With state role in LNG approved, special session likely



With the Legislature’s approval, at least in concept, for state participation in a large North Slope gas pipeline and natural gas liquefaction project, state officials are now working to execute the agreements for work on pre-Front End Engineering and Design for the giant project.

Also, preliminary agreements will be signed with TransCanada Corp. for the pipeline company to become the state’s partner in a 25 percent share of the pipeline and North Slope gas conditioning plant, Alaska Natural Resources Commissioner Joe Balash said.

Following that, the state’s current contract with TransCanada under the Alaska Gas Inducement Act, or AGIA, will terminate, he said.

The pre-FEED involves more detailed engineering and design work that will be beyond the conceptual-level studies of the project so far and will lead to a better estimate of costs, which are currently expected to range between $45 billion and $65 billion, Balash said.

The pre-FEED cost is pegged at about $450 million and the state’s 25 percent share of that would be $112.5 million, but a hefty share of that, for the pipeline and gas treatment plant, will actually be paid by TransCanada, Balash said.

The state would own a full 25 percent share of the large natural gas liquefaction, or LNG, plant planned in Nikiski at the southern terminus of the pipeline.

If the state decides not to proceed with a partnership with TransCanada, the pipeline company will have to be repaid.

Balash said the pre-FEED work will be done in 2015 but that the refined cost estimates would not be available until later in the year. If the results are favorable and decisions are made to continue, the parties will begin the full Front End Engineering and Design phase involving much more detailed work that would set the stage for a Final Investment Decision, the go or no-go, in 2019.

Meanwhile, work will also begin immediately on negotiating the formal Participation Agreements for the state’s involvement in the project. These are the actual partnership documents not only between the state and North Slope producers BP, ConocoPhillips and ExxonMobil, but among the companies themselves.

Balash said that agreement, which will be very detailed, must go back to the Legislature for approval but that this wouldn’t happen during a regular 2015 legislative session but in a special session that would be called later in the year, he said.

“There will likely be some legislation dealing with property tax issues, which affect municipalities, during the regular session,” but the big decisions will be left for a special session, Balash said.

What will be separately negotiated is the state’s gas shipping contract with TransCanada. The state will be taking its royalty and production tax in-kind, or in the form of gas, and this will amount to 25 percent of the North Slope gas production. 

Because TransCanada will own, and finance, the 25 percent of the gas treatment plant and pipeline, the state must enter into a long-term contract with the pipeline company to ship the state’s 25 percent share of the gas. This will be a binding “take or pay” contract that will allow TranCanada to finance the construction, and once signed, the state is legally obligated.

This will be a long-term, multi-billion-dollar commitment. The gas shipping contract with TransCanada and the Participation Agreement with the producers are to come before legislators in the same 2015 special session.

Balash said one of the sticky parts of the Participation Agreement will be some kind of agreement on fixing the fiscal terms for the project, a must-have for the North Slope producers.

“We don’t yet know what form this might take, or how we would define fiscal ‘certainty,’ but it’s important because all the parties have to be able to count on the future cash flows. The form of this hasn’t been worked out yet,” Balash said.

The discussions mainly involve the state production and property tax. Corporate income taxes are not part of the deal, he said.

A fix on fiscal terms like taxes, meaning an assurance to the producers that taxes wouldn’t increase over a period of years, is sensitive politically and is also legally complicated.

Some legislators are also concerned that the administration will be pushed to include a freeze on oil taxes along with gas taxes. This happened when former Gov. Frank Murkowski was negotiating a similar state gas pipeline participation deal in 2006. Murkowski reluctantly agreed to it in return for other concessions by the producers, but it evoked strong criticism in the Legislature and helped doom the initiative that year.

On taxes, the state constitution prohibits one Legislature from “binding” another, which means there is no legal way legislators can make an assurance that a future Legislature might not change taxes.

This limitation is recognized by all parties and the consensus is that any assurance of fixed tax terms, even in the form of a contract, would amount to a kind of moral pledge, but one which can’t be legally enforced.

The state has made moral pledges in many kinds of agreements, including a moral pledge for backing of public revenue bonds, and the Legislature has never allowed any of these pledges to be reneged on.

Also, the Legislature has already provided for assurance on taxes and royalty terms in the AGIA contract with TransCanada although any new agreements would be in a different form.

The state taking its gas production tax in-kind lends some assurance to the partners on taxes because the state, though TransCanada, will be investing in pipeline capacity to ship this gas.

The royalty share, in contrast, is fixed by contract in the lease at amounts ranging from 12.5 percent to 16.6 percent depending on the lease and those amounts won’t change, although there are issues in how the royalty is administered.

Having the state take its royalty in-kind and make its own shipping arrangements is important to the producing companies because it eliminates the possibility of disagreements over royalty values when the royalty is paid in cash.

These kind of disagreements became a real problem after the Trans-Alaska Pipeline System was completed in 1977, and the resulting litigation, known as the Amerada Hess case, was to cost all parties hundreds of millions of dollars before a settlement was finally reached.

The producing companies want to avoid these kinds of disputes with the gas pipeline, and having the state take its royalty in kind and sell the royalty gas itself solves these problems, the producers have said.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.

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