Royalty measure that could help Agrium OK'd by House

Posted: Sunday, April 20, 2003

When profit margins are tight, it is vital that costs are well known. But for manufacturing companies purchasing gas from producers, laws governing the way the state sets royalties on its share of natural gas resources can make that kind of knowledge hard to come by, and uncertain, say proponents of an Alaska House bill that would stabilize gas prices.

Current law allows the state to reassess gas lease contracts cut with producers, even years after they were written, and up the amount of the state's royalty payments if conditions warrant. Producers, in turn, pass those increases on to their gas buyers.

That puts buyers such as Agrium's Kenai Nitrogen Operations in a bind -- never knowing for sure the contract price they've negotiated with the producer won't be changed, altering their bottom lines.

Fixing that condition lies at the heart of a bill passed by the Alaska House last week that would ensure that gas prices remain unchanged once they are negotiated. House Bill 57, introduced by Rep. Mike Chenault, R-Nikiski, would amend the way the state's royalty share is determined. It would require the state to accept as the value of its royalty share the price established in a contract between the producer and a gas or electric utility, or between the producer and a manufacturer of agricultural chemicals.

Sen. Tom Wagoner, R-Kenai, has introduced a similar measure in the Senate.

HB 57 would allow companies such as Agrium to know what their royalty costs were at the outset and to know they would not be hit with additional bills for more royalties in the future.

Agrium uses Cook Inlet natural gas supplied mostly by Unocal, the plant's owner until 2000 when it was sold to Agrium, to produce anhydrous ammonia and urea that are used in fertilizer products marketed to Pacific Rim buyers.

The fertilizer plant consumes 53 billion cubic feet of gas per year, based on historic rates over the past five years. Agrium has been operating at around 75 percent capacity lately because of a shortage of gas supply. It also is engaged in a restructuring process that could result in the loss of an uncertain number of high-paying jobs.

Critics of HB 57 say the royalty-stabilization measure reduces payments to the state and really amounts to a subsidy for a large international corporation. Further, it ignores the economic tenet that when supply is short and demand is strong, prices go up, not down.

Opponents point out that subsidizing corporations at a time when individual Alaskans are watching cuts eat into a variety of services, including education, and facing increased fees and taxes is unfair.

The bill would mean less royalty payments to state coffers. An analysis by the Division of Oil and Gas on the impact of HB 57 says Alaska would lose an average of just over $1.9 million a year in fiscal years 2004 through 2009, or about $11.5 million. In fiscal year 2009, the rate of loss would be $4.4 million annually.

HB 57 was written specifically to address the gas price uncertainties facing Agrium's Nikiski fertilizer plant, where some 300 people are employed at an average salary of about $84,000 a year, said Chenault. Its provisions would affect future gas supply deals between Unocal and Agrium as well as with so-called "third-party producers," smaller gas production companies that might also pen contracts to supply Agrium with gas.

"We want to make sure we keep Agrium and assist them, at a minimum, in knowing what the gas price is so they can make business decisions on firm numbers versus prices that can fluctuate," Chenault said.

One of HB 57's provisions is a set of criteria that must be met for the commissioner of DNR to apply the terms of the bill and lock the price of gas to that negotiated by the producer and manufacturer. One of those criteria requires that a contract demonstrate the prospective reduction in royalties received by the state would be balanced by "employment opportunities or other tangible benefits to the state."

Other criteria include that the contract price not be unreasonably low, that the lessee and manufacturer are not related in management, ownership or other aspect, and the contract price is in the best interest of the state.

Absent adherence to any of those criteria, the commissioner could decide not to apply the provisions of HB 57 to the contract, in effect allowing a contract under the old provisions and leaving the contract price subject to upward adjustment at a later date.

An Agrium spokesperson downplayed any connection between HB 57 and Agrium's current move to reduce the size of its workforce.

"There is no direct correlation between this legislation and reorganization," said Lisa Parker of Agrium's public affairs office. Agrium provides tangible benefits well beyond jobs, she said.

"There are tangible benefits for every 1,000 cubic feet of gas we purchase," she said.

Agrium adds some four times the gas' value to the finished products.

"In 2000, we spent an average of $1.51 per 1,000 cubic feet. We added $6.28 per 1,000. That's a tangible benefit -- through payroll, additional purchases and sales. When the commissioner looks at tangible benefits, he will look at more than just employment."

Employment, she acknowledged, is part of the overall picture.

"In the future, what we hope this legislation will help us do is to know what it is we are paying for the gas we are buying," Parker said.

In a case where the commissioner determined a contract between producer and buyer did not meet the criteria for the royalty-reduction provision of House Bill 57, a gas sale could still take place. It would, however, be governed by provisions of existing law -- meaning market value and sale proceeds of gas would determine the royalty due to the state, and the state, at a later date, could determine more was due than originally expected, according to the Division of Oil and Gas.

The six House members voting against the bill included Democrats and Republicans. Rep. Eric Croft, D-Anchor-age, was one. He said there were good arguments for and against the bill. For instance, he said it is prudent to have confirmation that a reported sale price of the state's gas represents a fair market value, as HB 57 requires.

"But I don't think it is appropriate to give a $4 million a year subsidy (the annual rate of loss to the state by FY 2009 is estimated at $4.4 million) to a major international corporation when the governor is asking for individual Alaskans to pay a new laundry list of taxes," Croft said.

Croft also questioned the logic of lowering the price when demand is high and supplies low. He said Agrium, which is desperate to buy gas, isn't some corner mom-and-pop operation, but rather a huge corporation able to handle price fluctuations.

"The biggest factor for me (in voting against) was how do we justify losing $4 million a year by 2009?" he said.

Croft said the move might be justified if the state had a balanced budget, but it doesn't. Yet while lawmakers decry pending economic doom, they continue shoveling subsidies out the back door. He called it the Will Rogers approach to special interests.

"This Legislature has never met a subsidy for major corporations it hasn't liked," he said. "They are being very generous with your money."

Rep. Ethan Berkowitz, D-Anchorage and the House Minority Leader, said he voted for the measure because he expects amendments addressing some of his lingering concerns to be forwarded in the Senate -- amendments that would address not so much price issues, but the availability of gas. Tinkering with price would have minimal impact on Agrium at the end of the day, Berkowitz said.

He said he had been unaware until just the other day that Agrium was considering layoffs. Had he known of that possibility, he said, he might have held the bill back for a while to do some more investigating.

"We did not have all the facts," he said.

He acknowledged that the loss of royalty revenues is a big deal for the state at this time. But if Agrium goes away because production becomes unprofitable, that would mean an even greater lost to state coffers, he said.

State leases under the current contract between Unocal and Agrium would not be subject to House Bill 57 provisions. The two companies currently are in litigation over that contract.

According to the division analysis, should Agrium and Unocal negotiate a new, low-price contract to replace the current contract, "the royalties foregone (by the state) could nearly triple, from $11.5 million to $29.5 million."

Agrium, however, has said it does not intend to renegotiate the contract in such a way that a replacement would fall under the provisions of House Bill 57, the division said.

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