JUNEAU - Gov. Sarah Palin's administration gave lawmakers four reasons Tuesday why the state should offer a $500 million incentive to the winning bid for a natural gas pipeline.
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That inducement will accelerate the timeline for a gas line, help offset start up costs for the successful bidder, will help keep transportation costs down and encourages gas exploration, said Revenue Commissioner Pat Galvin.
"What we recognize is the need to get this gas line project moving and we need to get it moving quickly," Galvin told lawmakers. "We need to get the North Slope basin open for future gas discoveries."
Galvin spoke as state lawmakers held their first hearing since Palin introduced the Alaska Gasline Inducement Act, or AGIA, on March 2. She had repeatedly warned that Alaska's gas supplies - a known 35 trillion cubic feet in the North Slope - must not sit untapped any longer.
The bill sets project criteria which energy companies must meet in exchange for inducement incentives from the state to build a pipeline. Companies will vie for rights to the project.
It affords tax incentives and royalty breaks for the first group of companies who commit to supplying the pipeline with natural gas, a process known as open season.
But the most talked about incentive is the $500 million the bill offers to provide the company or group with the winning pipeline proposal.
Galvin and others from the administration outlined the support for the $500 million perk to the House Special Committee on Oil and Gas:
It will help put the project on a faster timetable, though the bill does not call for a specific year when gas will be flowing. A quicker start, even by one year, means faster royalties and production taxes for the state.
The money would offset start up costs and result in a lower tariff, which covers transportation rates, terms and conditions for the pipeline service. Higher tariffs mean lower royalties for the state and higher costs for companies paying to use the pipeline.
The incentive also calls for the pipeline operator to use a certain tariff formula that encourages expansion and subsequent production by keeping down the transportation costs for additional shipments.
The inducement requires market-driven capacity expansion commitments and this encourages additional gas exploration, Galvin said. It also means tapping well beyond the known North Slope reserves.
"The explorers need to know if they make a discovery, an expansion will occur within a certain period of time," Galvin said after the hearing. "They need to know they don't have to go through a long, drawn out fight forcing a company to expand the pipe."
Lawmakers appeared pleased with the detailed, nearly two-hour presentation, but still had questions.
Rep. Ralph Samuels, R-Anchorage, said he wants to have a deeper understanding of how the administration will weigh proposal criteria submitted by the companies.
Samuels, also wants to understand the impact of the Point Thompson lease litigation between the state and Exxon Mobil Corp. - already in Alaska Superior Court - and how it could effect the pipeline project.
Last year, the state revoked the Irving, Texas, company of its leases, saying the company failed to come up with a viable plan for developing the field's vast reserves.
The House Oil and Gas Committee resumes hearings Thursday with more questions for the administration. Committee Chairman Vic Kohring, R-Wasilla, wants to conclude hearings in just over two weeks and is reviewing some bill amendments.
"I think we have a good bill here to work with," Kohring said after the hearing. "I'm optimistic; we are off to a good start. I don't want to rush the process. I want to make sure we have a bill that the committee is fully comfortable with."
The Senate gets its first chance today to quiz the administration with Sen. Charlie Huggins, R-Wasilla, leading the Senate Resources Committee.
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