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Vol. 19, No. 17 Week of April 27, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

House passes SB 138

Senate concurs in changes, sending enabling legislation to governor for signature

Kristen Nelson

Petroleum News

By a vote of 36-4 in the House and a 16-4 vote in the Senate to accept House changes to the original Senate bill, the governor’s enabling legislation, Senate Bill 138, passed the Alaska Legislature April 20.

The bill allows the administration to work on the Alaska liquefied natural gas project as described in the heads of agreement and memorandum of agreement, with the state taking its royalty gas and its production tax on gas in kind, and an equity position of 25 percent in the project, equivalent to the state’s total share of the gas.

The version that passed was based on work done to SB 138 by the House Resources and Finance committees.

House Finance passed some administration and some member amendments April 17, including a large administration amendment which cleaned up language and removed a requirement that for the state to obtain data from the project, the Department of Natural Resources commissioner would have to determine the project was not making adequate progress toward a final investment decision.

Deputy Revenue Commissioner Mike Pawlowski, walking through the changes, said access to data isn’t something that happens later, it’s something that happens immediately. The phrase “or an entity of the state” was added in that section of the bill, and others, to reflect involvement of the Alaska Gasline Development Corp.

Expansion for natural gas found by independents was a concern in both committees and the bill was amended to include a study of “costs, benefits, and risks associated with building a pipeline with a mainline diameter larger than 42 inches” to provide for additional gas from “increased exploration activity by parties and nonparties to this project.”

Infrastructure costs

Who would pay for needed infrastructure has been a concern for legislators, and House Finance amended the bill to add language requiring that proposed agreements or contracts for the project “must provide the means for allocating infrastructure costs between the state and other parties in the project,” taking into consideration how much infrastructure is used by the project and how much by the public, and states: “The proposed agreement or contract may not require the state to pay infrastructure costs that are directly related to the project and not designed for general public use in a proportionate amount that is greater than the state’s share of participation in the project.”

A requirement that the Department of Transportation and Public Facilities “evaluate certain bridges and infrastructure related to an Alaska liquefied natural gas project” was added, specifying that DOT is to consult with AGDC and DNR on an evaluation of “existing bridges and infrastructure and bridges and infrastructure constructed to accommodate a gas pipeline resulting from an Alaska liquefied natural gas project and determine whether the bridge or infrastructure could also be constructed for transportation uses, including vehicular traffic.”

Another amendment addressed the need for natural gas by in-state utilities and required that an agreement “must include principles based on commercially reasonable terms for delivering natural gas to public utilities in the state when the demand for natural gas by the utilities exceeds the amount of the state’s royalty natural gas and natural gas delivered to the state as payment of tax” available in a project.

Cautious optimism

In debate on the House floor April 20, most legislators were cautiously optimistic, with emphasis on this being approval for a first step.

Rep. Eric Feige, R-Chickaloon, co-chair of House Resources, carried the bill on the floor. His lead-off remarks included a review of failed attempts to produce gas and a caution about the need to bring the public along as the project moves through its stages, as well as concern about the cost.

He said the goal is to seek and attain the prize of gas development, but not at the risk of the state treasury.

TransCanada’s participation was an issue early on for a majority of House Resource members, but the state won’t be wedded to TransCanada until it signs a firm transportation services agreement, Feige said.

Resources co-Chair Dan Saddler, R-Eagle River, called this a critical first step and said state ownership will have the state playing an unprecedented role in the project.

He also addressed the TransCanada issue, saying that at the end of the day three factors gave him comfort: that TransCanada will help pay upfront costs in exchange for a reasonable tariff for moving the gas; that including TransCanada maintains project momentum; and that TransCanada shares the state’s interest in increasing gas shipment through a line.

He also noted that Plan B, an in-state line, continues through the efforts of AGDC.

Concerns over Plan B, Plan C

Rep. Les Gara, D-Anchorage, who sits on House Finance, said he was voting for the enabling legislation because it was an important project, even though the legislation was in what he called great need of improvement. He said he hoped the governor would listen to legislators as the deal moves forward.

When a future Legislature sees a deal for approval, Gara said the first concern should be that it’s a fair share for the state and the second whether the plan will allow for major expansion so the state can have robust new exploration.

He also said that Plan B, the in-state line, scares him because with a smaller line it will mean more expensive gas.

Rep. Tammie Wilson, R-Fairbanks, also a House Finance member, said what worried her most was Plan C — doing nothing. Fairbanks has watched Anchorage grow based on energy, she said, and while people in her community want to know where the off-takes will be and what gas will cost, she said she knows that if we don’t start we can’t get anywhere.

