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Special edition
DNR memo gives gas to pipeline negotiators
(This special edition of my newsletter excerpts portions of a stunning memo that partially pulls the wraps off the governor's secret negotiations to build a pipeline that carries our North Slope natural gas to consumers in the  Lower 48. At a minimum, the memo reflects chaos in the governor's negotiating team. Beyond that, the memo asks Alaska's attorney general to determine whether or not the governor is offering conditions to the energy firms that are unlawful and unnecessary.
This memo was sent four days ago by Department of Natural Resources Commissioner Tom Irwin to Attorney General David Marquez. Details of the memo were covered extensively by media outside Juneau but in far less detail by media in Juneau so I offer these pertinent excerpts from the memo to my Juneau constituents. The highlights that provide emphasis were added by me.)
From Thomas Irwin to David
Marquez:
"SUBJECT: Request for Legal Advice Regarding
Negotiations with the Producers (BP, ConocoPhillips, and ExxonMobil) under the
Alaska Stranded Gas Development Act "For close
to two years this Administration has been engaged in negotiations
with the Producers, comprised of BP Exploration (Alaska) Inc.,
ConocoPhillips Alaska Inc., and ExxonMobil Alaska Production Inc.,
under the Alaska Stranded Gas Development Act. . . [O]ver the course
of negotiations, we have seen the positions taken by and terms
acceptable to the Administration evolve. As a consequence, we now
find ourselves in a position that is causing some members of the
Department of Natural Resources--myself included--to seek advice on
whether this Administration is operating within the limits of
current law as it pushes for the conclusion of negotiations with the
Producers.
". . . I am
concerned whether members of the DNR are being asked by the
Administration to operate outside current law by our continuing
participation in negotiations. . . My first question, then, is
whether this Administration is operating within the confines of
current law by continuing with negotiations with the Producers under
the Alaska Stranded Gas Development Act when all analyses indicate
that the project gas as a whole--and particularly Prudhoe Bay and
Point Thomson gas--does not meet the definition of "stranded gas" contained within that Act.
"Second, it
appears that under AS 43.82.130(2) the Administration should not
consent to terms in a proposed contract that materially conflict
with the obligations of an oil and gas lessee to the State under an
existing lease or unit agreement between that lessee and the State.
However, I am concerned that the proposed Article 5 provisions on
Work Commitments--especially when read together with Article 35.1,
and even in spite of the potentially mitigating language proposed in
Article 38--are terms that materially conflict with the obligations
of lessees BP, ConocoPhillips, and Exxon Mobil under their existing
North Slope lease agreements and the Prudhoe Bay and Point Thomson
Unit Agreements. . . Furthermore, substantial and continuing
pressure is being exerted on the DNR to endorse terms governing
Point Thomson development that are inconsistent with and materially
weaker than the Producers' current obligations to develop Point
Thomson in accordance with the Point Thomson Unit Agreement and the
plans of development approved under that unit agreement. Thus, I ask
whether the intent and literal language of the Alaska Stranded Gas
Development Act is being honored in the Producer negotiations if the
Producers' obligation to diligently develop Prudhoe Bay and Point
Thomson gas reserves is less under a contract proposed under the Act
than under the existing lease and unit contracts with the
Producers.
"Third, AS
43.82.220 governs proposed contract terms relating to royalty.
Subsection (a) appears to permit the Administration to make a
long-term commitment to take its royalty gas in-kind and forego its
current contractual right to switch to taking some or all of its
royalty in value. The proposed Producer contract requires that the
State make a multi-decade commitment to take all of the State's
royalty gas in-kind without proof or compelling evidence that the
viability of the project proposed by the Producers is dependent upon
the State taking its royalty gas in-kind. Therefore, my third
question is whether it will be legal for me to support/sign a
preliminary fiscal interest findings and determination at this time
when I believe that the State will assume significant risk without
substantially improving the Producer's incentive to develop the
pipeline.
