Last week, Gov. Sean Parnell announced he was cutting a deal to make the state a partner in a large-diameter gasline. Now, the terms of the agreement with the North Slope producers and TransCanada have been released.
The document that was signed yesterday is the contract-version of a promise ring. It’s like getting engaged to be engaged, except with maybe a pipeline at the end of it instead of a wedding.
Basically, the State of Alaska, Alaska Gasline Development Corporation, Exxon, BP, Conoco, and TransCanada have all agreed to work together on a natural gas megaproject so long as 20-odd pages of conditions are met. It would give Alaska up to a 25-percent stake.
“You arrive at that number by taking our royalty interest, which between Prudhoe Bay and Point Thomson, is somewhere north of 13 percent. You add to that a production tax number, and that production tax number is something that we need the Legislature to fix in statute,” says Natural Resources Commissioner Joe Balash. “That number, we hope, is going to fall somewhere between 7 and 13 percent.”
The Big Three would split the rest of the pie amongst themselves. Meanwhile, TransCanada would get a chunk of the state share. That’s because according to this agreement, TransCanada would fund the development work on a pipeline. The agreement signed yesterday also lays out terms for TransCanada to eventually exit the project.
“They will get a share of the equity for the initial contract term, but at the end of that 25 years, we can buy them out at their net book value,” says Balash.
The company had originally been brought in as a partner during the Palin administration under the Alaska Gasline Inducement Act (AGIA). That law envisioned a pipeline that would stretch from the North Slope through Canada and down to the Lower 48, but hit roadblocks when a boom in shale oil made the project uneconomic.
The memorandum of understanding between TransCanada and Alaska also addresses the reimbursements to the company that the state committed to paying. AGIA contained a provision where the state would cover up to $500 million in TransCanada expenditures to develop a pipeline, and about $300 million of those funds have already been spent. Balash says the state would be released from the rest of that obligation if the Legislature approves the terms of yesterday’s agreement.
In addition to laying out how much the Alaska could get from the project, the larger agreement between all of the parties also address just how the state should be compensated. The State of Alaska has the option of getting paid in money or simply getting a portion of the natural gas itself. A study commissioned by the Department of Natural Resources addressed some problems with the state taking the gas in kind — namely, that the state would have a hard time getting a good price for the gas because of its inexperience selling the product on the global market. With the agreement, the state could implement a ninja-like accounting move where they take the gas in kind, but have the Big Three operate as brokers.
“They’ve agreed to market our LNG, so that we get the same price that they get,” says Balash. “So as long as they’re prepared to solve our problem, and it certainly appears that they are, then we’re prepared to take in-kind.”
Balash adds that the producers now plan to court buyers for North Slope gas with the new agreement in place.
“The fact they’re going to get started on the marketing is a really big deal here,” says Balash.
For the parties to all follow through on the agreement, state lawmakers need to pass legislation this session that would allow the executive branch to negotiate confidentially with the other parties while working out contracts related to the project and let the state enter gas shipping agreements. They’ll also have to enact a statute that would give the Alaska Gasline Development Corporation authority to be involved in the project. While AGDC became an independent public corporation this year to pursue a smaller gasline, last week they created a subsidiary to participate in this bigger project as well.
The Legislature will also have to take on the issue of gas taxes to meet the terms of the agreement. Right now, natural gas is taxed the same way oil is, despite the differences in the way they’re priced and marketed. Revenue Commissioner Angela Rodell says a simpler gross tax of up to 13 percent would make more sense if the state is an equity partner. She thinks it will be a less contentious discussion than the bruising battle over oil taxes that occurred over the past few years:
“The conversation about the state being an equity partner already leads us to a much more positive discussion about what the possibilities are for the state’s take.”
State lawmakers will be asked to consider equity terms during the 2015 legislative session. If the terms of yesterday’s agreement are then met, they will then be in a position to ratify a final contract between the involved parties.
Legislators from both chambers and both sides of the aisles largely welcomed news of the announcement. Members of the House and Senate Majority issued glowing statements about the agreement. The Democratic minority was slightly more subdued, commenting that they view an equity arrangement favorably but want to there to be safeguards for the state in whatever deal is made.
Larry Persily, who is the federal coordinator for an Alaska gasline, also says it’s a step in the right direction, even if it’s not quite yet time to break out the champagne bottles.
“There’s a lot of information in here, and there’s a lot that Alaskans still want to know. Alaskans want to know, ‘When are you going to build it, and when am I going to start seeing steel pipe come over the dock?’ We’re not there yet, but that’s a piece that’s got to be there before you get to that decision.”
While that construction would be a ways off even if everything does go as planned, field work on the project is expected to take place this summer if the Legislature takes the actions required by the agreement.