Parnell wants the state to become a partner and investor in a natural gas pipeline

ldemer@adn.comJanuary 10, 2014 

Gov. Sean Parnell on Friday announced that he was prepared to abandon the Palin-era natural gas pipeline law and set the state on a new path as an investor and partner in a long-dreamed-about natural gas project from the North Slope.

Parnell unveiled the dramatic shift in strategy before a receptive crowd of hundreds attending the Alaska Support Industry Alliance oil, gas and mining conference in Anchorage.

"You guys should be really happy at this point. This is huge progress," the governor said about 20 minutes into his speech, prompting laughter and then loud applause. "Pardon me if I didn't make that clear."

The state and TransCanada Corp. have agreed to "amicably terminate" their agreement under the 2007 Alaska Gasline Inducement Act that called for the pipeline company to develop a project that meets Alaska-specific terms, Parnell said.

Instead, the state will seek legislative oversight over "a more traditional commercial arrangement" that includes TransCanada, oil and gas producers and a state agency, the Alaska Gasline Development Corp., the governor said. He referred to the arrangement as a "heads of agreement," which Investopedia defines as guideline or first step to a binding legal partnership agreement.

A natural gas project is expected to cost $45 billion to $60 billion. The state, using the $45 billion figure that subtracts out North Slope field development, expects to put in 20 to 30 percent of the cost, said Natural Resources Commissioner Joe Balash. The state owns a share of the natural gas, generally 12.5 percent, but more on some fields, known as royalty gas. That share could be leveraged to pay for the state investment, the commissioner said.

In an interview after his speech, the governor said the state will not owe TransCanada any damages for canceling a contract in which the state had promised to pay up to $500 million as incentives. The state has paid $300 million of that, with another $30 million appropriated but not yet spent, said Bruce Tangeman, deputy revenue commissioner. Under the current law, called AGIA, the state has the right to buy the work already created, but the new partnership will make clear what happens to the environmental studies and regulatory work, Tangeman said.

Republican lawmakers reacted favorably to the governor's proposal, while a leading Democrat was more cautious.

The new direction for the mega-project promises to dominate the 2014 legislative session, which begins Jan. 21. The state would become an investor in the pipeline and other, expensive facilities such an liquefied natural gas plant needed to export Alaska's vast stores of natural gas to commercial markets in Asia.

Alaska has been trying to develop its gas resources for decades, but the economics have never worked out. A big pipeline from the North Slope is expensive and natural gas is much less valuable than oil. The oil producers, which reinject the natural gas to force out more oil in aging fields, have resisted.

Last year, the Legislature undid the oil tax regime put in place under then-Gov. Sarah Palin. AGIA was another of her hallmarks but it's time is over, Parnell said.

"I think this is very, very good news," state Rep. Eric Feige, R-Chickaloon and co-chairman of the House Resources Committee, said after the speech. He said he had been briefed about the shift and noted the governor said progress would come one step at a time. "It's kind of a like a ladder. You've got the state. You've got the producers. I go up one rung, you go up one rung, all the way to the top."

Senate President Charlie Huggins, R-Wasilla, called the governor's plan "a business proposition."

"TransCanada will still be a player. This is just a different model to help Alaskans get the affordable gas they need, while also opening up export opportunities," Huggins said in a written statement.

State Sen. Bill Wielechowski, D-Anchorage and one of the senators who has closely followed oil and gas issues, said he had concerns, but was willing to look at the details of what Parnell proposes.

"The first thing the state is going to need to do before we decide to make an investment is decide whether this is this a good viable project that's going to have a return for Alaskans and is not going to bankrupt the state," Wielechowski said.

A state-commissioned $424,000 study on the economics of a natural gas project used three natural price scenarios, including a middle-ground base case that assumed natural gas prices in Asian markets would remain linked to the cost of oil. That may not be a reasonable assumption considering the push in Asia to separate oil and gas prices in order take advantage of the vast amounts of natural gas being produced and projects in development, the senator said.

Parnell said the plan is a good one.

The "Heads of Agreement" for an Alaskan LNG project should be signed within days by BP, ExxonMobil, ConocoPhillips, TransCanada, the Alaska Gasline Development Corp., and the state commissioners of revenue and natural resources, the governor said.

Other oil and gas producers shouldn't be left out, Wielechowski said. The current approach under the Alaska Gasline Inducement Act ensured that smaller producers could ship their gas, he said. While the governor's proposal will give the state a seat at the table, it will be a minority owner.

"You are going to get outvoted every time by the producers," Wielechowski said.

The Parnell administration will be proposing legislation to allow the Department of Natural Resources to enter into shipping agreements to move and sell the gas and to switch the tax structure from a net production tax to one based on the gross value. That change won't mean less revenue to the state, Natural Resources Commissioner Joe Balash said.

The governor also proposes that for some leases the producer would pay the production tax in the form of natural gas.

If the legislation passes and the agreement is signed, the next phase involves refining the cost estimates and engineering challenges. That should take about 18 months, Parnell said. The project will be vetted publicly.

"Bottom line: We will have an investment quality project when that's complete," Parnell said.

And if the big gas pipeline does fail to move forward, the governor said, the state has a backup plan to build its own smaller pipeline.

Reach Lisa Demer at ldemer@adn.com or 257-4390.

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