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Alaska's Stranded Gas Act

Legislation routinely referred to as the Stranded Gas Development Act originally passed in 1998 (HB393), with amendments passed in 2003 (HB16), to encourage a gas development project in Alaska. The legislation offers sponsors of such gas projects the opportunity to negotiate fiscal contracts with the State of Alaska, both to increase the theoretical certainty for calculating taxes and royalties over the life of a project, thus increasing the competitiveness of the project, and to reduce fiscal risks.

The Legislature found that although the state can do little to reduce expected construction costs, the state could reduce some financial risk associated with a stranded gas development project by adjusting the timing of the state and local government receipts of its share of the economic rent of the project. It found that the present fiscal regime is front-end loaded, which means the state and local governments take a significant part of their share of the economic rent of a project early in the life of the project, even before the project starts to generate a revenue stream. The state administration and legislature believed the state and local governments could improve the economics of a stranded gas development project by taking their shares of the economic rent of a project later in the life of a project.

The legislation eliminated the affected municipalities' ability to collect property taxes from any stranded gas project that is developed within the parameters of the Act. Instead, the state will negotiate a payment in lieu of taxes for the municipalities, presumably reducing or eliminating municipal taxes during the construction and ramp up of the project, and allowing for a revenue stream to municipalities when the project becomes profitable. Under the legislation, a sponsor of the stranded gas development project is required under the application process to provide a “detailed description of options to mitigate the increased demand for public services and other negative effects caused by the project.”

The purpose of this legislation is to make a gas pipeline project in Alaska feasible. The state government has determined that this activity is in the best economic interest of the state. It will become important in negotiations between state officials and representatives of the company proposing to do the project that the savings to the company and the relative decrease in project cost be explicitly laid out.

For affected municipalities, it is essential that the state negotiate a deal in which the state and the municipalities through which the project will run will receive an economic benefit greater than that given to the project company in the form of tax relief.