The gas line legislation working its way through the Legislature holds the best chance yet for monetizing Alaska’s North Slope gas resources. We should move ahead with eyes wide open, but we should definitely move ahead.
Shortly before our legislative session began, the Parnell administration signed a Heads of Agreement with TransCanada, the Alaska Gasline Development Corporation, Exxon Mobil, BP, and ConocoPhillips. This document defined the handshake agreements and laid out a path for the Alaska LNG Project. A condition of that HOA was “enabling legislation” that would make certain law changes required for the project to proceed.
The plan calls for the State of Alaska to assume 20-25 percent ownership of the project through its tax and royalty share of the gas. The project is estimated to cost between $45 and $65 billion. Short of the state’s citizens voting to authorize use of the Permanent Fund, Alaska does not have that kind of cash. To be involved in a project of this magnitude Alaska needs a financial partner as well as an experienced pipeline engineering and operations partner. It would be unwise to commit this large a chunk of the state’s treasury to any one project without bringing in solid expertise to assist. Enter TransCanada.
The state has signed a Memorandum of Understanding with TransCanada to be our partner and in return receive a part of our project ownership of the gas treatment plant and pipeline. This MOU is conditional, just like the HOA, upon the partner’s approval of the enabling legislation.
Though Senate Bill 138 is fairly wordy at around 60 pages so far, it does about six basic things. First, it makes some changes to AGDC statutes to allow the state corporation to become involved in the project -- currently they are limited to an in-state gas pipeline project only -- not an LNG project requiring liquefaction. Second, it allows DNR to renegotiate royalty contracts to allow the state to take large quantities of gas as payment for those royalties. It also allows DOR to take gas in kind as payment for production taxes. In the bill the tax rate on that gas is also set at 13 percent of the gross amount of that gas produced at the wellhead. This combined with our average royalty rate makes up our roughly 25 percent share. These changes in the law will allow the project to move into the next phase, called Pre-Front End Engineering and Design.
Besides the statute revisions, SB138 (so far) addresses some additional areas the Senate and House Resources Committee thought appropriate. It establishes an Alaska Affordable Energy Fund to direct 20 percent of the state’s project revenues toward expanding our energy infrastructure to reach areas of the state not directly served by the main gas line. This infrastructure may be additional gas distribution pipelines, LNG distribution projects or electrical transmission lines. We see this as a way to bring cheaper energy sources to more Alaskans. In addition, there are requests for more information on risks, financing options, and further analysis of our oil/gas fiscal structure. The bill establishes an Interim Advisory Board composed of representatives from the municipalities, state government, and project partners to address the issues of Payment In Lieu of property Tax and financial-impact aid to communities affected by construction activities of the project.
Finally, there are provisions to investigate how we can make it possible for ANCSA regional corporations, municipalities, and individuals to invest directly in the project. This may provide an additional revenue stream to cities and boroughs across the state.
Who will buy the gas and for how much is the most critical piece of information we do not currently know. If customers are not willing to pay what the project needs to be profitable, it will not be built. We need to fully investigate other financing options beyond the scope of partnering with TransCanada. It may be advantageous to acquire additional partners or seek other sources of financing. Finally, all this has to be considered in the context of our producing project partners as they will bear 75 percent of the overall costs.
I believe this project is something we as a state should move forward on to Pre-FEED with the passage of SB 138. It has the potential to bring a healthy revenue stream to Alaska for many years. But as we move forward we should investigate all aspects of the deal, preserve as much optionality as we can, and look to minimize the financial risks to the treasury as much as possible. These are exciting times -- stay tuned.
Rep. Eric Feige represents District 6 in the Alaska House of Representatives, serving communities along the Glenn and Richardson Highway corridors from northern Palmer, Sutton, and Chickaloon, to Delta Junction, south to Valdez and Prince William Sound. He co-chairs the Alaska House Natural Resources Committee with Eagle River/JBER Republican Dan Saddler.
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