Lengthy to-do list remains for Alaska LNG negotiators
There is a long list of commercial issues yet to be resolved in the Alaska LNG Project negotiations but many of these may be combined, so the number of agreements, in the form of contracts, is yet to be determined, sources familiar with the negotiations have told the Journal.
At the top of the list are four items important to the state of Alaska, two of which Gov. Bill Walker hopes to see resolved by early December. They are:
• Gas balancing agreement: Sometime called a gas supply agreement, which spells out how and when gas will be withdrawn from the two fields supplying Alaska LNG: the Prudhoe Bay and Point Thomson fields.
This agreement is between the three Slope producers — ExxonMobil, BP and ConocoPhillips — and is complex because of differing ownership levels at the two fields. ExxonMobil and ConocoPhillips each own about 36 percent of the gas at Prudhoe, and BP another 26 percent. At Point Thomson, ExxonMobil and BP own about 93 percent of the gas and ConocoPhillips less than 5 percent.
About 75 percent of the gas for the project is to come from Prudhoe and the remainder from Point Thomson. The gas at Prudhoe, unlike at Point Thomson, is used to enhance oil recovery.
• Withdrawn partners agreement: This would spell out terms for a partner withdrawing from the project and clarify how the partner’s gas, as a producer, will still be available for purchase through the project.
Other issues pending include:
• Fiscal agreement: This would stipulate that state taxes on gas produced for the project would not change over the terms of LNG sales contracts, which could span 20 years to 25 years. Purchasers of the LNG will require this provision, or at least will ask producers to absorb any state tax increase, which the producers will not do.
The state constitution currently forbids long-term tax deals, so a constitutional amendment will be needed.
Sources have told the Journal that attorneys for the state and the companies are currently debating whether a narrowly-drawn constitutional amendment is possible, such as one that relates to specific contract terms, or whether the amendment will have to be more broadly written.
Alaska voters are considered more likely to approve a narrowly-drawn amendment than a broadly-written approval.
• Governance agreement: This would provide the long-term framework on how the project would be managed and how costs would be allocated. Decisions have to be made on whether a stand-alone operating entity, such as Alyeska Pipeline Service Co., would be created.
This is needed by late 2016, the time that the project would move into final engineering, if that happens. As it has been described the governance agreement would guide the work on final engineering, construction and operations.
• Expansion agreement: This is a request by the state, and it involves how a physical expansion of the project, such as if there were more gas to be shipped, would be funded and managed. Sources said this may wind up being rolled into the governance agreement.
• PILT, impact payments: It was revealed Sept. 23 that the producers have agreed to pay the state $16.5 billion for property tax obligations and community construction impacts related to the Alaska LNG Project.
Revenue Commissioner Randy Hoffbeck made the announcement during a Municipal Advisory Gas Project Review Board meeting in Fairbanks.
Of the $16.5 billion sum, $800 million would be for community impact payments during construction. Afterwards, $15.7 billion would be payments in-lieu of tax, or PILT, substituted for property tax payments in project infrastructure and property holdings, according to Hoffbeck.
The negotiated $800 million amount is a “fairly firm” number, Hoffbeck said, and would pay for increased public services — police, fire and other first responders — needed in communities along the project corridor that grow from an influx of construction workers.
How the massive dollar figures will be allocated amongst the state and the communities affected by the project still needs to be worked out. Whether or not the state’s purchase of TransCanada Corp.’s share of the gas treatment plant and the pipeline — done after the PILT and impact amounts were announced — plays into how much money is distributed is another question Kenai Peninsula Borough Mayor Mike Navarre has raised.
The board consists primarily of mayors of local governments along the project route from the North Slope to Nikiski on the Kenai Peninsula. The state commissioners of the Natural Resources, Revenue and Commerce departments also serve on the board.
The next Municipal Advisory Gas Project Review Board meeting is scheduled for Dec. 7 in Anchorage.
• Contract operator service agreement: This would govern how a company acting as project operator, currently ExxonMobil Corp. in the preliminary engineering now underway, would perform its duties.
• Member services agreement: This could be a separate agreement, providing administrative services like independent accounting, to support the contract operator. This could be rolled into the contract operator service agreement.
Sources told the Journal that ConocoPhillips has been asked to provide the administrative support function until decisions are made on a possible independent operating company.
• Capacity release agreement: This would cover how an owner of capacity in the project, most likely a producer, would release it to other parties if there is spare capacity. The state wants this in place as an assurance to third party access, such as independent explorers.
• In-state sales agreement: This is needed to spell out whether and how producers, or the state, will offer gas for in-state sales, such as to utilities.
Sources told the Journal that the producers are not keen to supply in-state needs because they would prefer all of their gas go to long-term export customers, and that they would prefer that the state supplies in-state needs with its gas.
The state is concerned that if it is the only supplier of in-state gas there will be huge political pressure to sell state gas at a discount. Having producers among the sellers of gas to in-state customers would provide a buffer against these kinds of pressures.
• Financing of spur lines and gas conditioning facilities at gas take-off points: The Alaska LNG Project has agreed to at least five of these, but there could be more, as many as 20. The governor is pressing the producer members of Alaska LNG to allow the project to pay for these, including spur pipelines of several miles, such as will be needed to connect the Alaska LNG pipeline to Fairbanks.
This is still an issue on the table. The producers thought that Alaska Gas Development Corp., the state gas corporation, was supposed to be responsible for this, which is spelled out in Senate Bill 138, the legislation providing the framework for state participation.
So far, AGDC has funded the engineering and design of the “kits,” or facilities, needed at the takeoff points, but there have been no decisions made on where the points will be except for one near Fairbanks, in the Matanuska-Susitna Borough and on the Kenai Peninsula.
Who would fund the takeoff kits and spur lines is also undecided.
Tim Bradner can be reached at email@example.com.
Journal reporter Elwood Brehmer contributed to this article.