Thursday, June 11, 2015

Walker pitches TransCanada buyout

Alaska Contract Staffing
Tim Bradner
Alaska Journal of Commerce

Gov. Bill Walker is considering ending the state’s relationship with TransCanada Corp. in the big Alaska LNG Project and taking over a full 25 percent share of the project.

In an interview June 7 in Fairbanks, Walker said that he is weighing the takeover option along with keeping TransCanada in the consortium under the current structure. Under that arrangement TransCanada would ship state-owned gas though its share of pipeline capacity.

A third option Walker is weighing is the state taking a 40 percent share of TransCanada’s interest in the project under the current contract with the state.

The state now has a contract with TransCanada that has the pipeline company owning and operating 25 percent of the large North Slope gas treatment plant and the 42-inch, 800-mile pipeline, and with the state itself owning 25 percent of the large liquefied natural gas plant planned for Nikiski.

North Slope producers BP, ConocoPhillips and ExxonMobil Corp. would own 75 percent of the overall project. The percentages will be roughly in line with the gas ownership of each participant, except that under the current arrangement the state would have TransCanada as a partner in its share.

“TransCanada is a very fine company and I have no problems with their capabilities,” Walker said.

However, the state assuming a larger share of ownership of the project may be in its long-term best interests, the governor said.

Walker made the comments at a conference on state fiscal issues in Fairbanks.

In a related development, Walker has shuffled the state’s management team on gas pipeline negotiations. He named Audie Setters, a 35-year industry veteran manager, as the state’s top manager for gas issues. Marty Rutherford, who formerly filled that role, will remain as deputy commissioner of Natural Resources, the governor said.

There was no announcement of the change but in an interview Walker described it as a “transition” that would bring more strength into the state’s negotiating team, while retaining Rutherford’s experience and allowing her to devote more time to Department of Natural Resources matters.

Rutherford would presumably remain engaged in key gas issues as they relate to the DNR, such as a pending decision to take royalty gas in-kind and a separate gas-balancing agreement.

Walker may face some embarrassing questions about naming Setters to the role, however, because he is a resident of Houston, Texas, although he has been working with the state on gas issues for about a year.

Early this year Walker fired a board member of the Alaska Gasline Development Corp. because he lived out of state, also in Houston.

On TransCanada, the governor has asked the state Legislature for $108 million to compensate the pipeline company for its expenses to date on the project. Legislators have asked for more details of the governor’s plans, however.

Walker did express concern over the added burden of financing a larger state share of the project in view of Alaska’s diminished finances, which are currently stressed by low oil prices and a sharp drop in state revenues.

The Heads of Agreement signed by the project participants with former Gov. Sean Parnell set the framework for the preliminary work on the pipeline and LNG plant. The state signed a separate agreement with TransCanada to allow the pipeline company to own a stake in the project. The contract expires in December, although the assumption has been that it would be extended.

Walker may opt not to extend the contract, however, leaving the state in full ownership of 25 percent of the pipeline and Slope gas plant along with its share of the LNG project.

The project is currently in the pre-Front End Engineering and Design, or pre-FEED, stage, with this phase of work to be wrapped up by early next year. The pre-FEED will include a revised cost estimate, which is currently pegged at $45 billion to $65 billion.

The next key decision for the overall project will be moving into full Front-End Engineering and Design, which could occur in mid-2016 and will involve an approximate $2 billion commitment by the parties.

Later this year, however, the state must decide on whether to extend its deal with TransCanada, and also finalize a fiscal agreement with North Slope producers covering gas production tax and royalty terms. Negotiations on the fiscal agreement and other pending issues such as a Payment-in-Lieu-of-Taxes, or PILT, on municipal and state property taxes, are currently under way.

In an email sent to state legislators May 29 but made available June 9, Walker said, “The agreement with TransCanada allows the state to remove the company as its agent at the end of the pre-FEED. The administration could choose to remove TransCanada at that time, and as late as July 2016. Alaska could then take a direct role in the project at the FEED stage.”

