Gas tax shelved, buyout still on agenda

  • Senate Finance Committee members Sen. Peter Micciche, R-Soldotna, left, Sen. Anna MacKinnon, R-Eagle River, center, and Sen. Pete Kelly, R-Fairbanks, listen to Deepa Poduval, principal consultant at Black and Veatch, and Department of Natural Resources Deputy Commissioner Marty Rutherford give a presentation on Gov. Bill Walker’s proposed buyout of TransCanada at the Capitol on Oct. 26. Photo/Michael Penn/Juneau Empire
  • Deepa Poduval, principal consultant at Black and Veatch, and Marty Rutherford, deputy commissioner of the Department of Natural Resources, left, give a presentation to the Senate Finance Committee at the Capitol on Gov. Bill Walker’s proposed buyout of TransCanada from the Alaska LNG Project on Oct. 26. Photo/Michael Penn/Juneau Empire

The state Legislature is plodding through its special session on natural gas issues, although the hot-button questions like a deal on state fiscal terms are not yet on the table.

Gov. Bill Walker pulled his controversial idea for a state tax on natural gas reserves off the special session agenda, which now leaves only the question of paying TransCanada Corp. for its investment to date in the Alaska LNG Project.

Rep. Mike Hawker, R-Anchorage, said lawmakers have little role in the decision for the state to buy TransCanada’s share of the giant project. Under the state’s contract with TransCanada the governor has that sole authority, Hawker told the Alaska Support Industry Alliance in a briefing Oct. 22.

Under the contract the Legislature must approve funds, with interest, to pay TransCanada’s costs to date, which are estimated at $67 million, Hawker said.

If lawmakers balk at the payment TransCanada will sue under the contract, he said.

A second appropriation of $36 million is also needed to pay the state’s share of costs to complete preliminary engineering on the pipeline and LNG Project. These are funds would have been paid by TransCanada if the pipeline company were to remain in the deal.

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. 

BP, ConocoPhillips, ExxonMobil and, for now, TransCanada, and 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 if TransCanada is out of the picture. That percentage is equal to the state’s share of gas reserves under the terms of Senate Bill 138 that passed by combined vote of 52-8 in 2014 session.

In a related development, Pat Pitney, the state budget director, told legislators Oct. 24 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.

TransCanada buyout

There seems little doubt in Juneau at this point that the Legislature will approve the funds to pay TransCanada as well as appropriate money to Alaska Gasline Development Corp., the state gas corporation, to allow it step into TransCanada’s shoes.

There is a lot of discussion among lawmakers gathered in Juneau, however, over the long-term cost implications of the decision. If the project continues into final engineering, or front end engineering and design, or FEED, the state’s cost for would be about $675 million. The state’s share of full construction, meanwhile, is estimated at about $13 billion.

Assuming the state does acquire TransCanada’s share, the state would be obligated to $144 million for the pre-FEED costs, with part of that the state’s 25 percent share of the LNG plant engineering.

Natural Resources Deputy Commissioner Marty Rutherford said the recommendation to withdraw from the TransCanada deal is based on aspects of the contract seen as disadvantageous to the state.

Under the current terms the state must repay TransCanada’s investment with interest no matter what happens, even if the pipeline company terminates the contract, Rutherford told lawmakers.

“We are always obligated, even if TransCanada opts out or if the project terminates (because of adverse economics),” she said. “The state bears all the risk, and TransCanada none.”

Another reason for the state stepping in to fill TransCanada’s role is to have a more direct role in decisions that will affect state interests, Rutherford said. In decisions on design of the pipeline and gas treatment plant, for example, TransCanada now represents the state, but there may be circumstances where the state’s interests and those of the pipeline company may not align.

For example, the state is an owner of resources that will move through the project while TransCanada is a “midstream” pipeline owner with no stake in the “upstream” resources.

With the state assuming control of its 25 percent of the pipeline and gas treatment plant, the state will have 25 percent of all three parts of the project, including the LNG plant which the state now owns 25 percent directly.

In the same briefing with Rutherford, Deepa Poduval, senior consultant with Black & Veatch, a firm advising the state, said it’s important for the state to now be at the table itself when certain decisions are made. There are decisions needed as to how certain gas byproducts will be handled in the gas treatment that affect the state’s resource interests, she said.

Financing questions

On the question of how the state would pay ongoing costs of its project share, consultants to the administration told the House Finance Committee in hearings that there are basically four options for the state pay the funds TransCanada would have provided.

The state’s three main consultants on financing include Radislov Shillkoff of Greengate LLC, an infrastructure finance advisory firm; Steven Kantor, managing director of First Southwest, an investment bank; and Justin Palfreyman, director of Lazard LLC, an investment advisor. The three appeared in a panel before the House Finance Committee.

One option the three presented is a straight appropriation from the Constitutional Budget Reserve, although that would deplete the CBR fund faster. It is now expected to be drained in 2019 and a draw to pay near-term costs would move the depletion data up by three to five months.

A second possibility is a state general obligation bond for all or part of the funds needed, which is a possible solution although it would require a public vote.

The third option is “project financing” where the state, or more properly the state’s Alaska Gasline Development Corp., sells revenue bonds based on anticipated income from sales of the state’s share of gas production. 

The fourth option is to bring in new partners, which is essentially what the state has now with TranCanada but would be without the problems in the current contract with the pipeline company.

The governor has spoken of interest by potential LNG customers in Asia in taking a share, although that could require some form of commitment that state-owned LNG would be supplied.

Pulling the tax

On the gas reserves tax, the governor 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.

Walker’s decision was announced Oct. 23, the day before legislators began the special session.

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, in 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 ExxonMobil, the third major North Slope gas producer.

 “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 was producing gas for the project. However, the producer would pay the tax if not producing gas, Walker told legislators Oct. 24 in a session-opening briefing.

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, former federal gas coordinator and now the oil and gas advisor to the Kenai Peninsula Borough 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.

In their letters, BP and ConocoPhillips said they hope to have an actual withdrawn-partners agreement by Dec. 4.

11/24/2016 - 3:38pm