Alaska Governor Signs Bill Advancing Natural Gas Pipeline Project

June 2014, Vol. 241, No. 6

Gov. Sean Parnell moved Alaska one step closer to a gas line by signing Senate Bill 138 on May 8. The bill advances a large-diameter natural gas pipeline project, allowing the state to become an owner in the Alaska LNG Project. It also provides for getting North Slope gas to Alaskans first, using local hire.

Surrounded by state legislators, cameras, and heavy machinery, Parnell put his name on the bill at a pipeline training center in Fairbanks.

“So with my signature today, Alaska will be on its way to becoming an owner in an Alaska LNG project, and the project will officially get underway,” Parnell said.

The legislation that the governor signed into law will:
• Set the Alaska’s production tax share of gas at 13%, intended to replace what the state would receive if the tax were paid by check, not gas. When added to the state’s royalty share of produced gas, generally 12.5%, the state would take about 25% of the produced gas. Any additional leases that feed gas into the project in future years would be subject to negotiation.

• Expand the Alaska Gas line Development Corp.’s job description to include the LNG plant and marine terminal. AGDC, a state agency the legislature created in 2010, is limited to its original task of designing and putting together a business plan for a smaller-volume gas pipeline from the North Slope to south central Alaska as a back-up in case the larger producer-led project fails. AGDC would hold the state’s interest in the LNG plant and marine terminal if the larger project proceeds.

• Set up the Alaska Affordable Energy Fund with 20% of the revenue the state would earn from selling its royalty share of gas that moves through the Alaska LNG project after expenses and after the constitutionally mandated 25% deposit to the Alaska Permanent Fund oil and gas savings account. The new fund would be available for the Legislature to spend in areas that will not have direct access to gas from the project.

• Require the administration to disclose terms of the five-party contract, the state/TransCanada deal and other agreements to the Legislature and the public at least 90 days before the proposed effective date of the deals, which would be subject to legislative approval. Until then, negotiations and much of the information discussed in those talks will be confidential under provisions in this year’s legislation. Legislators and their consultants will be allowed to view material during negotiations if they sign confidentiality agreements.

• Require the producers – if the state contracts with the companies to market the state’s LNG – to obtain the same or “substantially similar” terms for the state’s gas as the companies get when they sell their own gas.

• Require all parties to the project to share in the costs of roads, bridges and other infrastructure needed during construction.

Provisions of the measure not written into state law but included as legislative intent or guidance to the administration include:
• The Alaska Department of Natural Resources and the Alaska Gas line Development Corp. will report on plans to make North Slope gas available in the state.

• The governor will establish an advisory planning group of municipal representatives and others to advise on the project, particularly municipal concerns.

• The Alaska Department of Revenue must report to the Legislature on financing options for the state’s investment. The report also should include a plan for municipalities, Native corporations and individual Alaskans to invest in the project.

• The Alaska Energy Authority, Alaska Industrial Development and Export Authority, and Alaska Gas line Development Corp. must develop a plan for delivering affordable energy to areas of the state that will not have direct access to North Slope gas.
Map provided by the Alaska LNG project sponsors, shows possible alternate routes across Cook Inlet to the proposed Nikiski liquefaction plant.
The major North Slope producers –Exxon, BP, and ConocoPhillips – each get a 25% share in the project. The state will also get a quarter, but it will be giving the pipeline-building company TransCanada a cut to effectively serve as the state’s bank. Instead implementing a traditional tax on the natural gas, the state will get a share of the gas itself.

The producers and TransCanada estimate construction costs of the Alaska LNG project at $45-65 billion ($2012) to cover:
• One of the world’s largest gas treatment plants on the North Slope to remove carbon dioxide and other impurities.

• About 800 miles of pipeline and eight compressor stations to move the gas to a liquefaction plant at Nikiski on the Kenai Peninsula, about 60 air miles south of Anchorage.

• The liquefaction plant, which would include three production lines with a total output capacity of 15-18 mtpa of LNG – about 2-2.4 Bcf/d of natural gas. The plant would be among the world’s largest.

• LNG storage tanks and two tanker berths at the Nikiski site.
The pipeline would have at least five points along the route where Alaska municipalities, utilities and commercial customers could take gas for local distribution. The state will decide the locations of those offtake points later.

Earlier Failures
Will this legislation truly get a gas line built? Its construction has been attempted many times without success. More than 40 years ago, trillions upon trillions of cubic feet of natural gas were discovered on the North Slope. Since then, Alaska’s leaders have been trying to figure out a way to sell it.

“In 1968, when they discovered oil and gas at Prudhoe Bay, the whole play was you build a pipeline to take the oil to market, take the weekend off, turn the equipment around, and go build a gas line,” said Larry Persily, the federal coordinator for Alaska Natural Gas Transportation Projects, “That didn’t happen.”

In the 1970s alone, you had companies with names like Arctic Gas, El Paso and Alaska Northwest all making plays to build a gas line. Congress was supportive, too. Permits were issued, federal regulations were met. There were a lot of people who wanted the project to work.

“So you had three legit proposals in the Seventies,” said Persily. “None, as we know now, worked out because of the economics.”

The demand for natural gas just wasn’t enough to justify tapping the supply. The price for natural gas was so low that there would be no way to cover the costs. And on top of that, natural gas on the North Slope had value insofar as it made oil recovery easier.
“Everyone said, ‘Oh, this isn’t going to make any money.’ So, no one wrote any big checks to order pipe or go ahead with it,” said Persily. “That’s the simple answer.”
Through the decades, there were other private attempts at a gas line.

And since the late 1990s, there have been three major legislative efforts to get a gas line built. Gov. Tony Knowles got behind the Stranded Gas Act, which would have let the state enter into negotiations with firms to build a line. No one bit. Gov. Frank Murkowski tried to get through his own version of that, but it didn’t even come to a vote because of concerns that it prevented future legislatures from making tax increases. Then there was Gov. Sarah Palin’s Alaska Gas line Inducement Act, which offered a half-billion dollars in subsidies to get a project kick started.

“Stranded Gas Act 1 didn’t work. Stranded Gas Act 2 didn’t work. AGIA didn’t work,” said Persily.

So, what’s different this time?

“Well, what’s different this time around is the state would be an investor,” said Persily. “So, when you think about a business, every dollar that the state invests as a partner the companies don’t have to invest.”

Persily said the economics for selling the natural gas to Asia are different, too.
“It wasn’t until about 2008 that LNG prices in Japan looked to be high enough to cover the costs of an Alaska LNG project.”

But there are skeptics, too. Gubernatorial candidate Bill Walker puts the odds that the legislation will lead to a gas line at zero. He said it commits the state to a hundred-million-dollar studies without a guarantee that anything will be built.
For his part, Persily is cautiously optimistic.

“If the market grows like many people expect. If prices in Asia stay high. If the producers do their engineering and environmental permitting work and don’t find any surprise and don’t find any big problems. If the producers and TransCanada and the state pass the political test with the public and the Legislature,” said Persily, before pausing. “Yeah, we have a decent shot at this, we really do.”

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