Category Archives: Energy

Oil and alternative energy in Alaska

Wielechowski: Confidentiality in AGIA v confidentiality in the AK LNG line

In a comment, Alaska state Sen. Bill Wielechowski responds to questions about the differences between the confidentiality measures in AGIA, which he voted for, and the legislation passed last session that allows negotiations to advance an LNG line, which also include confidentiality agreements, which he didn’t vote for.

There are times when confidentiality provisions are necessary. In AGIA we had a confidentiality provision, but it was much more limited as the burden was on the organization seeking to keep something confidential to prove it was proprietary or a trade secret.

In SB 138, the legislature, wrongly in my opinion, allowed the Commissioner to “enter into confidentiality agreements to maintain the confidentiality of information related to contract negotiations and contract implementation associated with a North Slope natural gas project.” As a lawyer, you should know that “information related to contract negotiation and contract implementation” is way too broad, and potentially allows ANY discussions related to the gasline contract to be confidential and hidden from the Alaska public. This is unnecessarily withholding information from the public and bad public policy, in my opinion.

That said, some vital pieces of information have been kept confidential, like the results of the supposed failed 2010 open season, and what, exactly, the company spent $300 million of state dollars on while working under the AGIA license.

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Shell takes big step towards Arctic drilling. Delegation now needs to focus on revenue sharing.

Despite massive setbacks, and a shed of the company’s North American assets, Royal Dutch Shell appears to have made a decision to continue to pursue drilling for oil and gas in the Arctic.

According to Fuelfix:

Shell’s campaign to resume Arctic drilling in 2015 took a major step forward Thursday, as the company gave federal regulators a broad drilling blueprint that lays out plans for boring new exploratory oil wells in the Chukchi Sea. The exploration plan filed with the Bureau of Ocean Energy Management in Anchorage keeps the door open for Shell Oil Co. to resume its Arctic drilling campaign as soon as summer 2015. It is the strongest evidence yet that Shell’s new CEO, Ben van Beurden, is willing to keep pursuing a big discovery in the U.S. Arctic, after a mishap-plagued 2012 exploration campaign ended with the grounding of the company’s Kulluk drilling rig and a $200 million loss for scrapping it.

Production, if it happens at all, is up to a decade away. Still, the big challenge now for the state’s federal delegation is to get a revenue sharing bill passed so that the state can share in the spoils with the feds, if there are any. A bill was proposed last year by Sens. Lisa Murkowski and Louisiana Democratic Sen. Mary Landrieu, and co-sponsored by U.S. Sen. Mark Begich, which would have given Alaska and other coastal states up to 37.5 percent of federal royalty revenue for energy production off their coastlines. The bill was opposed by environmental groups who oppose offshore drilling. It got one hearing in the Senate Energy Committee, and is now languishing, even though Landrieu is chair of the committee and Murkowski is a ranking member.

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Unrest in Iraq could skyrocket oil prices, providing ammunition for repeal

Energy and natural gas guru T Boone Pickens told CNBC on Friday that if Iraq’s oil supplies dry up as a result of unrest in the country, crude could hit $150-$200 a barrel, providing ammunition for those who want Alaskans to vote on an initiative in August to repeal the oil tax regime that passed the Legislature in 2013.
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Will historic Russia-China gas deal impact Alaska LNG project?

On Wednesday it was announced that Russia has signed a deal with China to supply the country with natural gas for 30 years. Russian gas company Gazprom CEO Alexei Miller said that the contract is worth about $400 billion. The gas will be shipped from Russia to China via a network of pipelines.

The deal has the potential to significantly impact Europe’s relationship with Russia and changes the power-dynamics between the United States and both Russia and China. Closer to home, people are questioning what, if any, impact that deal will have on getting Alaska gas to market.

Alaska is currently working on a plan with the big three producers—ExxonMobil, BP and ConocoPhillips—to build an 800-mile pipeline to carry gas from the North Slope to tidewater in Southcentral Alaska, where it would be liquefied and put on tankers headed to Asia markets. All told, the project is expected to cost up to $65 billion.

