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Alaska Governor Introduces Pipeline-LNG Bill

Alaska Gov. Sean Parnell on Friday introduced legislation to advance the state's Alaska liquefied natural gas (LNG) project, which would commercialize the state's long-stranded North Slope gas.

The bill would tweak the natural gas production tax regime to which producers are subject for the years 2022 and beyond. And it also affirms a commitment to the alternative Alaska Stand Alone Pipeline project. The introduction of the legislation follows a commercial agreement that was signed by the state, the Alaska Gasline Development Corp. (AGDC), major producers in the state and TransCanada Corp. that laid out the road map for an Alaska gasline (see Daily GPI ,Jan 16).

"Historic progress has been made on the Alaska LNG project, and this legislation ensures that it's on Alaska's terms and in Alaskans' interests," Parnell said.

The bill would expand the scope of AGDC to allow it, through a subsidiary, to advance a large-diameter pipeline project by carrying the state's equity interest in the infrastructure, particularly the liquefaction and marine facilities.

"A natural gas project of this scope is a new chapter in state resource development, and it will be enhanced by the state's equity participation in either project," Parnell said. "Given the momentum, we must act now to ensure that our laws provide the appropriate authorities and tools to allow the state to advance these critical projects."

Current state oil and gas leases contain terms -- such as provisions that allow the state to switch between taking royalty oil and gas in-kind or in-value -- which may hinder the ability of lessees to enter into long-term contracts for sales of natural gas produced on the North Slope, Parnell told lawmakers in a letter accompanying his bill.

The legislation would allow the commissioner of Natural Resources to modify lease terms on property that commits gas to a natural gas project in order to facilitate commercialization. After a natural gas project sponsor has demonstrated sufficient project commitments, the commissioner may modify existing leases that commit gas to a natural gas project, with the concurrence of the lessees.

Gas committed from these leases, whether through royalty or the production tax, would be subject to the current standards for sale, exchange, or disposal of gas taken in-kind by the state as its royalty share.

Other provisions of the bill relate to the tax levy on natural gas. The current tax structure, which imposes a net tax on the annual production tax value of oil and gas, is retained until 2022, when the tax limitations expire for Cook Inlet oil and gas produced anywhere in the state but used in-state.

For gas produced after 2021, the levy on gas under the proposed legislation would be 10.5% of annual gross value at the point of production. The oil tax levy would remain at 35% of net annual production tax value. The bill would allow a producer to pay, for gas from modified leases only, its production tax with gas instead of with money equal to 10.5% of the taxable gas production from the modified leases.

In order to pay the production tax in-kind, the producer would be required to make an irrevocable election under regulations adopted by the Department of Revenue. Disputes over any tax deficiency, and interest or penalties on a deficiency, would be accounted for as if the tax was levied in money. Gas flared, released, or allowed to escape upstream of the point of production, or gas used on a lease or property would not be subject to an in-kind election.

The alternate minimum tax on North Slope oil and gas would apply only to oil after 2021. The bill accounts for how producers make estimated monthly installment payments of tax due after 2021 and clarifies that credits may be taken only against the tax levy in money, not against the levy in-kind.

Current known gas reserves on the North Slope are nearly 35 Tcf, and U.S. Geological Survey estimates of technically recoverable conventional gas resources are more than 240 Tcf.

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