Oil and Gas Update: 2013 edition #nlpoli

First, the oil.

Regular readers will recall the Article 82 issue that will affect how much money the provincial government collects from oil and gas development outside the 200 mile exclusive economic zone.  Article 82 of the Law of the Sea Convention requires the coastal state to put up to seven percent of royalties from offshore oil and gas into a fund that will go to other countries.

CBC reported on Monday that neither the federal nor provincial governments have figure out how they’ll deal with it.  The federal government may have legal jurisdiction but the 1985 Atlantic Accord gives the provincial government the same ability to set revenues from offshore resources as if they were on land.

Resource give-away

The provincial government’s energy company controls billions of dollars worth of hydro-electric and oil resources  - much of it handed over as free gifts from taxpayers - but the company pays very little to the provincial treasury in return.

Nalcor hasn’t paid any dividends to its sole shareholder – the provincial government – since 2006. That’s something the current provincial government is proud of.

In 2008, some valued Nalcor’s 4.9% Hebron shares at $1.5 billion based on prices around US$80 a barrel.  Nalcor has control of those shares along with a 5% stake in White Rose and 10% in the Hibernia South extension. The provincial government paid cash for the equity stakes and handed them to Nalcor.

But when it comes to royalties, though, Nalcor won’t pay a penny for its stake in Hebron under the project financial agreements.*  According to Nalcor, the company is liable for royalties on its interest in Hibernia South and White Rose proportionate to its stakes. Those amounts don’t turn up in the company’s annual report.

Nalcor also controls the provincial stake in Churchill Falls and any Lower Churchill project.  The latter will cost at least $6.0 billion to build with considerable cash and loan guarantee backing from the provincial government.

And in return?

According to Nalcor, the company and its subsidiaries don’t pay  corporate income taxes. Twin Falls Power Corporation does pay corporate income tax, but Nalcor holds a one third stake in that small venture. The total value of Twin Falls electricity sales in 2010 was a mere $5.5 million with net earnings of $3.0 million.

Nalcor and its subsidiaries are liable for the provincial payroll tax and Churchill Falls (Labrador) Corporation does pay a small amount of gas tax.

The company has loan guarantees from the provincial government and is looking for more. But the current provincial government has been waiving any fees for those loan guarantees since 2008.  In 2010, that amounted to $9.1 million Nalcor didn’t have to pay taxpayers. In 2007 – the last year it paid a loan guarantee charge – the company paid taxpayers $13 million.

And that beats the only royalty any part of Nalcor pays for hydro-electricity.  Under the 1961 lease act,  Churchill Falls (Labrador) Corporation pays royalties and rentals.  That amounted to $5.0 million in 2008, $3.7 million in 2009 and $5.6 million in 2010, according to Nalcor’s annual reports.

The total Nalcor paid to the provincial government in 2010 for “accounts payable and accrued liabilities” – the accounting term for these payments – was $10.6 million.

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*Correction - 05 August:  Under the Hebron fiscal agreement, the provincial government may exemption Nalcor from royalties but to date it has not done so.

Here’s the full text of relevant part of section 8:

8.4 OilCo. 

(A) Sections 8.2 and 8.3 [guaranteeing no preferential treatment of parties] shall not apply to OilCo as long as OilCo is a Crown corporation of the Province.

(B) The Parties acknowledge that the Province may:

(1) make amendments to the Petroleum and Natural Gas Act;

(2) make amendments to the Royalty Regulations; or

(3) make an agreement pursuant to section 33 of Petroleum and Natural Gas  Act;

to adjust, vary or suspend OilCo’s liability for the payment of royalties on oil produced from the Lands. 

(C) The amendments or agreement in subparagraph B above shall apply to the royalties payable by OilCo on oil produced from the Lands, notwithstanding any other provision of this Agreement, to the extent such amendments or agreement does not affect the royalties payable  by any of the other Proponents on oil produced from the Lands. 

Alaska gas pipeline inches forward

From the Alaska Journal, an update on plans to develop a new gas pipeline in Alaska. The article compares the proposals from the former governor and his successor on a number of issues including local hiring and taxes and royalties.

On the latter issue, there's this observation:

One major difference between Murkowski and Palin plans is that while both approaches offer tax and royalty incentives for the producers, those proposed by Murkowski were more far-reaching and more controversial with the public and the Legislature.

Murkowski would have had a 45-year freeze on natural gas production taxes and a 30-year freeze on oil production taxes. Palin proposes a 10-year freeze on gas taxes only. The producing companies say this isn't enough, and it is a key obstacle for them in participating with a pipeline licensed under AGIA.

Murkowski would have solved a big problem producers have regarding uncertainties in state royalty administration, and particularly the state's ability under the current leases to switch between in-value and in-kind royalty-taking at six- to nine-month intervals. Murkowski's plan would have had the state take its gas in-kind for the duration of the 45-year contract.

In-kind would mean the state government would actually receive quantities of natural gas which it could then dispose of as it wanted.

One other difference between the Murkowski and Palin plans is that the former governor would have had the state invest in the pipeline and own as much as 20 percent. The idea behind this is that if the state takes its gas in-kind for a long period, it would, as a pipeline owner, be shipping its own gas and earning profits from that rather than paying another pipeline owner to ship state gas. Murkowski proposed investing about $4 billion in the project for a one-fifth share.

Palin would have no such equity ownership, but instead proposes a $500 million state grant to the pipeline license holder to subsidize early planning and engineering work. The state would get no equity or other repayment from the grant.

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