State One Step Closer to Getting Alaska’s Gas to AlaskansMarch 18, 2014
Governor Sean Parnell praised the Senate today for passing his legislation to advance a large-diameter Alaska natural gas pipeline project. “I applaud the Senate for voting today to advance the Alaska LNG Project and ensure Alaska’s gas is maximized for Alaskans’ benefit,” Governor Parnell said. “Our legislation paves the way for Alaskans to become owners in the project and ensures an open, public process going forward. I look forward to working with the House in the coming weeks to pass our legislation on Alaska’s terms and in Alaskans’ interests.” Senate Bill 138 is the enabling legislation that allows the Administration to negotiate firm contracts with the parties to the Heads of Agreement (HOA) and the Memorandum of Understanding (MOU) reached in January 2014 between the State, the Alaska Gasline Development Corporation (AGDC), ConocoPhillips, BP, ExxonMobil, and TransCanada, which stated all parties are in alignment. The agreements represent the first step on the path to full, legally binding contracts and set out roles and responsibilities of the parties before finalized contracts are drawn up. Currently, the project consists of three related mega-projects including a gas treatment plant on the North Slope, an 800-mile large-diameter pipeline from the North Slope to Nikiski, and an LNG export facility at Nikiski. Another major component calls for at least five off-take points for gas consumption within the state. “The Senate took into account three principles as it considered this legislation: Should we participate? If so, at what percentage? And lastly, what will be the process to advance Alaska’s LNG project?” said Senator Anna Fairclough (R-East Anchorage/Eagle River). “We’ve waited for decades to see this legacy project come to life. I believe now, after the work done on this bill, we are looking at the right gas at the right time. We have found a way to bring affordable energy to Alaskans while fortifying the State’s treasury and economy for generations to come. It’s time to act and that’s exactly what the Senate did today.” “Alaska is resource- rich and natural gas is abundant. This is the fourth plan in recent years to bring that gas to the homes of Alaskans,” said Senate Resources Chair Cathy Giessel (R-Anchorage Hillside/Turnagain Arm/N. Kenai). “SB 138 allows us to develop the project engineering and construction plans, while the fiscal details are also scrutinized. The Legislature will continue to carefully evaluate this project and the State’s potential investment, looking forward to a future of opportunity.” The Senate made several improvements to Senate Bill 138. One of the most significant changes increases the production tax on gas from 10.5% to 13%. The intent is to set the State’s equity share in a North Slope natural gas pipeline project at 25%, when combining the gas tax with the royalty percentages due to the state. “Business as usual has prevailed in our effort to get gas from the North Slope. But business as usual has gotten us no gas,” said Senator Pete Kelly, (R-Fairbanks). “That’s why I like the approach of SB138 - it’s different from anything we’ve done and I think it will work.” The Senate also added a provision which puts AGDC in charge of the Alaska LNG project instead of a subsidiary. The language enables AGDC to enter into contracts relating to the LNG project, but only after consulting with Commissioners from the Department of Natural Resources (DNR) and the Department of Revenue (DOR). It also requires AGDC’s board to appoint a program director to manage the Alaska LNG Project so it doesn’t interfere with the State’s commitment to maintain progress on the Alaska Stand Alone Gas Pipeline (ASAP) project, which passed the Legislature last year with the goal of delivering affordable gas to Alaskans through an in-state small-diameter gasline. As part of the Senate’s lengthy discussions on SB138, members of both the Resources and Finance Committees also investigated thoroughly whether TransCanada was the right partner to help finance the mega-project. “The answer to that question is yes,” said Senator Fairclough. “Deals like these hinge on the concept of ‘Risk and Reward’ and we need to make sure Alaskans receive the maximum possible benefit from our natural resources. That also means we do not put Alaskans in a place where we finance ourselves into massive debt,” said Senator Fairclough. “Right now, if the State ‘goes it alone’, we could possibly max out our credit rating. At that point, the State would start losing its ability to borrow. That’s not something we want to see. TransCanada’s