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Parnell gas line deal aims to avoid 'fiscal certainty' confrontation

Dermot Cole
The recent agreement between the state and major oil companies on gas line planning attempts to sidestep debate on "fiscal certainty" and whether the Alaska Constitution allows long-term tax deals.
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FAIRBANKS -- The gas line agreement announced by Gov. Sean Parnell and the “Big Three” oil companies Wednesday attempts to avoid the old “fiscal certainty” argument that helped derail a gas pipeline project backed by Gov. Frank Murkowski seven years ago.

But by any other name, the political debate over whether political leaders have the power to lock in Alaska natural resource revenues for decades will be impossible to escape.

The companies and the state say the wide-ranging agreement is an attempt to settle key details and proceed to a $400 million phase of pipeline planning. After that stage, the companies will decide on whether to proceed to the final design, which would cost billions on a project pegged in the $45 billion to $65 billion range.

Fiscal certainty or durable contract terms are one giant detail, according to the oil companies. Under the Murkowski plan, the state said it had the authority to set long-term tax rates that could not be changed by elected officials for decades. The tax freeze controversy helped stall the Murkowski pipeline contract.

Under the Parnell plan, the state would not promise to keep taxes stable for 30 or 40 years. That’s because the companies would not be paying taxes for 30 or 40 years. Instead, the companies would give the state a portion of their natural gas, perhaps from 7 percent to 13 percent, the document says, instead of taxes.

The state would collect revenue by selling the gas, and its value would rise and fall depending upon world markets. When added to the state royalty share of about 12 percent, which is the portion of the gas the state already owns because the resource is on state land, Alaska would have an ownership interest of from 20 percent to 25 percent of the gas under this approach.

The ownership would be through a subsidiary of the Alaska Gasline Development Corp., an entity that has already been granted extensive authority by the Legislature.

The state could attempt to market its 20 percent to 25 percent share of the gas to customers in Japan and elsewhere, an enterprise in which it has no expertise, or it could agree to sell the gas back to the oil companies, negotiating with the companies on price.

The administration will no doubt promote this aspect of its plan as a means of reducing risk for the oil companies and increasing the chance that a pipeline will be built. But the financial risk to Alaska associated with an arrangement that pledges the state to market gas for decades creates challenges as well, both political and economic.

The process outlined by the Parnell administration is that the Legislature will be asked to approve legislation in 2014 allowing the state to enter confidential negotiations with the oil companies. The results of those confidential negotiations would be contracts that would face a ratification vote in 2015.

Bill Walker, who is running for governor as an independent and who has long been a proponent for an all-Alaska gas pipeline, said that after a quick read of the agreement, he has two main concerns. First, the public process is missing. Second, the state has signed off on an agreement before discussing any of the details with the public.

“It makes me very angry that they’re doing it this way,” he said, adding that this is just like the approach the governor took on the Point Thomson settlement. He said that one line in the agreement says state support for “a healthy, long-term oil business” is necessary, a phrase that he says reveals the desire for a long-term freeze on oil taxes.

“It's all about fiscal certainty on oil,” he said.

A 2012 letter from the oil companies to the governor, which is attached to the agreement, also says that a “healthy, long-term oil business, underpinned by a competitive fiscal framework,” would be necessary to get natural gas to market.

The Parnell proposal says that state contracts to be negotiated with the oil companies would be used to set property taxes for local governments and settle a variety of issues, from lease expenditures to gas treatment. The contracts “will need to be of sufficient duration to support investment decisions,” a period that the oil companies have said in the past could be 30 years or longer.

The commissioners of revenue and natural resources, the head of the AGDC, and executives of TransCanada, BP, Exxon Mobil Corp. and ConocoPhillips signed the document.

Nothing in the agreement requires “any party to reach or execute any legally binding or enforceable agreement(s) or to refrain from engaging in any business whatsoever.”

The immediate goal is to reach the point at which the companies would decide whether to spend the billions needed for final design. Each company will “make that decision in its sole discretion.”

Contact Dermot Cole at dermot(at)alaskadispatch.com. Follow him on Twitter @dermotmcole.