A critical year lies ahead for Alaska LNG Project agreements

The coming year is a critical one for the Alaska LNG Project. Continued progress on Alaska LNG is vital to Alaska’s long-term economy, and the state budget. If targets are missed, the state’s future, already cloudy because of short-term state revenue issues, will be challenged.

If the project does proceed, the sales of natural gas from the North Slope, as liquefied natural gas, or LNG, will bring new petroleum revenues to the state to replace declining oil income.

Also, the construction of a $45 billion to $65 billion project will also be huge stimulus to the state’s economy, reminiscent of the building of the Trans-Alaska Pipeline System in the 1970s.

Steve Butt of ExxonMobil, the project manager, will provide an update of a pending labor-needs study for the what’s known as a “giga” project at the Alaska Support Industry Alliance’s annual “Meet Alaska” conference Jan. 8.

Alaska LNG involves an 800-mile gas pipeline to be built from the North Slope south through the Interior to Southcentral Alaska. The project involves a large gas treatment plant at Prudhoe Bay mainly to remove carbon dioxide from the gas, the pipeline itself with a thick-wall pipe diameter at 42 inches or 48 inches (both cases are still being studied) and a large natural gas liquefaction plant at Nikiski, the planned terminus of the pipeline on the Kenai Peninsula.

Each of the three components are mega-projects in themselves, which led AK LNG to be dubbed a “giga” project by some.

Key decisions have to be made in 2016, however. At the forefront are agreements on a set of commercial contracts among the parties involved in the project, which includes the state and the three major North Slope producers: BP, ConocoPhillips and ExxonMobil.

Each partner would own about one-fourth of the project, a share that is in line with the parties’ share of North Slope gas reserves, including the state. The concept is that each owner will ship its share of gas through its owned capacity in the project, so that profits are made not only on gas production and sales but also the transportation and processing services.

The most important agreements needed include a gas “balancing” contract among the producers that will govern how gas supplies are to be made available if there is a technical problem with production in one of the two fields supplying gas, Prudhoe Bay and Point Thomson.

At least one of the partners — ConocoPhillips — says the gas balancing agreement is critical to its participation.

This is a complicated issue because the producing companies own differing percentages in the two fields, and arrangements for compensation for emergency gas supply must be worked out in advance.

The second most important agreement — and this one is a “must have” for all three of the producers — is a contract on state fiscal terms on gas production, which would assure the companies, and LNG customers, that state taxes on gas won’t change for a period of several years, mostly likely the 20-year or 25-year term of LNG sales contracts.

This is a needed because the economic margins in gas production are very thin and the state has a record of frequent changes in taxes on oil production. Without it, buyers are unlikely to sign long-term LNG purchase contracts.

A new twist is that an amendment to the state Constitution is needed to allow this, because the constitution now prohibits any Legislature from locking in taxes that a future Legislature can’t change. Alaska voters will have to approve the amendment in the November 2016 general election.

That approval is vital if the project is to continue to the next step in mid-2017 of doing final engineering, or front end engineering and design.

A critical deadline on this is June 24. That’s when a proposed constitutional amendment, approved by the Legislature, must be transmitted to the Division of Elections for placement on the November general election ballot.

If the deadline is missed, the next general election is in November 2018. This would effectively delay Alaska LNG for two years. And, if voters turn down the amendment the companies and the state have no “plan B”, or alternative method of assuring LNG buyers there would be no changes to state tax terms.

If the fiscal terms agreement is reached — there’s no guarantee of that — and if the Legislature approves the deal and the constitutional amendment — no guarantee of that, either — the proponents of the amendment will have to convince the public that a “yes” vote is a vote on the Alaska LNG Project itself.

Meanwhile, there were some important changes in the project in the latter part of 2015, three of them done at the request of Gov. Bill Walker.

One was the governor’s decision for the state to take over TransCanada’s share of the pipeline and gas treatment plant so that the state would own a uniform 25 percent of all three parts of the project: the gas plant on the Slope, the pipeline and the LNG plant.

Previously TransCanada owned 25 percent of the gas plant and pipeline with the state owning only 25 percent of the LNG plant. There is potential for misaligned interests when the state ships its one-quarter share of gas through parts of the project it doesn’t own.

The new arrangement solves that problem, but it also means the state must finance a full one-quarter share of the project cost, which will be in the range of $13 billion or more. Previously TransCanada would have arranged financing for its share of project costs.

The Legislature agreed to fund the TransCanada buyout in a November special session.

Another change, or at least potential change, came in early autumn when the governor asked the industry partners to pursue a more detailed assessment of a 48-inch pipe diameter to be considered alongside 42-inch diameter pipe that appears to be optimum, for now at least.

The governor argued that building in extra capacity now would allow for more efficient shipping of gas if new gas discoveries are made, which state geologists believe will be the case.

Alaska Gasline Development Corp., which owns the state share of the project, will also have to find a new president after Walker obtained former CEO Dan Fauske’s resignation on Nov. 20. The board of directors for AGDC has hired a consulting firm to conduct a worldwide search for a new president.

 

Updated: 
12/22/2015 - 4:10pm

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