The Alaska Gasline Inducement Act (AGIA) and the Petroleum Production Tax (PPT) are obviously two issues affecting the oil and gas industry in our state, but other links between the two may be more important than some people realize.
With regard to AGIA, RDC strongly supported two major aspects of Governor Palin’s proposal. We thought that a Request for Applications (RFA) process to solicit proposals from a number of parties was a good idea. We also believed the transparency built into the process was the responsible way to go.
However, we parted ways with the governor and her administration over the issue of flexibility of the terms in the proposal. RDC believed that if the terms were more flexible there would be more applicants.
In the end, the legislature supported the governor. It is important to understand the governor and her key gasline advisors (DNR Commissioner Tom Irwin, Department of Revenue Commissioner Pat Galvin and Department of Natural Resources Deputy Commissioner Marty Rutherford) are strongly committed to getting a gasline for Alaska and equally they strongly believe in their approach.
We should be able to make some preliminary observations about AGIA’s strengths by this fall and have some feel for its future direction after the end of next year’s legislative session. Under the current plan, the state will issue the RFA some time in early July. Those entities wishing to respond will have to do so by early October.
The proposals will be made public sometime late in the year and the administration hopes to be ready to recommend a licensee to the legislature in January. The legislature will need to approve the successful applicant. If all goes as planned by the administration, the winning applicant will begin its field season next summer.
Who might respond to the RFA? The North Slope producers have indicated it is likely they will not bid. Other possible bidders include several pipeline companies and the Port Authority.
Assuming the process proceeds as expected, the next major step in the AGIA process will be the licensee’s decision as to when to hold an open season, which is the point at which owners of gas will have to make the long term, binding commitments to ship gas on the proposed line. Most observers agree this commitment is the key to getting the line financed.
There is no set time line for the open season. It is likely it will take place somewhere between two and four years after the license has been issued to the winning bidder.
There is no question the open season is where the rubber meets the road. Many familiar with the oil industry believe the open season will not be successful. The state is requiring the licensee to proceed to Federal Energy Regulatory Commission (FERC) certification, even if the open season fails. The state is willing to pay 80 percent of the costs for that activity up to $500 million.
The administration believes if the proposal to the producers is reasonable, their board and shareholders will insist the companies proceed to monetize their gas assets. Others are not so sure.
One thing I will say for the administration is that they have developed their strategy and have stuck to it. Although there are many, including the producers, who feel the state’s strategy is flawed and highly risky, I believe the administration’s theory is not without merit, and I know it is committed to make it work.
One concept virtually any reasonable person can agree with is that sooner or later the producers have to come to the party. When (or, in a worst case scenario, if) they come to the party and what the party will look like are still the great unknowns of the elusive gas line project.
If it is unclear what the producers will do with AGIA, it is equally clear the role they are playing with PPT. They paid the state almost $1 billion in new taxes for a nine month period in 2006. Now the oil industry is facing a special session this fall that one can only assume is being called to see if the state can hike the tax further. In addition, some legislators are proposing to change the methodology for calculating the tax and to exempt certain expenses from being credited against it.
And some legislators seem surprised the producers feel compelled to seek some fiscal certainty before they commit their gas to any pipeline project. However, to be fair, some in the industry agreed to a change in the PPT last year – as part of a contract on fiscal terms related to construction and operation of the gasline. But the industry ended up with no contract, and was left with a significant increase in the PPT.
Taking more will hurt not only the “big three,” whom some public officials seem to love to hate, but it will also send the wrong message to those companies who are new to the state or who have returned after an absence. The wrong decision on PPT will not only increase the rate of decline for North Slope production, (now under 800,000 barrels per day), it will also put a damper on any enthusiasm the industry has for AGIA or any other approach to getting a gas line.
The state needs to be very careful as it proceeds with both AGIA and PPT. Our future is at stake.