participation would allow the State to retain 25-percent of the gas share for only 18-percent of the costs upfront.” The Senate’s discussions on SB138 also examined the topic of what kind of compensation municipalities and boroughs would receive for the impact on their communities. That’s why the Senate added a provision directing the Governor to establish an advisory board on municipal involvement in a North Slope natural gas project. “The benefits available to all Alaskans due to the provisions of SB 138 are undeniable, from jobs to lower-cost energy, as well as rural energy project funding and LNG export revenue,” explained Senator Peter Micciche (R-Soldotna). “Also considered was a municipality’s right to tax jurisdictional infrastructure and potential construction and operational impacts. Therefore, the bill includes an Interim Advisory Board in Section 58 that ensures municipalities an active voice in local taxation and community impact discussions.” “The last elected job I held prior to serving in the Senate was Soldotna’s Mayor,” continued Micciche. “I understand both the benefits and impacts of such projects in our cities. Therefore, the Senate worked as a team to identify an avenue that keeps municipalities represented in an effort to answer concerns we heard from affected municipal leaders along the route of the project from the North Slope to the Nikiski terminus.” In order to help rural Alaskans, Senator Lyman Hoffman (D-Bethel), inserted language into SB138 to ensure the gasline helps lower energy costs for all Alaskans, regardless of whether they get the natural gas directly. The new Alaska Affordable Energy fund will be used to develop energy infrastructure in areas that do not have direct access to a North Slope gas pipeline. The fund will receive ten percent of all revenue received from the State’s royalty gas transported in the Alaska LNG project, after paying the Alaska Permanent Fund its share of that royalty. SB138 also directs the Alaska Energy Authority to develop a plan extending energy infrastructure to parts of the state without direct access to a North Slope natural gas pipeline. “This bill does two things Alaskans have been waiting for-the first is to monetize Alaska’s abundant natural gas resources and the second is to have affordable energy for all Alaskans,” said Senator Hoffman. “With the amendment passed last week in the Senate Finance Committee and the passage of the bill today the Senate has taken a giant step to make both a reality.” Senate Democrats offered 16 amendments to defend Alaska sovereignty, protect property tax payers and potential Alaska gas consumers. (Senate Democrats Amendments) SB138 also includes a section introduced by Senator Lesil McGuire (R-Anchorage) known as ‘Pick.Click.Invest’ which would direct the DOR to work with the Securities and Exchange Commission (SEC) to create the best way for Alaskans to use their PFDs to invest in the gasline. The Senate Finance Committee later added a provision to require that the DOR’s plan for Alaska ownership must include ownership opportunities for municipalities and for Native corporations. “I believe this will get Alaskans reinvigorated about our robust oil and gas industry by allowing them the opportunity to have an equity share in the project, or, in other words, own a piece of the pipe,” said Senator McGuire. “This amendment would essentially allow Alaskans to buy stock in the pipeline and earn interest on their investment.” Construction of the pipeline is expected to add anywhere from 9,000 to 15,000 jobs to Alaska’s work force. In order to make sure Alaskans are the ones ready to fill these high paying positions, Senator Click Bishop (R-Fairbanks) added language to the bill to expand the existing oil and gas producer education tax credit to include contributions to nonprofit regional training centers recognized by the Department of Labor and Workforce Development, and for vocational education, equipment and facilities. “We learned an important lesson from the construction of TAPS,” said Senator Click Bishop (R-Fairbanks). “And that was if we want to hire Alaskans, we have to train them for the jobs. We have worked hard over the past decade to create training programs to get that done. Last, but not least, SB138 starts a gated approach to building the gasline which offers off-ramps if the State, or any of the other parties in the agreement, want to end their participation after the preliminary front end engineering design (Pre-FEED), or front end engineering design (FEED) phases, but before the final investment decision (FID). “It took the Alaska State Legislature in 1973 to prevent