State gasline corp. gets favorable ruling from IRS
The Alaska Gasline Development Corp. has cleared another of many hurdles in its effort to monetize the state’s North Slope natural gas resources.
The state-owned corporation announced Tuesday morning it qualifies as a federally tax-exempt political subdivision of the State of Alaska, according to a ruling it received from the Internal Revenue Service.
AGDC President Keith Meyer said in a press release that the ruling will give the organization “significant maneuvering room” in how it can shape the financing structure for the $40 billion LNG export proposal.
“This is great news for the corporation and the Alaska LNG Project. Receiving a favorable tax ruling from the IRS was one of the expectations of the transition of the Alaska LNG Project to state leadership,” Meyer said.
Being labeled a “political subdivision” of the state means potential profits to the corporation from the project will not be subject to federal income taxes and AGDC can issue tax-exempt debt, according to the Tuesday release.
Those prospective benefits were selling points to legislators skeptical of Gov. Bill Walker’s push to continue the project under state leadership. Under the previous project structure, which had BP, ConocoPhillips and ExxonMobil as equity partners with the state equal to their respective natural gas holdings, the companies concluded a flooded global LNG market and correspondingly low prices for the commodity would not allow the project to return profits at levels needed to make their investments worthwhile.
As a result, the major North Slope producers suggested either slowing the design phase of the project until market conditions improved or handing it to the state to see if AGDC could make it work with the state’s tools.
Meyer has said the Alaska LNG Project — with multibillion-dollar gas treatment and LNG plants on the North Slope and Kenai Peninsula and an 800-mile buried gas pipeline connecting the two — would be primarily debt-financed on the back of customer commitments and would not obligate the State of Alaska to repayments if it went sour.
A copy of the five-page letter dated July 18 states AGDC is a political subdivision of the State of Alaska and therefore does not have to file a federal tax return. It does not specify whether or not partnering with private firms on the project, or partial private investment in Alaska LNG, would impact the project’s tax status.
In setting the facts the opinion is based on, the letter asserts AGDC stated it may enter into “arm’s-length” natural gas or LNG sale contracts and tolling arrangements with private entities.
About a year ago an executive from the global energy industry consulting firm Wood Mackenzie said during legislative hearings that a project not subject to federal taxes under a state-owned gas tolling model as proposed by AGDC could be competitive at current energy market prices; however its ultimate success would be dependent upon a number of other factors as well.
Wood Mackenzie’s Dave Barrowman estimated the previous equity-owner model with high returns for the producers would require contracts with Asian buyers for LNG priced to at least $12 per million British thermal unit, or mmBtu.
A traditional third-party owned tolling structure with lower investment returns could be profitable at approximately $7 per mmBtu and a state-owned, tax-free project could be economic selling LNG at $6 per mmBtu, according to Barrowman.
His assumptions were made on wholesale natural gas being sold into the project at about $2 per mmBtu.
The three Slope gas owners have all said they would sell gas into the project on mutually agreeable commercial terms.
Tax attorneys testified in the same hearings that while AGDC could be considered a political subdivision of the state, actually capturing tax-exempt status could be more problematic.
The corporation could be required to demonstrate other sovereign powers to be recognized by the IRS as above federal taxes beyond just being state-owned, they testified.
To that end, AGDC holds the state’s eminent domain powers, according to the IRS opinion.
The municipally-controlled Alaska Gasline Port Authority, formerly led by Walker, also received a similar political subdivision determination from the IRS in 1999 but was unable to advance a gasline.
Elwood Brehmer can be reached at [email protected].