Larry Persily, the federal coordinator of Alaska gas pipeline projects, and a go-to gas analyst, doesn’t think that the Russia-China deal will have much of an effect on the project. “It’s not a death knell for Alaska LNG” he said.

For one, the focus has been on selling Alaska LNG to Japan and Korea. Secondly, China will still need gas, he said. But more than anything, price will dictate the viability of any LNG project. He said that the price envisioned for Alaska’s LNG will be competitive with what Russia is offering China.

It is, however, a reminder that we’re not the only ones selling gas, Persily said.

Interesting note: Gazprom’s Alexei Miller traveled to Alaska in October, 2008 to talk about Alaska’s gas. While in Alaska, Miller and his entourage met with ConocoPhillips executives, and with DNR Commissioner Tom Irwin and Deputy Commissioner Marty Rutherford. During the meeting, Miller predicted that a pipeline would never be built. He said that gas would eventually be put on tankers that, with the help of ice cutters, would carry gas through the Northeast passage.

Then-Gov. Sarah Palin didn’t make the meeting. She was on the presidential campaign trail.

Contact Amanda Coyne at amandamcoyne@yahoo.com

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PPP poll on oil taxes

I missed this in my earlier coverage of the wide-ranging PPP poll: Question 1: If the election were today, how would you vote on SB 21 referendum?:

  • Yes: 45 percent
  • No: 34 percent
  • Undecided: 21 percent.

A few things to keep in mind: It was a poorly conducted question. I’d wager that not many in the public know what SB 21 even is. (For those who don’t: it’s the oil tax repeal.) Also, PPP has been problematic in the past. However, the polls number in the Senate race track generally consistently with other poll numbers released.

I’ve tried to get a response from those who are working against the repeal. No luck.
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Local economist calls ‘$2 billion giveaway’ a myth

The phrase, “$2 billion giveaway” that was coined by those who want to repeal oil tax reform, has been used so often, including by this writer, that for many it’s believed to be a fact. Often quoted, and much respected UAA economist Scott Goldsmith took a hard look at the number and came up with something very different in a report funded by Northrim Bank, which is against repeal but funds a wide variety of reports about all facets of the state’s economy.

The “$2 billion giveaway is a myth,” Goldsmith told a crowd of about 200 at the Resource Development Council meeting on Thursday morning

While it’s true that the state is running at about a $2 billion deficit, the oil tax break isn’t what’s driving most of it, he said.

For one, to the extent that there’s a “giveaway” at all, it’s closer to $90 million. Much of the rest of the money is a result of lower production, lower prices, and rapidly increasing costs to produce the oil, costs that the oil companies provide to the state, and which we need more information about, he said.

Secondly, in the long run, reform will stabilize the tax system. At some prices the amount of taxes the producers will pay will be more under the new tax regime than under ACES. At some price points, it will be less. Why do the companies like it so much that they are willing to spend tens of millions to make sure that it’s not repealed? Because they believe that it will increase production

“The producers are not in business to minimize taxes,” Goldsmith said, “They’re in the business to maximize profit.” And the best way to do that is to expand and to increase the size of their operations, he said. He likened it to his wife getting a job. The family’s tax bill will go up, but the household will have more income. “We’ll be better off. And the treasury will be better off as well.”

Read Goldsmith’s presentation here.

Vic Fischer, who is the head the effort to repeal SB 21, issued a press release following the presentation. He’s sticking to his guns. “Goldsmith misses the mark,” he said and pointed to the $2 billion deficit has his proof.

“What Alaska needs is a tax structure that increases exploration for new oil and gas, not just provide incentives to pump the oil they are contractually obligated to produce,” he wrote.