TransCanada’s role in the overall project has been somewhat controversial in Alaska. Parnell agreed to bring the pipeline company in as a partner to gain access to the pipeline company’s expertise in large project management and in dealing with the producer partners in capacity management and expansion issues.

Another consideration is that the arrangement would have TransCanada finance its share of equity in the project, which would amount to several billion dollars, with its own resources. That would relieve the state from the burden of having the raise the money, if it were to assume the full 25 percent share.

On the other hand, under that arrangement the state would not make as much profit from the project.

However, the TransCanada deal was also done partly to resolve potential legal issues related to terminating a previous contract the state had with the pipeline company under the Alaska Gasline Inducement Act, or AGIA. Many state legislators, and Walker as a candidate for governor, criticized Parnell’s move, arguing it gave up too much ownership and share of future revenues to the pipeline company.

There has also been an assumption that TransCanada, as a part owner, would also play a major role in managing the actual construction of the pipeline, an area where it is widely experienced. However, an industry source close to the project, asking not to be identified, said decisions on which entities would be involved in construction management have not been made.

In a response to Walker’s request for funds, state legislative leaders wrote, “Many in the Legislature support the termination of the state’s contract with TransCanada once sufficient financial review and a thorough evaluation of the benefits and risks is undertaken.”

The response was in a letter sent June 4 but not released to the public until June 9. It was signed by House Speaker Mike Chenault and Rep. Mike Hawker, R-Anchorage, chair of the Legislative Budget and Audit Committee, and the co-chairs of the House Resources Committee, Reps. Ben Nageak, D-Barrow and Dave Talerico, R-Healy.

Lawmakers also asked for details as to how the state can fund a larger commitment to the project: “Our partners, before progressing to FEED, will need to know the state has the ability to fund its FEED commitment, which will be significantly higher if TransCanada is no longer a partner in the venture.”

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Saturday, May 16, 2015

Educators misled by the NEA and the Partnership for Public Education

Kara Moriarty

Alaskans deserve facts on all major public policy issues. Sadly, misrepresentations about Alaska’s oil and gas tax credits threaten to turn a situation that requires a thoughtful and fact-based approach into a political skirmish complete with slogans and accusations.

It is impossible for anyone to track every issue, so we tend to rely on media outlets, unions, trade groups, etc., to provide us accurate information that enables us to learn about and take positions on public policies. Unfortunately, in this case, the union representing teachers has let its members down by continuing to spread inaccurate information for the last month -- even after hearing the facts.

The NEA commissioned a poll this spring, in conjunction with the members of the Partnership for Public Education, which include: AFL-CIO; Alaska PTA; Anchorage Polynesian Lions Club; Citizens for the Advancement of Alaska’s Children; NAACP; Polynesian Association of Alaska; and School Business Partnerships. One of the questions asked Alaskans how they felt about oil tax credits, and if the Legislature should revisit oil taxation. Fair question. However, the question as worded was blatantly incorrect. This could have been an honest mistake, but professional standards dictate that when an error is identified, the responsible party is obligated to correct it. To date, the NEA and the Partnership for Public Education refuse to take ownership of their error, which is especially regrettable when you consider this is the union that represents teachers who, more than any other professional, strive for truth in information as they educate the next generation of Alaskans.

More than a month ago, I respectfully presented the correct information from the Department of Revenue to the NEA and the PTA. I asked that they provide the facts to those that received the poll and put a disclaimer on the public results. Several emails and many weeks later, I have been ignored and nothing has been done. The pollster for this organization, Hays Research Group, is also unwilling to correct the record despite what appears to be a clear violation of the ethical guidelines outlined by that profession’s trade organization. As the head of a professional association whose mission is to provide Alaskans with factual, third-party referenced information, this kind of casual attitude toward the truth is unsettling. My professional training is in education; I used to be an elementary school teacher, and an NEA member, and I would be horrified to know my union was consciously choosing to misrepresent an issue that was proven to be false.

