To: Pete Sprague, Assembly President

Assembly Members

Thru: Dale L. Bagley, Mayor

From: Bill Popp, Oil & Gas Liaison

Date: February 6^th, 2003

Subject: House Bill 57 and Senate Bill 50

The Administration requests the support of the Assembly for House Bill 57 and Senate Bill 50. These companion pieces of legislation would allow the Commissioner of the Department of Natural Resources the discretion to enter into agreements with non-affiliated natural gas producers to accept as the price for the State's royalty share of natural gas the price established in an arm's length contract negotiated between the natural gas producer and Agrium Kenai Nitrogen Operations and any other manufacturer that uses Alaska natural gas to create value added products. Currently, under AS 38.05.180, this type of fixed royalty pricing arrangement is allowed only for public electrical utilities as a means of offering price certainty for natural gas for use in power generation.

Traditionally, the State of Alaska usually takes 12.5% of most produced natural gas as its royalty share of the resource, most of which is sold through an "in-kind" agreement where the producer acts as the selling 'agent' for the State. Further, the State of Alaska maintains an expectation that it will receive the highest prevailing value for its royalty share of natural gas sold. This value is calculated on a quarterly basis. Using this method has resulted in broad fluctuations in the value of royalty natural gas.

Agrium has requested this legislation to provide for a more stable cost structure for the natural gas it relies on as a feedstock for its Nikiski facility. Under the current system, Agrium faces the potential for broad future price swings and retroactive royalty payment demands from the State for past royalty payment adjustments. This lack of price certainty makes it very difficult for Agrium to establish sound business planning for future production and capital investments.

It should be noted that the proposed legislation will apply to any non-affiliated manufacturer of value-added products that use natural gas as a feed stock. Affiliated companies such as the ConocoPhillips LNG facility, where the supplier of natural gas also owns the value-added manufacturing facility, will not qualify for this kind of royalty gas pricing agreement.