BP agrees to help state on gasline development

  • BP Alaska Vice President of Commercial Ventures Damian Bilbao, seen testifying to the Legislature about oil taxes in 2013, told the House Resources Committee on Jan. 23 that BP would commit staff and resources to the Alaska LNG Project as well as consult on the hiring of third-party contractors under the cooperation agreement signed with the state a day prior. (Photo/Becky Bohrer/AP)

JUNEAU — Alaska still has one partner in its $45 billion liquefied natural gas export project.

BP and the Alaska Gasline Development Corp. announced an agreement of cooperation Jan. 23 “to collaborate in the development” of financing and customer contracts for the Alaska LNG Project, according to an AGDC press release.

The agreement comes less than a month after the state-owned corporation, BP, ConocoPhillips and ExxonMobil finalized a deal to transfer more than $500 million worth of early engineering and regulatory work done on the project under the former, four-party participation structure. That left AGDC to lead the megaproject that has been challenged by an oversupplied world LNG market through the federal permitting process.

AGDC President Keith Meyer said in the release that “BP’s input will be invaluable” as the project proponents seek customers to underpin financing.

This year will be a pivotal year for the long-term project, as AGDC leaders and Gov. Bill Walker have said it will be spent determining if there is a market for Alaska’s North Slope natural gas. AGDC is also hoping to submit its environmental impact statement application to the Federal Energy Regulatory Commission by June, kicking off 18 to 24 months of permitting and regulatory review.

Getting a timely — and favorable —decision from FERC will be critical to get the project producing LNG by 2025. A mid-2020s startup would meet the “market window” Meyer and the governor contend is available to the Alaska LNG Project as global demand increases and large contracts other LNG suppliers have with Asian buyers begin to expire in number.

Walker and Meyer have taken ample criticism for taking over the project. Opponents, including legislators from both parties have questioned the state’s technical and fiscal capacities to manage one of the largest infrastructure projects in the nation’s history while mired in $3 billion-plus annual budget deficits.

BP put its moral support behind the governor’s plan during an August legislative update on the Alaska LNG Project, saying the company’s portion of the 35 trillion cubic feet, or tcf, of North Slope natural gas is the largest undeveloped resource in its global portfolio.

ConocoPhillips and ExxonMobil reiterated their willingness to sell gas into the state’s project during Jan. 23 House and Senate Resource Committee hearings on the project but for now anyway will remain at arm’s length when it comes to paying for and building the 800-mile underground gas pipeline with a gas treatment and LNG plant at each end.

BP Alaska Vice President of Commercial Ventures Damian Bilbao testified during the hearings that the company would commit staff and resources to the project as well as consult on the hiring of third-party contractors under the cooperation agreement signed a day prior.

Bilbao did not specify BP’s exact levels of contribution, but House Resources co-chair Rep. Geran Tarr, an Anchorage Democrat, said during a Jan. 24 press conference that she was told BP would be open to funding 21 percent of project costs under the agreement, which would be equal to the company’s share under the previous joint-venture iteration of project ownership — also its equity stake in North Slope gas resources available to the project.

AGDC Vice President of Program Management Frank Richards said to the committees that the corporation has $104 million remaining in funds set aside by the Legislature for Alaska LNG and the smaller Alaska Standalone Pipeline, or ASAP, the corporation’s first project mission, and would not be requesting further funding for the large project in 2017.

While AGDC already has money for pursuing the projects, the corporation’s operating budget — $10.3 million this fiscal year — covering personnel, office leases and employee travel must still be authorized by the Legislature.

Tarr, who has also been a state-led skeptic, said she would be comfortable with allowing AGDC and the administration to pursue the project through the end of the year, but added, “that’s probably as far as I want to go” if significant progress on the customer and financing fronts is not made in 2017.

The agreement ends Dec. 31, 2017, but either side can end it after July 1 with 30 days notice. BP can cut ties if AGDC deviates from its FERC filing plan, speeds up the project schedule or if the state imposes a reserves tax on the company’s North Slope gas.

Walker floated the idea of a reserves tax on unproduced natural gas and then withdrew it before a special session in fall 2015 when the Legislature agreed to appropriate the funds to buy TransCanada out of the project.

Following that session, Walker announced that ConocoPhillips and BP had given him letters assuring him they would sell gas into the project under mutually agreeable commercial terms.

It became apparent in late January 2016 that something would have to change if the Alaska LNG Project was going to remain viable. At that time state officials said commercial negotiations between the three producers were not progressing as hoped.

On top of that, oil prices bottomed out around $26 per barrel and a depressed LNG market led the companies several weeks later to give the Walker administration the option to either slow the pace of the project and keep the same structure in place or have the state take the reins.

The governor chose the latter on the premise that state-owned infrastructure in the project could reduce the federal tax liability, which is a significant cost.

Additionally, the administration believes that getting large investment funds to invest in the project could, which presumably will require lower long-term rates of return than the oil majors could improve the economic competitiveness of Alaska LNG.

A study presented to the Legislature last August by the energy research firm Wood Mackenzie found a third-party financed Alaska LNG Project with at least some tax exemptions might marginally competitive in the global market at current energy prices, but probably would have considerably better project economics than one that was mainly equity funded by the producers.

Anchorage Republican and Senate Resources chair Sen. Cathy Giessel, a staunch skeptic of the state leading the project, commented to Bilbao she’s happy BP “recognized that AGDC could use some help.”

FERC filing

AGDC’s Richards said the state is hopeful it will have a record of decision from FERC for the project’s environmental impact statement by mid-2019 if the corporation can submit its EIS application this June. That is based on a roughly two-year timeframe that the federal agency has used to review other large projects.

Larry Persily, an oil and gas advisor and acting chief of staff to the Kenai Peninsula Borough Mayor said in an interview that AGDC’s expectations in regards to FERC’s process are not unreasonable even though the Alaska LNG Project would likely be the largest and most complex EIS the agency has undertaken.

Persily is also the former federal gas pipeline coordinator for Alaska.

Permitting the North Slope gas treatment plant and the Nikiski LNG plant and marine terminal should be fairly straightforward, he said, but the 800-mile pipeline will assuredly be the most complex portion of the project to get federal approval.

And that approval will not be cheap, Persily noted.

FERC hires out EIS work to private contractors and the cost is born by the project proponent — in this case the State of Alaska.

“You probably start at $100 million and go north from there,” Persily said.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

This story has been updated from an earlier version to include details about the project's FERC filing.

Updated: 
02/01/2017 - 12:41pm

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