Resource Development Council for Alaska, Inc.

On behalf of the Resource Development Council for Alaska, Inc. (RDC), thank you for providing an opportunity to comment on the Department of Revenue’s Preliminary Fiscal Interest Finding (PFIF) and proposed Alaska Gas Pipeline Contract. The prospect of successfully commercializing the natural gas resources of Alaska’s North Slope has never been closer to becoming reality. RDC appreciates the opportunity to participate in the public process and our members look forward to the sanction, permitting and construction of a gas pipeline project.

RDC is a statewide business association comprised of individuals and leading companies from each of Alaska basic industry sectors — oil and gas, mining, timber, tourism and fishing. Other members include local communities, Alaska Native corporations, labor unions and a broad cross-section of industry-support firms. For more than 30 years these diverse interests have worked together through RDC to advocate for the responsible development of Alaska’s natural resources.

No development project since construction of the Trans-Alaska Pipeline System has had the potential to benefit Alaska as greatly as the proposed gas pipeline project. A project of this magnitude has naturally been of intense interest to RDC’s board of directors and membership. RDC has strong historic links to many of the past efforts to monetize Alaska’s stranded North Slope gas resources and our members view the proposed contract as a significant positive step toward the development of an economic project.

History

An incredible amount of talent and money has been invested in trying to identify an economic means of delivering Alaska’s gas to consumers and RDC has been a part of much of this effort. In fact, RDC was originally incorporated in April 1975 as the Organization for the Management of Alaska’s Resources (OMAR) — a single-issue association advocating for

the commercialization of North Slope natural gas via a pipeline to Valdez. In 1978, OMAR was reconstituted as RDC with an expanded mission to support responsible resource development throughout Alaska.

Since then, the North Slope producers, various pipeline companies, Alaska’s Native corporations, the State government and local communities have continued to focus on the project. The producers and several pipeline companies have each spent several hundred million dollars on pre-feasibility, permitting and engineering work. During the 1970s and 1980s, RDC supported the North Slope producers who, with Foothills Pipe Lines Ltd., studied a project that would have cost $4-$4.50/mcf to transport gas to market. Fortunately, such a project was never built, as gas prices languished near $2.00/mcf for much of the next two decades.

More recently, RDC worked productively with former Governor Tony Knowles’ Alaska Highway Natural Gas Policy Council and we supported both the passage in 1998 and subsequent reauthorization in 2003 of the Alaska Stranded Gas Development Act. That this collective investment of time and resources has not resulted in an economic plan to commercialize North Slope gas highlights the magnitude of the project’s risks. Alaska’s high cost environment and distance to consumers, as well as historically low natural gas prices have conspired to keep a project from moving forward.

However, after more than 30 years, a confluence of factors has emerged that may finally turn the state’s dream of a natural gas pipeline into reality. Market conditions have improved, Federal enabling legislation is in place and the North Slope producers are eager to move forward. In our view, the proposed contract may be the final piece to the puzzle.

Process

Beginning shortly after the PFIF and proposed contract were made public in early May of this year, RDC’s board of directors has been working diligently to understand and evaluate the proposal. We have held six separate board meetings and work sessions on the PFIF and contract totaling more than 25 hours of direct board analysis and deliberation, in addition to hundreds of man-hours spent by staff and individual board members in research and preparation work. During this period, the RDC board worked extensively with key members of Governor Murkowski’s negotiating team, as well as representatives from the sponsor group — BP, ConocoPhillips and ExxonMobil.

Additionally, the RDC board met with former Alaska Department of Natural Resources officials Tom Irwin, Marty Rutherford and Mark Myers; Legislative Budget and Audit Committee co-chairs Senator Gene Therriault and Representative Ralph Samuels; and an array of other interested or impacted stakeholders, including representatives from independent oil and gas companies, local governments, local utilities and industry-support firms.

The contract is a complex, technical document that incorporates a number of important public policy decisions. The RDC board wrestled with many of these issues, and throughout the process board members were able to ask questions, identify issues of importance and discuss areas of potential concern. The organization’s effort to understand the contract and to craft thoughtful comments has been commensurate with the project’s importance to Alaska.

Comments

RDC believes the project contemplated in the PFIF and proposed contract is the right project at the right time for Alaska. Construction of a natural gas pipeline is absolutely critical to the future of the state. The potential benefits of such a project to both the public and private sector are massive — billions of dollars in investment, billions of dollars in tax revenue and thousands of new direct and indirect jobs will be generated throughout the life of the project.

A successful project will create a new industry in Alaska — a gas exploration and production industry on the North Slope and along the pipeline corridor. While only 35 trillion cubic feet of natural gas has been discovered on the North Slope, more than 50 TCF of gas will be required to fill the pipeline to capacity over the life of the contract. The exploration and production activities associated with finding and developing these additional gas resources will require tremendous new capital investments in Alaska. For a state constantly looking to diversify its economy, this is an opportunity that absolutely cannot be missed.

Furthermore, by providing a means to monetize North Slope natural gas, the project will significantly extend the life of TAPS, generating billions of additional dollars in oil tax and royalty revenue to the state and maintaining an economic climate in Alaska that will be attractive to private sector investment for decades to come. Perpetuating a vibrant oil patch in Alaska for another half century is a project benefit of immense value.