Contact Amanda Coyne at amandamcoyne@yahoo.com

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Picture of the day: Anchorage sixth grader Alys Korosei’s winning doodle

google doodle

Sixth grader Alys Korosei of Bowman Elementary School in Anchorage is Alaska’s winner in Google’s annual Doodle contest, where school kids from across the country “doodle” their inventions to make the world a better place. “If I could invent one thing to make the world a better place, I would invent a machine that turned garbage into fuel. This way we could use less natural resources and have no oil spills,” Korosei wrote about her doodle. Now, the public votes on the winner from each of five grade groups. Cast your vote here.

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BP’s asset sale to Hilcorp signals new era of independent oil in Alaska

On Tuesday BP announced that it’s selling, for an undisclosed price, 15 percent of its Alaska assets to Hilcorp, one of the largest independent, privately-held oil companies in the United States. The fields it’s selling are Endicott and Northstar. It’s also selling half of its interests in the Liberty and Milne Point fields.

All told, the fields currently produce about 20,000 barrels of oil a day, only a fraction of the 520,000 or so daily barrels of oil produced from all North Slope fields, including Prudhoe Bay.  But it’s a lot for a smaller company like Hilcorp, which all told produces about 85,000 barrels a day.

Hilcorp is not a stranger to the state. It made a big move into Alaska in 2011 and 2012, acquiring assets in the Cook Inlet from Chevron and Marathon Oil.

In a statement, Janet Weiss, President of BP Alaska, said that the deal would free up BP to focus on Prudhoe Bay, still the largest oil field in North America, and to advance “the Alaska LNG opportunity.”

The Alaska state Legislature just passed legislation to advance the up-to-$65 billion large diameter natural gas pipeline, which would carry gas from the Slope some 800 miles to tidewater in Southcentral Alaska.

The assets were likely more attractive to Hilcorp after the Legislature passed oil tax reform last session, which significantly lowers the state take on oil when prices are high. The sale will likely provide fodder for those who are working to repeal the oil tax, which voters will vote on in August. So far, the oil companies, including BP, ExxonMobil and ConocoPhillips have spent more than $6 million campaigning against the repeal.

Shortly after the announcement, state Sen. Hollis French, who is running for lieutenant governor and has been one of the most vocal advocates of repeal, said that BP “cashed out in Alaska, proving once again that oil taxes do not dictate the operations of global energy producers.”

Others see it differently. Several elected officials issued press releases and made statements in support of the sale. Bill Walker, who is running for governor as an independent, was also positive about the sale. “We need a whole bunch more companies like Hilcorp,” he said.

For one, they are committed to local hire, Walker said. Secondly, they’re likely to be more aggressive in producing oil.

Independents are generally more nimble and quicker than major oil companies, which can sit on assets to work on other, more attractive oil plays in other parts of the world.

Too, many have long argued that the three major oil companies’ stronghold on the North Slope has hindered development by scaring independents away. After BP acquired ARCOs’ assets in 1999, a Charter Agreement signed by BP was supposed to help give independents access to the Slope. But the majors are still not known for being particularly friendly in allowing access to their facilities.

Last year, during legislative testimony on the new oil tax regime, Bill Armstrong, president of Armstrong Oil & Gas — a North Slope lease holder that has attracted Pioneer, ENI and Repsol to the Slope — was asked about his company’s relationship with the majors. Armstrong likened it to the abusive relationship between Ike and Tina Turner. “We’re Tina,” he said.

Contact Amanda Coyne at amandamcoyne@yahoo.com

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Gasline legislation passes the Senate. Stedman votes no, details concerns in letter.

The Alaska state Senate voted 15-5 to pass legislation that would enable the large diameter, natural gas pipeline to move forward. The vote was 15-5. Four Democrats and one Republican voted against the bill. Democrats proposed 16 amendments–ranging from greater ownership in the line to a change in tax structure–all of which failed.

At anywhere from $45 to $65 billion, if built, it will be one of the biggest, most expensive projects in the world.

The proposal partners the state with BP, ExxonMobil and ConocoPhillips as well as Canadian pipeline company TransCanada Corp. It’s the latter partnership which appears to be the major concern for most who voted against it, including Republican Sen. Bert Stedman, who wrote the following letter detailing his concerns. The legislation now moves to the House. It’s not normally so, but in this case that chamber appears to be the more deliberative body.