Rep. Andy Josephson, D-Anchorage, said he was supporting the bill with some caution and some hope, with his support based on a real opportunity for cheap gas and a real chance to replace diminishing oil revenues in the treasury. But, he said, he wouldn’t decry anyone who voted no because reasonable concerns and questions have been raised, including whether TransCanada is needed, the costs of infrastructure and concerns about employment and labor.

Rep. Geran Tarr, D-Anchorage, a Resources Committee member, said that while there were many things that concerned her, she was giving cautious and measured support to the bill because doing nothing is not an option. Improvements were made in the bill, and Tarr said she didn’t want to sacrifice the good for the perfect.

Long time coming

Rep. Charisse Millett, R-Anchorage, said she remembered the days when Yukon Pacific proposed an LNG project and called this the first step for a pipeline that her grandchildren would see come to fruition and said she’d be voting yes in honor of her grandchildren.

Rep. Alan Austerman, R-Kodiak, co-chair of House Finance, said there was talk of why wasn’t there a gas line when he came to the House 20 years ago. He said it took him a couple of years to realize that as long as there was more money in reinjecting gas to produce more oil, there wouldn’t be a gas line. But with the decline in oil, things have changed, he said.

The lack of security in taxes has made it harder for industry to want to take on a gas project, but one of the beauties of this proposal is that by becoming a partner and taking gas in lieu of taxes the state has stabilized the tax situation, Austerman said. He noted it would take a couple of years for the details to be worked out, but said he was optimistic that this project would move forward.

Rep. Mark Neuman, R-Big Lake, vice chair of House Finance, said a couple of issues that hadn’t been mentioned included the potential for gas to get to Donlin in Interior Alaska where there is very high unemployment and a large gold deposit.

He said the Legislature is responsible to help create opportunities in communities and this project would bring a lot of opportunities to the state.

Rep. Paul Seaton, R-Homer, a House Resources member, said he supports the project but cited a need to temper enthusiasm because not all LNG projects go forward. He noted a letter most members of House Resources sent forward identifying to the administration terms which would not be acceptable, such as the fiscal certainty included in the Stranded Gas Development Act contract and changing tax on existing oil and gas properties.

The no votes

Rep. David Guttenberg, D-Fairbanks, a House Finance Committee member, said a lot of legislators were cynical about this bill initially, but said you don’t hear a lot of cynicism anymore. He called the bill basically an appropriation to hire people to continue the project at some pretty good salaries. He complained that legislators were told they couldn’t touch the MOU or the HOA and said he believes the same thing will happen when contracts come back to the Legislature for approval.

Guttenberg said more time was needed to ask questions and get answers, and told fellow legislators that if they still had questions, they should vote no. He also said he was concerned Exxon was just negotiating for some future point when they’d be ready and said legislators would look back and realize they were playing a different game, in a different league.

Rep. Sam Kito III, D-Juneau said he was concerned about the multiple projects the state is backing, about whether the enabling legislation had put enough sideboards in place, whether TransCanada was getting too much out of the deal and about the state’s equity ownership, although he said that did give the state a stake in the project. He also noted that on the trans-Alaska oil pipeline there was an agreement for Native hire, which wasn’t in the enabling legislation, and said he wanted a way to encourage Native Alaskans to get training and participate fully in the project.

Rep. Chris Tuck, D-Anchorage, the House minority leader, said he appreciated the hard work of the administration in negotiating the HOA and MOU, but was concerned that a 90-day session was too short and there were a lot of questions still unanswered. He said the bill should have had a Judiciary Committee referral since the Alaska Gasline Inducement Act contract was an issue.

Tuck said the state gives up its sovereignty as a minority partner and there are no guarantees contracts developed for the project will protect the state’s interests. He said he’d be a reluctant no vote because he wants to see more due diligence done on the project.

Rep. Scott Kawasaki, D-Fairbanks, who sits on House Resources, said he wants a gas line built and would like to see the benefits a line could bring for Fairbanks, but said the bill essentially legitimizes and ratifies deals the governor has already made in the HOA and MOU, with very little opportunity for legislators to change those agreements. He said there were too many unanswered questions and too much risk to the state and called the proposal a reckless way to go forward.

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Property tax change included

A House floor amendment by Rep. Ben Nageak, D-Barrow, approved without objection, incorporated the contents of House Bill 379 into Senate Bill 138.

HB 379, which had previously passed the House 40-0, wrapped into the governor’s enabling legislation a change proposed by the North Slope Borough to allow it to use more of the property taxes it obtains from oil and gas properties for operations.

Prior to passage of the bill, the mill rate for the municipal operating budget was limited by state statue.

NSB Mayor Charlotte Brower said in a letter supporting the legislation that the change would allow a municipality more flexibility in the use of its oil and gas property taxes.

In a fiscal note the Department of Revenue said the bill may have a negative effect on property tax revenues collected by the state, and may reduce state revenues by $10 million or more in each year.

—Kristen Nelson