The inaccurate statement contained within the poll question posed to Alaskans read like this:

"The state revised its oil tax law in 2013, and Alaskans voted by a narrow margin in August not to repeal the new tax system. At current oil prices, the state gives out more in oil tax credits to the oil industry than it receives in revenue from the oil industry. Would you support the Legislature revisiting the issue of oil credits and taxes in light of the current deficit?"

Who wouldn’t respond with a “yes” to this question as worded? The trouble is, it’s just flat wrong.

In fact, its entire premise is wrong. It is an indisputable fact that the State of Alaska receives billions more in revenues than it pays out to oil companies when you look at all oil revenue sources: royalties (the state’s share as an owner), production taxes, income taxes, property taxes and other fees paid to the state.

Alaskans deserve an honest conversation based on facts as we tackle our fiscal challenges, not half-truths or political spin. No one is served when individuals or organizations throw out inflammatory accusations that are clearly either false or taken out of broader context.

The NEA has every right -- and even the responsibility -- to lobby rigorously for policies that benefit public education and teachers. But it should do so in a way that informs Alaskans with accurate information, not misleads them by spreading false information.

My organization has set up a special page on our website for readers who want more information on oil revenues and tax credits from objective, third-party sources. Visit and learn about it for yourself.


Kara Moriarty is executive director of the Alaska Oil and Gas Association, a nonprofit trade association whose mission is to foster the long-term viability of the oil and gas industry in Alaska.

Thursday, May 7, 2015

Pentex purchase could cut ratepayers’ bills immediately

Fairbanks Natural Gas customers could see their heating bills drop immediately if the utility is sold to the Alaska Industrial Development and Export Authority.

“We do believe through the financing tools that AIDEA has, we could reduce the (gas) rate in Fairbanks right away by approximately 14 percent,” former AIDEA director Ted Leonard said at the authority’s April 30 board meeting.

“Rationalizing” the two gas distribution systems being developed by Fairbanks Natural Gas and the Interior Gas Utility and forming one system could provide significant capital and operating cost savings, he said.

Leonard retired as AIDEA executive director earlier this year but has continued to work on the Interior Energy Project because of his extensive experience with the earlier North Slope work.

Further savings to ratepayers would come from the different business models — moving away from the inherent cost and return requirements in a privately-owned utility structure.

Mark Gardiner, a financial consultant who is working closely with AIDEA on the proposed deal, said that the current rate of $23.35 per thousand cubic feet, or mcf, of gas FNG customers are paying could be $20 next year if the sale goes through. The savings would be even greater if FNG’s pending rate case before the Regulatory Commission of $24.96 per mcf is accepted.

The potential cost savings from the purchase are separate from whether or not the Interior Energy Project moves forward. However, an early projection of $16.80 per mcf in 2020 for all customers of a blended utility was presented to the board.

That estimate assumes liquefied natural gas can be delivered to Fairbanks for the equivalent of $11 per mcf, a midstream price the Interior Energy Project will have to come close to in order to meet the stated goal of the project.

Leonard said North Slope gas trucking project models came in with a comparable price in the $13 to $13.50 per mcf range.

AIDEA projects full buildout of a consolidated Fairbanks gas utility to cost $223 million. To date, the authority has issued $52.8 million in loans for gas distribution from the $332.5 million Interior Energy Project state financing package.

AIDEA announced a preliminary agreement to purchase the parent company to Fairbanks Natural Gas, Pentex Alaska Natural Gas Co., in late January.

That announcement was met with resistance from some Alaska legislators who questioned the premise of the state purchasing outright a private business and how the AIDEA-Pentex sale would affect an earlier agreement for a Hilcorp subsidiary to purchase Titan Alaska LNG — Pentex’s LNG trucks and small Southcentral liquefaction facility.

