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Date Posted: 10:30:17 04/02/10 Fri
Author: Alaska Journal Of Commerce
Author Host/IP: 97-120-127-227.ptld.qwest.net / 97.120.127.227
Subject: Alaska Endorse TransCanada Overland NG Pipeline To Alberta Over Over Denali Pipeline Group

Web posted Friday, March 26, 2010

State dangles incentives for open season takers

By Tim Bradner
Alaska Journal of Commerce

The state is offering a set of special natural gas royalty and tax terms as inducements for North Slope producers to sign pipeline capacity contracts during an open season set by TransCanada Corp. that will begin May 1, state officials told state legislators in a briefing.

The incentives could be worth more than $20 billion in value to producers over the life of capacity agreements signed, assuming the entire 4.5 billion cubic feet per day of capacity is subscribed, according to estimates by Black & Veatch, a consulting firm working with the state.

TransCanada is proposing a 1,500-mile, 48-inch pipeline from the North Slope to its Aeco hub in Alberta that could cost as much as $41 billion, the pipeline company estimates.

The state endorsed TransCanada over the rival Denali pipeline group led by BP and ConocoPhillips after the Calgary-based pipeline company agreed to meet certain state goals regarding tariff structure and expansion terms.

BP and ConocoPhillips' Denali pipeline group will conduct its own open season later this summer.

Despite the inducements, it is expected that only conditioned capacity commitments will be made by most North Slope producers, contingent on further negotiations of fiscal terms with the state. The degree to which producers making conditioned offers will be eligible for the special royalty and tax terms is unknown.

State Deputy Commissioner of Natural Resources Marty Rutherford told the Senate Resources Committee March 18 that the special royalty terms will be available only for gas produced and shipped under capacity contracts signed this summer with TransCanada.

The state's offer includes freezing production taxes on gas produced and shipped with TransCanada as well as any oil produced in association with the gas. Oil would be shipped through the existing Trans-Alaska Pipeline System. Taxes would not change for 10 years under the state's offer.

Oil is included in the offer because oil and gas are taxed together, in terms of their combined energy value, in the state production tax. Because they are combined, the freeze on tax applies, in effect, on both crude oil and gas production.

A bill is pending in the state Senate that would separate oil and gas for purposes of the production tax, but the legislation must be passed and signed by Gov. Sean Parnell or else any gas committed under capacity contracts signed this summer will be covered by the current tax law, which also covers oil.

In regard to gas royalties, the state's offer includes easing a number of terms in state oil and gas leases that have proved controversial with producers in past years, and which are subject to agreements regarding current oil production but not for gas.

Under the offer, the state would waive a "higher-of" requirement in the lease that requires producers to pay royalty based on the highest "netback," or value at the field, reported by any producer in a producing unit.

This is a provision that creates considerable uncertainty and delay in determining final royalty obligations, Rutherford told legislators. The royalty would instead be based on only the individual producer's netback from a sales price.

Secondly, the offer would use a basket of market prices published in independent trade journals instead of actual market transaction prices, which the leases now require.

"Establishing a fair market value for royalty based on reliable trade publications as compared to actual sales values allows us to add certainty and clarity to this process," Rutherford said.

There is a transparency to prices reported in independent trade publications that will make reporting the sales values, or proxies of them, easier to administrate, she said.

In the years following the start of North Slope oil production there were disputes over downstream market sales transactions that resulted in litigation that dragged on for a decade, finally resulting in negotiated settlements.

This offer is intended to avoid those kinds of disputes with natural gas where the marketing of the gas is much more complicated than it is for oil, Rutherford said.

Thirdly, the offer restricts the state from making retroactive claims for payment based on reassessments of royalty values, Rutherford said. This would resolve one of the most troublesome of Alaska's royalty terms for producers, which is the ability of the state to come back, sometimes years later, with claims of royalty owed.

Finally, the state's offer would make changes in the state's ability to switch its royalty from in-value, or cash payment by producers, to in-kind, where the state takes physical delivery of the gas for sale to another party.

The switching can be done now with a 90-day notice under the lease, which could create serious problems for producers in a gas pipeline in managing the contracted pipeline capacity when the state makes the switch.

A natural gas producer must sign "take or pay" contracts with the pipeline company to purchase capacity and if they are stuck with unused capacity because the state sold its one-eighth royalty gas to another party, the producer is stuck with the financial obligation.

This uncertainty is a major problem for the producers as they consider signing contracts with TransCanada or the Denali pipelines.

The new offer provides for pipeline capacity to go with the royalty gas if it is switched, Rutherford said. Also, the state would allow any expenses related to unused pipeline capacity as deductions for calculation of netback values, on which gas royalty and taxes are paid.

Tim Bradner can be reached at

tim.bradner@alaskajournal.com.

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