Inducements

AGIA Pipeline Coordinator | Resource Inducement | Royalty Valuation Inducement
Gas Production Tax Exemption | Inducement Vouchers

$500 Million Financial Inducement

What is the reimbursement for?
AGIA provides for a natural gas pipeline construction incentive of $500 million in “matching” capital reimbursements to the AGIA licensee for qualified expenditures.  Qualified expenditures are those expenditures that are directly and reasonably related to the development and construction of a natural gas pipeline.  Reimbursements are available for a seven-year period immediately following the date the AGIA license was awarded.  Prior to the close of the first, binding open season, the licensee, TransCanada Alaska (TC Alaska), was entitled to receive reimbursements for up to 50 percent of its qualified expenditures.  When the first, binding open season closed on July 30, 2010, TC Alaska became entitled to receive up to a 90 percent reimbursement of its qualified expenditures.  See AS 43.90.110.

The reimbursement is not a giveaway.  TC Alaska, as the Licensee, must spend its own money (as a qualified expenditure) in order to collect anything from the state.

Why reimbursements?
The reimbursement incentive does not guarantee that a pipeline would be built.  No business or political entity would commit to building a multi-billion dollar project unless the economics justify doing so. 
The reimbursement provision was included as a financial incentive to encourage the licensee to identify the cost of a project to a sufficient degree of detail that the licensee could conduct an open season to determine whether there was sufficient commercial interest to move a pipeline project forward.  In the case of AGIA, the reimbursement incentive was intended to require the licensee to advance the project forward to certification by the Federal Energy Regulatory Commission (FERC).

For potential shippers the capital reimbursement match “sweetens” the pot because money spent by the state is not eligible for inclusion in the rate base.  In other words, whatever the cost of the project, $500 million will be deducted from the total in calculating the “cost of service” that establishes the transportation rate.  All shippers benefit from a lower tariff.

Is it working?
So far the reimbursement is having exactly the effect contemplated by those who crafted and ratified AGIA.  As an incentive, the reimbursement created commercial interest and several entities applied for the license.  TransCanada Alaska (TC Alaska) obtained the license.  TransCanada is one of the largest and most experienced gas pipeline companies in North America.  When ExxonMobil partnered with TC Alaska to form the APP, the project received the expertise of one of the world’s foremost oil and gas corporations, with special expertise in Beyond encouraging efforts to construct a major gas pipeline, the reimbursement provision also ensured that a project built under AGIA would contain provisions that are favorable to the state, including:

gray arrow Ensuring a process for constructing a gas pipeline that includes specific Alaska “must have”  requirements pursuant to Alaska Statute (AS) 43.90.130.  These “must haves” include:

    • Requiring the AGIA licensee to commit to a project timeline
    • Requiring off-take points for gas to be available for instate use
    • Requiring distance sensitive rates so that Alaskan consumers pay an appropriate price for transportation of utility and industrial gas
    • Allowing for future pipeline expansion opportunities—so that future explorers are ensured that their gas will have an opportunity to reach the market
    • Mandating rolled-in rates for pipeline expansion to make access to the pipeline affordable to future shippers; and
    • Cementing the commitment for AGIA licensee to seek FERC certification

gray arrow Providing an opportunity for interested parties to bid to become the AGIA licensee

gray arrow Creating a competitive environment that maximizes the opportunity for the state to realize a 30 year old goal to commercialize Alaska North Slope gas and demonstrating the state’s resolve to move the project forward by putting some “skin in the game” in the form of an incentive investment

gray arrow Providing immediate economic benefit toward the state’s net present value (NPV) for the project that will cover the cost of this investment, i.e., the reimbursement will be excluded from the tariff rate charged by the company, and

gray arrow Requiring the AGIA licensee to advance a natural gas pipeline project to the point of certification by the Federal Energy Regulatory Commission (FERC) – a stand alone benefit worth the value of the state’s reimbursement inducement.