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Murkowski writes letter to legislators urging them to scrutinize TransCanada’s role in pipeline

On Tuesday, former Gov. Frank Murkowski wrote a letter to legislators, urging them to dig more deeply into TransCanada’s role in the contracts that are being negotiated to build the large diameter natural gas pipeline, which is estimated to cost as much as $65 billion.

“I am prompted to write each of you to express my growing concern over a major uncertainty associated with Senate Bill 138 – that is, how much revenue will the State lose by turning over to TransCanada what would otherwise be the State’s interest in the gasline?” Murkowski wrote. (See the full letter below.)

The state is partnering with TransCanada to own an equity stake in the pipeline and, among other things, is guaranteeing the company a 12 percent return on equity, which as Murkowski points out, is more than “twice what the State could borrow by issuing revenue bonds or tax-exempt bonds.”

In turn, TransCanada is financing much of the state’s investment. The question remains, however, if that arrangement is in the best interest of the state.

“This is a major policy call that has taken place without Legislative scrutiny,” Murkowski wrote.

Murkowski is urging legislators to pass one part of the agreement which would align the state with the producers who have lease rights to the gas, but to wait to pass the other part which establishes the state’s relationship with TransCanada.

When Murkowski was governor, he was also in the process of negotiating a large diameter natural gas pipeline, which at the time received much criticism. Gov. Sarah Palin, however, won the race before the contract could be finished. During her administration, legislation was passed and another contract was negotiated with TransCanada. That contract is still legally binding, and explains why the state has not looked for partners outside of the company.

Read the full letter below:

I am prompted to write each of you to express my growing concern over a major uncertainty associated with Senate Bill 138 – that is, how much revenue will the State lose by turning over to TransCanada what would otherwise be the State’s interest in the gasline?

SB 138 contains two parts: the Heads of Agreement which I urge that you pass this session. This brings gas owners and the State in alignment as each party owns North Slope gas.

The second part is the MOU between the State and Trans Canada. Unlike the 2007 AGIA agreement, the new MOU would pay for TransCanada’s services with what otherwise would be the State’s equity interest in the gas line. The tariff to the State is fixed at 12%, which is inflation proofed. This tariff is more than twice what the State could borrow by issuing revenue bonds or tax-exempt bonds.

Reports have noted that the MOU is a very complex document. Some of the lawyers who have appeared at the committee hearings of jurisdiction acknowledge parts are difficult to comprehend, let alone explain. Any legislator who takes the time to try to digest the document would agree.

Some take comfort in their belief that the MOU is non-binding and the state can “take the off ramp at any time”. This can be unrealistic. Take a quick look back at 2007 when TC entered in to the first AGIA agreement with the state. So far the state has expended more than $300 million with more to come, and we have yet to get a full explanation of what the State received for its money. Commissioner of Revenue Rodell stated that with TC’s participation the cost to the state would be $300 million annually in lost revenue once the gas begins to flow. The argument favoring this approach is that the capital costs of the project would be in the billions and would come at a time (2015-2021) of declining State revenues. TC would get the State’s share of the gasline by fronting these costs.

Commissioner Rodell said that the cost of lost revenue was worth the financing that TC would provide.

Really? Why have we not seen a side by side comparison of the costs and rewards to the State of TC holding the State’s share of the pipeline with the costs and rewards to the State of  the State holding the State’s share of the pipeline.

This is a major policy call that has taken place without Legislative scrutiny.

There are major costs to the State of doing this. The “loan” is risk free to TC because the State pays all of its costs, including depreciation for TC’s up front capital costs (Exhibit C Item 6) and an inflation proofed cost of money at a base rate of 5%. Moreover, TransCanada will simply use the State’s Take or Pay agreement to transport our gas as security for the obligation it undertakes to pay for the State’s share.