Alaskans from owning a portion of the Trans-Alaska Pipeline,” said Senator Fairclough. “Today, the Senate voted to not repeat history and took the next step in a long process to a provide energy relief to Alaskans and economic opportunities for our children.” Senator Bert Stedman (R-Sitka) voted against the Governor’s proposed Liquefied Natural Gas Pipeline Project. Stedman represents District Q which includes Ketchikan, Sitka, Wrangell, Haines, Metlakatla, Craig, Klawock, Hoonah, Kake, Thorne Bay, Angoon, Saxman, Hydaburg, Coffman Cove , Naukati, Hollis, Klukwan, Hyder, Pelican, Kasaan, Port Alexander, Port Protection, Edna Bay, Whale Pass, Elfin Cove, Point Baker, & Meyers Chuck. In explanation of his vote agaomst SB 138, Senator Stedman said in a prepared statement, "My vote against SB 138 was not a vote against a natural gas pipeline." Stedman said his objection comes from the fact that the state’s interests as a sovereign are not in alignment with the inclusion of TransCanada owning the state’s share of the pipeline and gas treatment plant. Stedman said, "There are many troubling risks to the state from this megaproject including: low gas prices due to a potential oversupply from competing international projects under development; the state’s lack of expertise and ability to market its share of the gas received in lieu of royalties and taxes; and handing over the state’s ownership share of the pipeline and gas treatment plant to TransCanada. The last point is what gives me the most indigestion." Make no mistake; the producing companies (ExxonMobil, BP, and ConocoPhillips) and not the state are in control of moving this pipeline project forward said Stedman. "TransCanada is a pipeline company but who actually builds this pipeline will be decided by ExxonMobil with concurrence from BP and ConocoPhillips. TransCanada is simply acting as our lender to cover the upfront project costs at a guaranteed rate of return through construction. The deal looks like this: TransCanada will hold an ownership interest in the gas treatment plant and the pipeline equal to the state’s estimated 25% share of the gas; the state would have a one-time option to buy back up to a 40% of its ownership interest from TransCanada so long as TransCanada’s share doesn’t fall below 14% leaving the state with only an 11% ownership interest. Furthermore, regardless of whether the state exercises its option to buy an ownership interest from TransCanada, we are obligated to pay TransCanada’s development costs plus an interest rate of 7.1% if the project is not sanctioned." "The state entered into an agreement like this with TransCanada once before when the legislature passed the Alaska Gasline Inducement Act (AGIA) in 2007," stated Stedman. "That law guaranteed the state would reimburse TransCanada up to $500 million for costs incurred related to the development of a large diameter gas pipeline through Canada. Today, most legislators would agree that tying ourselves to TransCanada through AGIA was a mistake. I’m concerned that we didn’t learn our lesson and we’re making the same mistake again but instead of a $500 million mistake, this could turn out to be a multi-billion dollar mistake." Stedman said, " I’m uncomfortable supporting this proposed commercial arrangement that doesn’t align the state’s interests with ExxonMobil, BP and ConocoPhillips. These companies will see to it that this project is profitable for them or they won’t proceed. Similarly, TransCanada is guaranteed to make a handsome profit. Unfortunately it looks to me like the state of Alaska as a sovereign and the owner of the oil and gas resource is assuming the most exposure and risk. Making a bad situation worse, reduced revenue from oil taxes will result in year after year deficit spending to balance our budget, depleting our savings accounts around the same time pipeline construction will begin." Stedman said, "One of our own legislative consultants hired by the Legislative Budget and Audit Committee warned, “In its totality, however, the proposal will result in a radical departure from the State’s historical position and role as a Sovereign, as a Royalty Owner, as a Taxation Authority and as a Regulator which raises a number of issues and presents substantial risks.”" A sole source, non-competitive bid resulting in a multi-generational contract with TransCanada is not in the state’s best interest said Stedman. "In my opinion, the Legislature should put SB 138 on the shelf and work on it over the interim. We have the time and the obligation to do it right." Senate Bill 138 now moves to the House.
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