The proposed contract outlines a number of major public policy decisions, perhaps the most significant of which is state ownership. State ownership consists of three elements: (1) holding an interest in the project’s assets; (2) receiving gas royalties and payments in lieu of gas production taxes in the form of gas; and (3) owning the capacity to transport the state’s gas volumes to market. Each of these elements creates a new set of risk/reward dynamics for the state.

RDC acknowledges the risks associated with state ownership are real and should not be discounted. However, we believe the potential benefits achieved through a state ownership position exceed the downside risks over the life of the project. In fact, ownership creates a number of advantages for both the state and the producers.

Project economics for the producers are improved because the companies are not required to make firm transportation commitments on gas for which they have no economic interest.
Ownership will provide the state with a stable, steady revenue stream. Through receipt of its share of tariff income, the state will benefit from a regulated rate of return that is not dependent on commodity prices.
The state will have the ability to influence and participate directly in project decision-making.
The state will directly control a significant share of gas shipped through the pipeline. The state can optimize value to Alaskans by making its gas available for in-state use, sale at the wellhead or sale outside of Alaska. The state may manage its gas directly or through third parties and will have control in deciding how to obtain maximum value for its gas. The state can create a gas sales portfolio to meet its financial needs and tolerance for risk. Also, being exempt from federal income tax gives the state a significant edge in capturing desired markets.
State ownership and taking gas in kind better aligns the state and producers’ interest throughout the project. This alignment will reduce disputes over valuation, project management and transportation — unlike the state’s experience with TAPS.
Direct ownership in the project reduces the state’s commercial exposure to a cost overrun, because the state will receive a return on pipeline equity as a pipeline owner. Under the status quo, the state will pay the full project cost through the tariff.

While the contract clearly puts the state in a position of more directly sharing risk with the producers, it also creates a structure for moving the project forward. Because the economic benefits to Alaska from a successful project are so vast it is both acceptable and appropriate for the state to assume some risk. RDC views the state ownership structure defined in the proposed contract as a powerful lever to move the project ahead.

Concerns

During the course of our deliberations, the RDC board analyzed and debated a host of policy issues and technical matters incorporated in the contract. As a group, the board was able to come to terms with the vast majority of the contract provisions and to support the contract as a balance of interests among the various parties. However, the board did identify three issues for specific comment.

First, RDC recommends Article 8.7, the language defining a state-initiated expansion of the pipeline, be deleted. Article 8.7 appears to create a higher standard for expansion than required for an expansion mandated by the Federal Energy Regulatory Commission (FERC). The section also includes unnecessary timing and frequency restrictions and may set unfavorable precedents. A party unable to achieve an expansion through the FERC process may find it impossible to meet the requirements of Article 8.7, rendering the section meaningless. In RDC’s view, Article 8.7 may not help to achieve expansion of the pipeline and may actually create a hindrance and should therefore be removed from the contract.

Second, while RDC fully supports and expects FERC regulation of the project, we are concerned with provisions in Articles 8.1, 8.2 and 8.3 that prevent the state from initiating or supporting decisions of the Regulatory Commission of Alaska (RCA), even in situations where the RCA may have regulatory authority. RDC supports language requesting FERC regulate all aspects of the project, but we request the remaining portions of Articles 8.1, 8.2 and 8.3 be deleted.

Third, RDC is troubled by the geographic limitation on oil and gas leases eligible for the benefits of the uniform upstream fiscal contract as defined in Attachment 1 to the contract. Section 4 of the PFIF describes the uniform upstream fiscal contract as a means to “create a level playing field for all explorers and producers not affiliated with the project with the objective of attracting more gas to the project.” However, the proposed legislation creating the uniform upstream fiscal contract limits the eligible leases to those located north of 68 degrees North Latitude. For example, the Yukon Flats sedimentary basin holds huge gas potential and lies proximate to the proposed gas pipeline, but its location south of the Brooks Range makes it ineligible for the uniform upstream fiscal contract. RDC recommends Sec. 43.82.437 (b) of the proposed legislation as documented in Attachment 1 be deleted.

Conclusion

The proposed contract — a product of years of negotiation — is by definition an amalgamation of compromises and trade-offs. Every observer can no doubt find fault with particular aspects of the document or argue that certain policy choices could have been made differently. In fact, since the proposed contract was made public, many of the concerns voiced by Alaskans, legislators and various consultants have focused on particular provisions and suggested that the administration could have negotiated more favorable terms for one or more of those particular provisions. While this may be true, it must also be said that other provisions could have been negotiated more favorably for the sponsor group.

When viewed as a whole, RDC finds the contract to be a positive step forward in Alaska’s efforts to monetize the natural gas resources of the North Slope. We believe the proposed contract balances the project’s risks and rewards for all parties. RDC encourages the Murkowski administration, members of the sponsor group and members of the Legislature to work together to move this project forward. After more than 30 years, the time to commercialize Alaska’s gas is now.

Thank you again for the opportunity to comment on this important issue.

Sincerely,

RESOURCE DEVELOPMENT COUNCIL

for Alaska, Inc.

cc: Governor Frank Murkowski

Commissioner Mike Menge

Attorney General David Marquez

Members of the 24^th Alaska Legislature

Resource Development Council for Alaska, Inc.
121 West Fireweed, Suite 250 Anchorage, AK 99503
resources@akrdc.org Phone: 907.276.0700 Fax: 907.276.3887