"Fourth, AS
43.82.400 requires a preliminary finding that the proposed contract
terms are in the long-term fiscal interests of the State. DNR is
concerned that no modeling can show the need for the proposed fiscal
support from the State to the Producers and the need for a guarantee
of fiscal certainty extending three decades from the pipeline's
in-service date. Based on the Administration's project modeling
(which is generally consistent with the modeling discussed publicly
by others), I do not believe that the economic viability of the
project requires the State's "give" nor that the prospect of
long-term changes to the fiscal system are necessary. Therefore, my
question here is whether current law permits me to support/sign a
preliminary fiscal interest findings and determination endorsing
contract terms that runs counter to the best data within the
possession of the Administration.
"Fifth, AS
43.82.445 instructs the Administration to include terms in any
proposed contract which apply in certain events, such as a
Producer's breach of a material provision of the contract, failure
to comply with the approved qualified project plan, or intentional
misrepresentation made in the course of negotiating the contract. .
. My question is whether the proposed contract terms are legal under
current law as reflected in the Alaska Stranded Gas Development Act,
and whether I can legally support/sign a preliminary fiscal interest
findings and determination accompanying a proposed contract
containing such terms.
"Sixth, AS
43.82.010(1) calls for the development of a proposed contract that
does not significantly alter tax methodologies and rates on existing
oil infrastructure and production. As you know, for a long time the
Administration resisted the Producers' invitation to negotiate oil
taxes in conjunction with gas pipeline matters. However, this summer
the Administration embarked on extensive analysis and discussion of
oil taxes under the umbrella of the Producers' application filed
under the Alaska Stranded Gas Development Act. Therefore, my
question is whether a commissioner can sign a preliminary fiscal
interest findings and determination under the current provisions of
the Alaska Stranded Gas Development Act if the proposed contract
terms or the likelihood of the gas pipeline project itself are tied
in any way to an agreement with the Producers regarding alteration
of tax methodologies or rates on existing oil infrastructure or
production.
"Seventh,
while I recognize that the Administration has developed a plan to
address some portion of the legal impediments discussed above, I am
not sure that the plan itself is sufficient or permissible. The
plan, as I understand it, is to propose legislation amending current
law as needed to bring the law into conformance with the proposed
Producer contract. However, the Administration does not intend to
introduce the proposed legislation until after the preliminary
fiscal interest findings and determination is signed, which raises
the issue of the legality of my actions at the time of signature as
well as of the actions of this Administration at this time.
Moreover, the Legislature may choose not to enact some or all of the
legislation to be proposed by the Administration. Furthermore, the
Stranded Gas Development Act invited potentially interested
applicants to apply and negotiate with the Administration under the
terms of the Act as it now reads. Changing the rules of the game at
this late stage is much like changing the rules by which proposals
received in response to a Request for Proposal (RFP) are evaluated
so as to allow the award of a contract to a favored party on terms
other than as advertised. This, too, strikes me as potentially
improper, and I would like the Department of Law's
advice on the
issues raised in this paragraph as well.
"Finally,
DNR staff are assisting the departments of Revenue and Law in
preparing the preliminary fiscal interest findings and determination
under AS 43.82 (SGDA). In doing so we have been advised by the
department of Revenue that the findings and determination will not
include a quantitative evaluation of alternatives, such as other
applications submitted under AS 43.82. Therefore, I would ask the
Department of Law to evaluate whether the proposed preliminary
findings and determinations meets the AS 43.82 requirements as well
as the Administrations responsibility to provide a full
disclosure/comparison which allows the public to adequately evaluate
any proposed contract.
"The
requests for legal advice contained in this letter are not made
lightly but with recognition of the serious and long-lasting
ramifications of any proposed contract and preliminary fiscal
interest findings and determination issued under the Alaska Stranded
Gas Development Act. My concerns over the legality of current and
anticipated actions are great and I respectfully request receiving a
legal opinion on the subjects raised in this letter. Furthermore, I
must point out that putting members of the Department of Natural
Resources in a work environment where they seriously question the
legality of administrative actions they are asked to participate in
is so troubling that it could result in the resignation of
exceedingly valuable members of our gas pipeline team, which would
be a great loss to both the short and long-term interests of the
State. For these reasons, I ask for your or your agencies immediate
counsel on these issues."
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