just counting tax and revenue dollars?”
The governor said such other values include third-party explorer access to a gas pipeline and in-state use of gas.
He said the administration’s policy “is to make sure we increase the number of North Slope explorers. If explorers cannot get their gas to market, they will not explore. Explorers who look for gas will also find oil.”
“Part of the reason the negotiations are taking so long is because we have been fighting for these provisions that are clearly in Alaska’s interest,” the governor said.
The Federal Energy Regulatory Commission will regulate the gas pipeline and access to it, he said. “The state fought for and obtained FERC regulations unique to Alaska in order to protect explorer access. We have maintained and strengthened these provisions in the contract.”
The governor said the state has “insisted on four off-take points along the line” so that Alaskans will have access to gas. And the gas will be cheaper to Alaskans than in the Lower 48 “because transportation rates will be based on mileage from the North Slope to the point of use in Alaska.”
The governor said the state is “looking for that balance of dollars, explorer access and in-state use that is best for Alaska.” As to why negotiations are taking so long, “the Legislature told the administration to negotiate a business deal (not litigate) to construct the gas line,” he said. What’s being negotiated is “a business agreement in which each party is exchanging obligations and benefits,” the governor said, adding that he looks “forward to sharing the contract with Alaskans at the earliest opportunity.” More than one contract Irwin, Rutherford and Myers said that to ensure a gas pipeline is the “best project for Alaska,” all proposals need to go to the Legislature, “including proposals by the producers, TransCanada (an independent pipeline to Alberta), and Alaska Gasline Port Authority (a liquefied natural gas project).”
The three also said that information on all the options, “including the state’s analysis, and any information necessary to make a truly informed decision on the best alternative” must be made available by the administration to both the public and the Legislature.
“Without this information we may accept a proposal that takes on unnecessary risk to the state; we may not maximize our opportunities and revenues; we may not ensure equal access for new oil and gas exploration companies; and we may not facilitate in-state gas use and associated economic opportunities.”
The three also recommended a minimum public comment period of 90 days, saying a proper review will take time, more time than the 30 to 45 day review period the administration envisions.
They said that because there are billions of dollars at stake, “very sophisticated spin and advertising will be used to sell the proposed producer deal. The fact is that Alaska gas is economical to produce and Alaska has choices.”
They said they will remain involved as concerned citizens, and urged others to be involved: “It is your oil and gas, and the state’s future hangs in the balance,” the three wrote.
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