A Citizen’s Guide

At the heart of what many Alaskans are calling the most important issue in decades—the chance to develop a natural gas pipeline from the North Slope—lies an eight-year-old law called the Alaska Stranded Gas Development Act.

BP, ConocoPhillips, and Exxon Mobil used the law to make a natural gas pipeline deal with Gov. Frank Murkowski.

Lawmakers are now considering a proposal to change the law. In the coming weeks, they’ll be asked to consider many more changes, some of which promise to raise concerns.

As the SGDA steps into the spotlight, then, here’s a brief look at what it is, how it relates to the petroleum production tax and the gas pipeline, and why some people think it’s being misused.

What it is

The SGDA is a law that lets the state change the way it gets compensated by a company producing natural gas. Instead of requiring the same royalty and tax systems it does for other projects, the state can make an agreement with companies for “payments in lieu of taxes,” or PILTs.

As opposed to taxes, which lawmakers can change at any time, the PILTs can be fixed for the life of the contract, reducing how risky the investment is for a company. In this case, it’s an investment of about $20 billion.

When the law was created in 1998, lawmakers believed that a huge amount of natural gas on the North Slope was “stranded,” in the sense that companies might not develop it because of the high cost of getting it to market.

They also believed, according to reasons stated in the bill, that developing the “stranded” gas could benefit the state by providing revenue, jobs, and gas.

The SGDA was created to encourage projects that otherwise might not happen.

It allowed the state to shift the timing of the taxes and other payments so that companies weren’t swamped with bills before they had any income from the project.

It also enabled the state to make the compensation more progressive by taking more from the companies when prices—and therefore profits—were high, and less when they were low.

Any contract made under the SGDA needs to be approved by the commissioner of the Department of Revenue, who needs to find that the contract is in the “long-term fiscal interests of the state” and meets the requirements of the SGDA—that the gas is stranded, for example.

The commissioner gives the contract to the governor, who can then pass it along to the Legislature with a request that lawmakers give him permission to execute it.

Without the Legislature’s approval, the contract is no good.

SGDA, PPT, gasline

The three oil companies that proposed to build a pipeline from the North Slope used the SGDA to make a deal with the governor.

Little is publicly known about the contract because it hasn’t been released to lawmakers or the public yet. Murkowski says the SGDA gives him the authority to keep the contract confidential. He said last week it will be released May 10.

But the governor promises the contract will provide Alaskans a “fair share” of revenues, access to the gas, a share of the pipeline, and pipeline jobs. It will also be expandable and open to future explorers, he says.

While the administration was negotiating the contract, the companies said if they were going to invest billions in the pipeline, they wanted to know ahead of time what kind of tax they would have to pay on oil production, not just gas, according to Chuck Logsdon, an advisor to the governor.

“They were concerned that Alaska could significantly alter oil taxes,” he said, and that those changes could throw off the overall economics of the gas pipeline. So they asked for fiscal certainty on oil, too.

The same day Murkowski announced that he had reached an agreement with the companies on the terms of the gas pipeline, he presented his petroleum production tax proposal.

“I don’t think we’d be talking about PPT,” BP Alaska President Steve Marshall said recently, “if it wasn’t for gas.”

What’s the problem?

The governor’s proposal does not meet the requirements of the SGDA. The governor’s office admits that, and that’s why the coming amendments are necessary.

The way Logsdon explains it, the law doesn’t take into account changes in circumstances that have happened since the SGDA was written.

“Clearly issues have come up that may not have been anticipated at the time,” he said.

In order for the contract to line up with the law, the law will have to be changed, he said.

Hence the coming amendments.

Logsdon said one of the amendments will be related to providing fiscal certainty on oil—promising not to change the oil tax for a fixed period of time.

According to Fairbanks North Star Borough Mayor Jim Whitaker, who was involved in revising the bill as a state legislator and is pushing a different gas pipeline proposal, the SGDA prohibits negotiating an oil tax along with a pipeline contract.

Tom Irwin, the former commissioner of the Department of Natural Resources, resigned last year after questioning the legality of the administration’s negotiating under the SGDA. The first concern he put in his memo, in which he sought legal advice from the state’s attorney general, was that the gas being considered under the SGDA might not, in fact, be stranded.

“In my opinion, it’s no longer stranded,” he said Friday. That is, companies could make a profit developing it and don’t need the help the SGDA allows.

The fact that the contract doesn’t meet the requirements of the law made the recent proposal to change the law worrisome to those critical of the administration’s approach. As it was introduced, the bill (SB316 and HB502) would have made it impossible to challenge in court the commissioner’s finding that the deal was in the fiscal interest of the state and met the requirements of the SGDA.

The amendment, drafted by the Department of Law, was based on the idea that the commissioner’s findings are only recommendations—because lawmakers have the final say—and shouldn’t be subject to lawsuits any more than any other recommendation.

Mike Myers, who used to head the Department of Natural Resource’s Division of Oil and Gas but resigned with Irwin, thought the amendment was a terrible idea.

“The finding could say the moon’s made of blue cheese,” he said, and, as long as the Legislature agreed, it wouldn’t matter that it wasn’t true.

The amendment was changed so that now it would allow challenges, but only after lawmakers vote on the contract. Myers argues even the new version would limit the role of the public.

The Legislature plays an important role in part because of its ability to change—or not change—the law the three oil companies and Murkowski used to make a deal for a gas pipeline.

According to Logsdon, the whole pipeline proposal flies or dies depending on how lawmakers act on the amendments to the SGDA.

“That’s the power of the Legislature,” he said.

Staff writer Stefan Milkowski can be reached at smilkowski@newsminer.com or 459-7577.