What is the State’s alternative? There has been no discussion in the Legislature about going to the investment market to determine whether revenue bonds or other financing is available that would not require the state to pay down its savings during the 8 to 10 years before revenue starts to flow and would not require the state to give up its equity interest in the gas line.

Other questions remain yet to be answered:

Why share pipeline ownership with a non-gas owning company when the producers have the capacity to, and very well may, construct the LNG line themselves?

Having repaid 90% of TC’s expense for its work in the pipeline, what is the justification for TC to obtain any portion of the state’s equity share?

Why the special treatment for this particular company? Why not simply pay TransCanada for its services like any other company that provides services to the state?

When I was in the banking business, one of the rules of the road for a lending officer, was if you were lending your own personal funds, would you risk making the loan? Knowing what you know, but more importantly, being concerned about what you don’t know, are key factors in making this call?

A prudent approach would be for the Legislature to advance passage of the HOA this session. Then between sessions develop alternate means of financing Alaska’s equity portion of the gas line, so that Alaska does not “expend-down” its savings in the 8 to 10 years before first gas flows and the state can retain its equity.

Best wishes for a successful session.

Sincerely,

Frank H. Murkowski

Contact Amanda Coyne at amandamcoyne@yahoo.com

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Quote of the day: BP gets battered again, this time in Russia

From SeekingAlpha.com:

It seems like one issue after another for BP (BP). Ever since the Gulf oil spill disaster, the company has had uncertainty in payout looming over their heads, with another setback coming recently. Now, the conflict between Russia and Ukraine could prove to be another headwind for BP. BP owns 19.75% of Russian state oil company Rosneft (OTC:OCRNL), which is worth about $65 billion overall. With the Western world still uncertain how to approach the Russia-Ukraine conflict, there is a possibility that economic sanctions would be imposed on Russia, potentially harming Rosneft’s business, and consequently BP. In fact, a recent dip in Rosneft’s share price caused a loss of nearly $1B for BP overnight

.

 

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Mayors feel left out of natural gas pipeline negotiations

Four mayors from across Alaska sent a letter to Gov. Sean Parnell dated Feb. 11, expressing concern about their lack of involvement in the ongoing natural gas pipeline negotiations, and what those negotiations mean to their respective communities, particularly regarding taxation. (Read the letter here: Gasline Letter)

Although the mayors write that they are encouraged by the project, “we have become concerned about the lack of information provided to municipalities regarding the impacts of the ongoing negotiations, particularly local government concessions that may be considered during pending gas pipeline negotiations with the North Slope producers,” the letter says.

It is signed by Kenai Peninsula Borough Mayor Mike Navarre, Valdez Mayor Dave Cobb, North Slope Borough Mayor Charlotte Brower, and Mayor Luke Hopkins from the Fairbanks North Star Borough.

The state has been negotiating terms with the major producers and TransCanada under which a large diameter pipeline would be built. The pipeline, one of the largest projects in the world, would snake from the North Slope to tidewater in Southcentral Alaska and is estimated to cost up to $65 billion. Legislation is currently being considered which would give the state power to further negotiate fiscal terms. Among them are terms that could involve local property and infrastructure taxes, which are the charge of local governments.

“We are willing to be a party to such agreements provided that we have the opportunity to participate in the discussions, and to negotiate and agree to terms that will directly impact municipal tax structure and revenues,” the mayors write.

Contact Amanda Coyne at amandamcoyne@yahoo.com

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Alaska-Japanese LNG partnership emerging

As members of the resource committees in the Alaska state Legislature are focusing on the mammoth, 40-year old dream of a large diameter natural gas pipeline, the relatively modest bullet line, or the Alaska Stand Alone Project, appeared to be moving along with a potential big investor.

The state-owned Alaska Gasline Development Corp., charged with making the bullet line a reality, announced today that the Japanese Resources Energy Inc., or REI, is interested in making a multibillion dollar investment in the line, and buying a large amount of LNG—as much as 150 MMscf per day—from  the state.

