Walker backs down on gas reserves tax, for now

A proposed state tax on natural gas reserves is off the table, at least for now. Gov. Bill Walker said he would hold off on the idea after receiving letters from North Slope producers that they would commit gas to buyers through the proposed Alaska LNG Project if they withdrew.

The announcement came Oct. 23, the day before state legislators began a special session of the Legislature called by Walker to consider issues related to the Alaska LNG Project, a large gas project in which the state is a partner.

BP, ConocoPhillips, ExxonMobil and TransCanada, along with the state of Alaska, are in a partnership in the proposed $45 billion to $65 billion Alaska gas project. The state would hold a 25 percent equity stake.

The governor has been concerned that if one of the three producers withdraws from the pipeline and LNG project at a critical point in planning it could stymie the other companies, and the state, from moving forward.

Walker is pushing for a “withdrawn partners” agreement that would cover the contingency. It would require any party now in the gas deal to produce gas once the project moves forward.

In a briefing to state legislators Oct. 24, Walker said he had received letters from two slope producers, BP and ConocoPhillips, indicating they would commit to supply gas in the event of a withdrawal. Walker said a letter is forthcoming from the third major North Slope gas producer ExxonMobil.

 “They want fiscal certainty,” Walker said, referring to the producers’ request for a guarantee that state taxes and royalty terms won’t change. “Well, I want project certainty,” so that the project will continue even if a partner withdraws.

The letters from BP and ConocoPhillips were essentially statements of intent that gas would be sold, and both companies said they would pursue a more definitive agreement. A mechanism for partners remaining in the consortium, including the state, to cover capital costs of the withdrawing party would presumably be part of the agreement.

The state’s request for the withdrawn partners’ agreement had prompted a strong pushback from the producers, which prompted Walker to propose the state reserves tax as a lever in negotiations. Under the tax proposal, now withdrawn, a producer would be exempted if it were producing gas for the project. However, the producer would pay the tax if not producing gas, Walker told legislators Saturday.

The governor had hoped to have several agreements with producers ready for approval but delays in the negotiations led to only two items–the reserves tax and a buyout of TransCanada’s interest by the state–being placed on the special session agenda.  

The only business for legislators in Juneau, now that the reserves tax is no longer on the agenda, the is approving a $67 million appropriation to pay TransCanada for its expenses to date, with interest, and a second appropriation of $36 million to pay the state’s share of costs to complete preliminary engineering pipeline and LNG Project. These funds would have to be paid by TransCanada if the pipeline company were to remain in the deal.

In a related development, Pat Pitney, the state budget director, told legislators Saturday that the consortium’s cost for Alaska LNG Project preliminary engineering have increased from $511 million, which had been estimated, to $694 million.

The new target date for completion of the Preliminary Front-End Engineering and Design, or pre-FEED, is mid-2016. The higher cost is partly due to additional engineering being done, at the governor’s request, on a 48-inch pipe diameter option in addition to the project’s current base case plan of 42-inch diameter pipe.

Walker’s shelving of the reserves tax is seen by some partly as a face-saving measure. The tax would not have been passed by the Republican-led Legislature, leaders in the House and Senate said.   

Larry Persily, oil and gas advisor to the Kenai Peninsula Borough, a regional municipality, said the letters from BP and ConocoPhillips, which were conceptual in nature, took the governor “off the hook” by preventing an embarrassing defeat of his tax proposal in the Legislature.

However, Walker may have scored points too, Persily said.

“It can’t be denied that he got something (the commitments by the companies) by threatening the tax, although those letters are nothing you can take to the bank,” Persily said.

On the TransCanada buyout, the state has this option under a contract between the state and TransCanada agreed by the two in 2014. In the overall project partnership the state would own 25 percent, a share equal to the state’s ownership of gas on the slope. Similarly, the three major slope gas producers would own shares in the pipeline and LNG plant equal to their share of gas reserves.

The state’s separate deal with TransCanada, which owns no gas, would have had the pipeline company investing in and owning the state’s 25 percent share of the 800-mile pipeline and large North Slope gas treatment plant, leaving the state with its 25 percent of the large LNG plant planned at Nikiski, near Kenai south of Anchorage.

A provision in the contract allows the state to buy out TransCanada by repaying the pipeline company’s investment with 7.5 percent interest also paid, an option the governor has decided to take.

Rep. Mike Hawker, an Anchorage Republican legislator who chairs the Legislature’s Budget and Audit Committee said the contract allows the governor to make the decision to buy out TransCanda. “Our only role is approving the money to do it,” Hawker said in an interview.

“If we don’t approve the funds, TransCanada will sue us under the contract,” Hawker said, which means the Legislature actually has little choice.

However, if the state steps to own its full 25 percent share it will have to pony up $675 million in 2016 and 2017 to pay its share of final engineering costs and later about $13 billion to pay 25 percent of construction costs, Hawker said.

Coming up with that money won’t be easy, given the state’s current financial shortfalls due to low oil prices. Oil taxes and royalties pay for 95 percent of Alaska’s budget and oil revenues have dropped by half in the last year, creating $3-billion-dollar annual deficits for the state. Funding those deficits requires hefty drawdowns on state cash reserves, although Alaska still has a $53 billion “Permanent Fund” that could help in financing its share of gas project costs. 

10/26/2015 - 8:51am