The 10-year LNG supply agreement Harvest has with Pentex, as part of the Titan sale would remain as well. That agreement is to fuel existing gas customers and does not expand Interior’s natural gas supply.

It’s currently believed the two deals can coexist; AIDEA would purchase Pentex for $54 million and then sell Titan to Harvest Alaska (Hilcorp) for $15.1 million, which is the price Pentex and Harvest originally agreed to.

The AIDEA deal is set to close July 31. The Titan sale is being reviewed by the RCA and Attorney General Craig Richards and has a Sept. 31 financial close date.

If the Titan sale is denied or otherwise fails AIDEA would retain those assets.

Leonard and Gardiner said it is the authority’s intent to sell or otherwise transfer control of Fairbanks Natural Gas within two years to a local entity, most likely IGU, which is owned by the Fairbanks North Star Borough.

Fairbanks Natural Gas President and CEO Dan Britton, who is also a minority shareholder in Pentex, said in an interview that IGU leaders have generally been kept abreast of the negotiations with AIDEA and are supportive of the overall plan.

Fairbanks Natural Gas petitioned the RCA for IGU’s service area and Britton has said two operating gas utilities makes little sense for the small customer base that is the greater Fairbanks area.

IEP gets moving

Now that a bill has passed allowing Cook Inlet gas to be used as a possible supply, it’s full steam ahead for the Interior Energy Project, its manager Bob Shefchik said April 30.

The project team had meetings scheduled the week of May 4 with 15 to 18 parties that have expressed interest in partnering on the Interior Energy Project, Shefchik said.

“Because it’s been such a long process we want to bring them in, talk to them about where we’re headed, what we expect to be in the solicitation and get some feedback,” he told the AIDEA board.

A request for proposal, or RFP, for a private partner to expand Southcentral gas liquefaction capacity should be issued by AIDEA by mid-May and stay open for 30 days, according to Shefchik. Proposals for a small gas pipeline and propane solutions will also be accepted.

He said the board could expect the results of the RFP at its June 25 meeting.

Concurrently, the state Commerce Department along with the Revenue and Natural Resource departments are working on a gas supply solicitation.

Shefchik, a former Interior Gas Utility chair, said the Fairbanks utilities have agreed to participate in the RFP selection process and a range of acceptable gas prices will be worked out earlier than it was during the North Slope supply efforts to keep the utilities on board.

“The thing that has to be avoided is (price) being the last thing decided,” he said.

Sunday, April 5, 2015

State estimates $150B to treasury if ANWR ever opened

Alaska Contract Staffing
Tim Bradner
Alaska Journal of Commerce

Alaskans have long believed oil discovered in the coastal plain of the Arctic National Wildlife Refuge could help keep the Trans-Alaska Pipeline System operating and also replenish the state treasury.

It may be a pipe dream because the federal government shows no sign of opening the coastal plain to further exploration and Congressional approval is required for any exploratory drilling or leasing.

Interior Secretary Sally Jewell, who denied the State of Alaska’s proposal for new seismic exploration of the ANWR coastal plain and is awaiting the outcome of a court case challenging that decision, wants to make it wilderness, a permanent lockup.

But what if? What if there were exploration, and discoveries? How much oil could there be? State officials told legislators in February the revenue to the state treasury could total more than $150 billion over 50 years.

ANWR’s coastal plain, in the eastern North Slope, is thought by geologists to have the best potential for major discoveries of any unexplored onshore area of the U.S.

Major oil fields have been discovered in the central North Slope, including the very large Prudhoe Bay and Kuparuk River fields. There is potential for further discoveries in this area but they are expected to be smaller.

The southern North Slope, and the huge 23-million-acre National Petroleum Reserve–Alaska on the western Slope, are generally thought by geologists to be prone to natural gas discoveries although some oil will almost certainly also be found.

The most informed estimate on ANWR’s coastal plain area came from the U.S. Geological Survey in 1998, which made a “mean” estimate of 7.7 billion barrels of recoverable oil that could be discovered. “Mean” is basically mid-way between high and low estimates.