According to AGDC, REI visited the Anchorage offices on Wednesday to give a presentation which expressed interest in “exploring opportunities to assist with the financing of the ASAP project.” The investments include an LNG facility, local storage, export terminal and ocean transportation assets.

REI, made up of large businesses and a bank in Japan, has been in Alaska for years, trying to establish relationships and work with Alaska’s government to enter into a joint agreement to sell the state’s North Slope gas to Japan.

In 2012, then DNR Commissioner Dan Sullivan told the consortium that it should deal with AGDC. At the time, however, AGDC was, for various reasons, in no position to be dealt with. Now, however, the time appears ripe.

AGDC President Dan Fauske said that “REI would be an excellent anchor tenant” for the project as it heads to open season in 2015.

“Today’s presentation reaffirms our belief that we have a commercially viable project capable of delivering gas to Alaskans by 2020,” Fauske said.

Contact Amanda Coyne at amandamcoyne@yahoo.com

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Legislature starts to question TransCanada’s role in building LNG line

5839204_mMembers of the Alaska state Senate are beginning to question whether or not TransCanada is the right company for the state to partner with to build a large diameter natural gas pipeline that all told could cost more than $60 billion. The pipeline, which would carry natural gas from the North Slope to tidewater that would be shipped as LNG, would be one of the largest construction projects in the world. Legislation being considered this session, introduced by Gov. Sean Parnell’s administration, would begin to bind the state with TransCanada for generations.

However, the state has not put the newly conceived LNG project up for bid. Nor has it appeared to consider other companies that might partner with the state to build the line.

“It’s not Exxon, BP and Conoco’s responsibility to see that the state is aligned and to protect our interests. We have to protect our interests with TransCanada,” said Sen. Bert Stedman during a Senate majority press conference. Other members of the majority, including Sen. Peter Micciche, said during the press conference that they will look hard at the partnership.

The administration has proposed legislation that would begin the process of building the natural gas pipeline, a project that’ s been in the works for over 40 years. The initial legislation is just a start, the administration has said. However, it’s a start with a start at binding agreements and a multimillion dollar price tag attached to it.

TransCanada and Alaska go back a long way, most recently when it was the company chosen by the legislature in 2008 to build a pipeline to go from Prudhoe Bay through Canada. It was the only company then that designed a project to fit specific “must haves” that were delineated by Gov. Sarah Palin’s administration.

In exchange, the company was entitled to receive $500 million of state money to allow it to get to crucial commercial agreements with the companies that own the lease rights to the gas—ExxonMobil, BP and Conoco– and companies willing to ship the gas. For various reasons, those commercial agreements all dissipated. Legal contracts that the state has with TransCanada, however, haven’t.

Some legislators are wondering if the state has stuck with TransCanada simply to delay potential legal issues.

Democratic Sen. Hollis French would like the Senate Judiciary Committee to explore the legal contracts the state has with TransCanada. So far, however, Senate President Charlie Huggins hasn’t assigned that bill to the committee.

“There’s discomfort in the Capitol about whether we’re getting shoehorned into this new gasline deal with a partner that didn’t deliver in the last deal,” French said. “What’s the cost of shopping around?” he asked.

Legislators have likened the relationship with TransCanada to a marriage. French continued with the metaphor. “It’s like we’re staying in the marriage for the sake of the children without knowing who the children are,” he said.

The state has hired various consultants to help it understand that contracts. However, the bulk of committee testimony so far has been used by TransCanada, Exxon, ConocoPhillips, and BP, all of whose testimony appears to be coordinated.

Meanwhile, rumors persist that behind closed doors, some of the producing companies are also quietly questioning TransCanada’s role in the project.

Contact Amanda Coyne at amandamcoyne@yahoo.com

Correction: The original version of the story said that Sen. Hollis French was on the “Judicial” Committee. There is no such thing as a “Judicial” Committee. It’s the Judiciary Committee and Sen. Bill Wielechowski is now the minority member.

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