Saturday, August 15, 2015

Walker wants 51% stake in AK LNG

Alaska Contract Staffing
By Tim Bradner
Alaska Journal of Commerce

Alaska Gov. Bill Walker talks with BP Alaska President Janet Weiss during a May 22 visit to Prudhoe Bay. Walker has briefed legislators that he wants the state to take a 51 percent ownership in the Alaska LNG Project and that he may propose a gas reserves tax as leverage against North Slope gas owners BP, ExxonMobil and ConocoPhillips.

Alaska Gov. Bill Walker talks with BP Alaska President Janet Weiss during a May 22 visit to Prudhoe Bay. Walker has briefed legislators that he wants the state to take a 51 percent ownership in the Alaska LNG Project and that he may propose a gas reserves tax as leverage against North Slope gas owners BP, ExxonMobil and ConocoPhillips.

Gov. Bill Walker is still pushing North Slope producers for a larger share of the Alaska LNG Project, and may promote a state gas reserve tax as leverage against the companies, state legislative leaders briefed recently on the governor’s plans said in interviews.

The governor’s office would not comment on the briefings.

“This is all very deliberative, so it’s too soon for us to comment,” press secretary Katie Marquette wrote in an email.

Legislators were willing to share what they’ve heard so far.

“We were told the governor desires a majority ownership in the project, at least 51 percent, and that the administration is considering the use of a gas reserves tax if one or more of the companies don’t want to play,” said Rep. Mike Hawker, an Anchorage Republican who was one of the leaders briefed.

Hawker is chairman of the Legislative Budget and Audit Committee. He and House Speaker Mike Chenault, R-Nikiski, were briefed by administration officials.

A reserves tax is a property tax on the value of natural gas reserves in the reservoir.

Hawker said his overall concern is that the governor is veering away from a partnership concept in the plan now agreed to by the producers where each owner of gas resources on the North Slope, including the state, finances and owns a share of the project equal to the gas ownership.

Under this arrangement “alignment” on commercial terms among the parties is achieved, Hawker said.

“The governor’s idea (of a larger state ownership) goes another direction, possibly dividing the parties rather than seeking alignment,” he said.

Chenault said, “I know the governor wants a bigger piece of the pie but this project is working now as it was designed,” as a partnership with the state on an equal footing with each of the three major producers.

“For years the three producers tried to figure out a way to make this work having to pay 100 percent of the costs but getting only 75 percent of the revenues,” because of the state royalty and tax share, the Speaker said.

In making the state a partner, the costs and shares of revenues were aligned, “and it made sense,” Chenault said.

On the reserves tax, Chenault said people have talked about it for years and the option for the state is always there, but now is not the time.

“We shouldn’t be threatening them now. We should be working with them,” he said.

State Sen. Anna MacKinnon, R-Eagle River, another legislative leader who was briefed, voiced similar sentiments: “If you want to be partners who work your disagreements out, you don’t hammer people,” with things like a reserves tax.

MacKinnon is co-chair of the Senate Finance Committee. MacKinnon also said her impression is that Walker may be looking to enlarge the state share, or be ready to do it, as a hedge against one of the three producers balking at the last minute on the big project, which is now estimated to cost $45 billion to $65 billion.

MacKinnon and State Sen. Cathy Giessel, R-Anchorage, who was briefed along with MacKinnon, said they are primarily concerned with how Alaska will be able to pay for an enlarged share of the project given the state’s diminished finances and large budget deficits due to a sharp drop in oil revenues.

“For the state, the financing issues with this are mind-boggling,” Giessel said, who is chair of the Senate Resources Committee.

The lawmakers were told that the governor’s plan is to finance the state share — currently 25 percent but up to 51 percent if the state achieves a majority share — with debt through project revenue bonds and with no cash equity invested by the state. If the project cost is $50 billion, the state’s financing share would range from $12.5 billion to $25 billion.

“That is certainly possible, but it could be expensive in the long run,” Hawker said. “I’d also have to be convinced that it could be done without pledging the state’s general credit as a guarantee, particularly our Permanent Fund.”

Alaska’s Permanent Fund is a state savings fund of oil revenues, and now exceeds $55 billion in value. Tapping the fund to backstop a state gas project financing would likely require a constitutional amendment.

“I don’t have a great deal of confidence in this approach,” MacKinnon said, but she is still willing to listen to ideas for creative financing, she said.

Giessel said mentions were made in the briefings of possible state partnering with just one or two companies, including Japanese firms. Walker and senior state officials recently met privately with a senior Japanese government and industry delegation in Seattle and a follow-up meeting is planned in Tokyo in mid-September when the governor is to be there for a major LNG conference.

Total debt financing would leave the state with no equity and no profits earned on an equity share, which would reduce the revenues the project might bring the state over the long term, the legislators also said in the interviews.

Walker also appears intent on not having TransCanada Corp. as its partner in the project.

“This is what we’re hearing,” Giessel said.

MacKinnon said, “The governor has been fairly clear in his public statements that he would prefer that TransCanada not be part of the project.”

Currently, TransCanada would finance and own the state’s 25 percent share of the 800-mile, 42-inch pipeline and the large Gas Treatment Plant at Prudhoe Bay, with the state signing a long-term shipping contract to transport state-owned gas through TransCanda’s capacity in the treatment plant and pipeline.

The state would directly own, and finance, its 25 percent share of the large LNG plant planned at the southern terminus of the pipeline at Nikiski, south of Anchorage. However, the state’s agreement with TransCanada ends in December unless it is extended.

If the state does not extend it, TransCanada will be reimbursed for its investments to date, which are expected to exceed $100 million.

Another change the state is seeking is to enlarge the pipe diameter from 42 inches, in the current plan, to 48 inches, the legislators were told.

In their briefing, Giessel and MacKinnon said administration officials told them producing companies might go along with this if the state were willing to pay for it. Giessel expressed concern, however, about the effect such a change could have in delaying the Federal Energy Regulatory Commission permitting now underway.

Hawker said he has been told there are no U.S. steel mills capable of rolling 48-inch high-pressure steel and only three mills with that capability worldwide. The lack of manufacturing options could raise the price, he said.

MacKinnon said if the state pays for enlarging the pipe it would own the extra capacity and would have to manage it.

“We would be responsible for finding more molecules to ship. What experience do we have in this?” she said.

Chenault said he has told the governor that legislators want a regular flow of information, “so we can see where the administration is heading. We’ve got to get our members up to speed. They (the administration) can’t just dump all this on us a few days before a special session.”

Meanwhile, a reserves tax as a lever on the producing companies would face practical obstacles and would also likely spark lawsuits. The tax is essentially a property tax and while some government jurisdictions, mostly municipalities, levy property taxes on oil and gas reserves in the ground, there are complications.

One complication on the North Slope is that a reserves tax would have to uniformly be applied to all natural gas in a field without distinguishing among lease-owners or companies. To penalize one lease-owner and not another will be complex, although it is possible that a credit against the property tax might be granted for any gas produced.

More fundamentally, because the oil and gas fluids are comingled in the reservoir it would be tricky to have only the gas taxed without also taxing the crude oil.

Also, what is being taxed is the value of the unproduced hydrocarbons, and if there are honest disagreements over a economic viability of commercial production there will be big legal fights over the in-place value of the hydrocarbons.

Finally, having one company producing gas from a reservoir and not another will be complicated under the current operating rules for the fields.

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