Whether oil is really there isn’t known for sure. The USGS worked with data from 1,180 miles of two-dimensional seismic program conducted between 1983 and 1985, plus what is known about the regional geology.

The only exploration well drilled in ANWR, in a 91,000-acre in-holding of private lands owned by Kakovik Inupiat Corp. and Arctic Slope Regional Corp., was drilled in the early 1980s by BP and Chevron Corp., and the results are still secret.

No matter what the drilling showed, development of even these private lands are blocked unless Congress decides to open the rest of the costal refuge.

Still, state legislators in Juneau want to know what Alaskans may be missing out on.

In mid-February, the House Resources Committee asked the state departments of Natural Resources and Revenue to develop the most plausible oil discovery and production scenarios based on that is known, and to derive state revenue estimates from those.

The two agencies presented their results to the committee on Feb. 12.

Paul Decker, acting director of DNR’s Division of Oil and Gas, described ANWR’s regional geology in the so-called “1002” area, a coastal plain area named for the section of the law in which Congress designated for additional study of petroleum resources in the Alaska National Interest Lands and Conservation Act of 1980, the federal law that created the refuge.

Decker said the best prospects for discovery are in the western third of the coastal plain, which state geologists believe to hold the most oil potential. Of the 7.7 billion barrels of resources estimated to be in the 1002 area, 6.4 billion barrels are expected to be in the western third.

That is about five times the oil potential of the eastern two-thirds of the coastal plain.

“The northwestern one-third of the coastal plain is geologically simpler and more favorable to hosting oil accumulations,” Decker told the committee.

The area is also adjacent to state lands across the Canning River where companies have made discoveries at Point Thomson (gas, liquid condensate, and oil), and Sourdough (oil). Oil has also been discovered offshore the 1002 area, with the Kuvlum well in 1993 and “Hammerhead” (where Shell is exploring) in 1985.

Geologists in the division did further analysis, predicting that most of the accumulations that might be discovered would be in the 32 million-barrel range to 256-million-barrel range, but accumulations of 1 billion barrels were also possible.

Based on that analysis, the Department of Revenue developed possible production and oil royalty and tax estimates. Ken Alper, director of the Tax Division, presented the conclusions, assisted by Dan Stickel, assistant chief economist.

The scenario presented by Alper and Stickel would have permission granted by Congress to explore in 2016 and leases issues between 2017 and 2019. Exploration would begin in 2019, with the first field located in 2022, and with its development beginning that same year.

First production would be in 2026. From that point on, the scenario foresees one new field discovered and brought into production every two years so that there would be 25 fields in total developed by 2074. The assumed size of discoveries vary along the lines of the estimates by the Division of Oil and Gas but most of the new fields would be between 64 million barrels and 512 million barrels of recoverable resources.

All prices and costs in the modeling assumed 2015 constant dollars and an oil price of $110 per barrel along the lines of the Revenue Department’s very long-range price forecast (a $90 per barrel case was also considered, however).

The modeling assumes no gas being developed, although surely there would be gas discovered also.

Given these assumptions in the modeling, a “base case” of 7.1 billion barrels of oil developed and produced until 2075 would bring $150.9 billion to the state treasury, although the number could be higher, or lower, depending on the amount of oil found.

The production profile in the base case was about 560,000 barrels per day, with a high case, with more oil discovered, of 760,000 barrels per day and a low case, with less oil discovered, or 350,000 barrels per day.

The required investment by industry would reach $5.75 billion per year in the development, pre-production phase, with continuing investment all through the operating lives of the fields.

Because of tax credits in the current state production tax the state treasury would not begin to experience income net of the tax credits until 2030 or 2031, but revenues would then increase rapidly to a peak of about $4.9 billion per year in 2045.

Revenues would the taper off gradually, but even by 2075, the end of the period modeled, there would still be $3.3 billion per year net to the state treasury.

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