AGIA Pipeline Coordinator

AGIA created a new position—the Alaska Gasline Inducement Act coordinator—within the Office of the Governor. 43.90.250. The Alaska Gasline Inducement Act coordinator is charged with ensuring that state agency reviews and actions related to an AGIA natural gas pipeline project are “expedited in a manner consistent with the completion of the necessary approvals.” 43.90.260(a) The coordinator is responsible for ensuring that state agencies do not include in “any project certificate, right-of-way, permit, or other authorization issued to the licensee a term or condition that is not required by law if the coordinator determines that the term or condition would prevent or impair in any significant respect the expeditious construction and operation or expansion of the project.” 43.90.260(b) The coordinator is also tasked with ensuring that, unless required by law, state agencies do not “add to, amend, or abrogate any certificate, right-of-way, permit, or other authorization issued to a licensee if the coordinator determines that the action would prevent or impair in any significant respect the expeditious construction, operation, or expansion of the project.” 43.90.260(c)


In 2011, the Coordinator’s office was renamed the Alaska Gas Pipeline Project Office (GPPO) and the Coordinator position was re-designated as the Director of the GPPO.  This was done to remove any confusion between the Gas Pipeline Project Office and the State Pipeline Coordinator’s Office (SPCO), which is a separate office within the Alaska Department of Natural Resources. The SPCO is responsible for managing land and right-of-way issues pertaining to the Trans-Alaska Pipeline System and common-carrier pipelines.

Resource Inducement

A key element to a successful gasline project is the commitment by North Slope natural gas leaseholders to ship gas during the pipeline's first binding open season.  To encourage gas producers to make early commitments to ship gas in the pipeline, AGIA offers the following resource inducements:

    • Favorable regulatory terms for calculating the value of the state's royalty gas and limiting the ability of the state to switch between taking its royalty gas in kind or in value. AS 43.90.310.
    • A gas production tax exemption that may be applied within 10 years immediately following commencement of commercial operations of the gas pipeline. AS 43.90.320.

Royalty Valuation Inducement

To encourage gas producers to commit to shipping gas in the first binding open season, AGIA provides for favorable changes to the state's royalty valuation methods and the terms under which the state exercises its right to switch between taking royalty gas in value or in kind.  In March 2010 the state announced proposed royalty regulations defining the method of valuing its royalty share at a fair value that is based on reliable industry sources and minimizes retroactive adjustments. The regulations set a methodology the state will use to exercise its right to alternate between taking its royalty in kind and in value in a way that will not cause the lessee to bear disproportionate transportation costs or interfere with the lessee's long term marketing plans. A person who commits to ship gas in the first binding open season and that is qualified for the resource inducement may elect to calculate the royalty on gas transported in the first binding open season under the regulations, or enter into a contract with the state that amends the existing lease terms to incorporate the more favorable regulatory terms. AS 43.90.310.

Gas Production Tax Exemption

To encourage oil and gas leaseholders to commit to gas production and transportation, AGIA offers a gas production tax exemption that may be applied within 10 years immediately following commencement of commercial operations of a natural gas pipeline. The exemption may be applied to production taxes that are levied on North Slope gas shipped through firm transportation capacity acquired during the first binding open season or shipped in the firm transportation capacity described in a voucher received by the gas producer.

The owner is entitled to an annual exemption from the state's gas production tax in an amount equal to the difference between the amount of the person's gas production tax obligation calculated under the gas production tax in effect during that tax year and the amount of the person's gas production tax obligation calculated under the gas production tax in effect at the start of the first binding open season held under this chapter. If the difference is less than zero, the gas production tax exemption is zero. 43.90.320.

The tax exemption is a law of general application, not contractual, and so may be changed by a future legislature. 

Inducement Vouchers

To encourage the participation of non-gas leaseholders, AGIA offers inducement vouchers. A person that acquires firm transportation capacity in the first binding open season of the project that does not hold an oil and gas lease on the North Slope, and that is not an affiliate of a person that holds an oil and gas lease on the North Slope, may apply to the commissioners for a voucher.

A voucher issued by the commissioners under this section entitles the holder of the voucher to the royalty and gas production tax inducements for gas shipped in the firm transportation capacity acquired by the person applying for the voucher during the first binding open season of the project and described in the voucher. The voucher may be transferred to a gas producer that has a binding obligation to sell gas to the person transferring the voucher under a gas purchase agreement.

A gas producer holding a voucher may claim the resource inducements for gas shipped through the firm transportation capacity described in the voucher and only on gas that is produced and delivered to the purchaser on the North Slope. A gas producer may claim the resource inducements until the earlier of the termination of the binding gas purchase agreement or the expiration of the inducements by operation of law.  43.90.330.

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