Producers want gas by 2025. Does Walker?

When it comes to the Alaska LNG Project, it appears Gov. Bill Walker is more interested in negotiating the pre-nup than he is in planning the wedding.

With his latest shot from the hip directed at the project so critical to the future of Alaska, Walker is pitching the idea of some kind of natural gas reserves tax levied against producers who decide against participating in AK LNG.

Walker called the Legislature into a special session beginning Oct. 24 to review gas reserves tax legislation in addition to appropriating funds from the Constitutional Budget Reserve to buy out TransCanada’s interest in the project.

However, Walker has no bill for the Legislature to consider yet on the gas reserves tax and he was unable to explain how it would work at his press conference Sept. 25.

There is no bill to review because Walker decided to push for the gas reserves tax sometime between his meeting with House and Senate leadership on Sept. 21 and his call to a special session Sept. 24.

Responding to legislators who said they were blindsided by his tax proposal after he did not mention it in their Sept. 21 meeting, Walker claimed that he told them he was “working on” something for project certainty, as if they should have interpreted that as him planning to ask for a gas reserves tax.

Walker said he was “hoping” to hear something from his negotiating team on terms of a withdrawal agreement he has been seeking since taking over the effort last December. When no accord was reached, Walker decided to seek a gas reserves tax instead.

“This is in place of the withdrawal agreement,” Walker said Sept. 25.

Much like his announcement through a newspaper column in March that he wanted to pursue a state-owned, competing gas project to AK LNG, Walker doesn’t have a plan beyond getting in front of a microphone and repeating a bunch of populist pablum about “Alaska first” and justifying his actions by raising the unfounded specter of a producer pulling out of the project.

One of Rep. Don Young’s favorite expressions about government regulation is “a solution in search of a problem,” and that certainly applies to Walker’s threat to use a gas reserves tax against producers who have shown no indication they are walking away from AK LNG.

This is all likely a moot point, though, as Walker has a better chance of convincing President Obama to open ANWR than he does of selling the Legislature on a bill he can’t even describe yet.

Walker also said Sept. 25 that he spoke with each of the three North Slope partners the day before and, “I have not received a strong outcry from the producers on this. It’s only a problem if they’re not going to allow the gas they control to be used in a project. That would be an admission to me that they have no intention of doing a project. So let’s find that out now rather than 10 years from now.”

It didn’t take 10 years, but about 10 minutes, before both ExxonMobil and BP issued statements against the idea of a gas reserves tax. Exxon said it would “undermine” the project and BP said it would make it “more difficult.”

By Walker’s reasoning, their objections must mean BP and Exxon “have no intention” of doing the project.

Of course, no such thing is true, and it illustrates how Walker’s words routinely outrun decorum when he talks about the state’s project partners or the legislators he described as “un-Alaskan” back in March when they introduced a bill to stop his competing gas project.

Walker complains that the state has no leverage with the producers to keep the project on track for a mid-2020s startup for gas sales. He should read the filing BP and Exxon made with the Alaska Oil and Gas Conservation Commission on Sept. 8 in support of their request for additional gas offtake at Prudhoe Bay to supply the AK LNG Project.

In the document, the companies state unequivocally that a 2025 startup for a major gas sale project results in a four-fold increase in total hydrocarbon recovery from the Prudhoe Bay pool compared to oil alone, and every year of delay reduces potential gas sales as it would continue to be used to fuel operations supporting oil recovery.

Without a gas project, it becomes less and less economic to maintain the North Slope oil infrastructure that will have been in place for nearly 50 years by 2025.

From the filing: “A later MGS (major gas sale) start-up also increases the uncertainty that the project can deliver a full 30-year project life due to declining oil production and revenues which underpin the project, and due to increasing project risk from aging facilities which could reduce project life and thus ultimate recovery, reducing the potential incremental recovery relative to a 2025 start-up.”

According to the BP-Exxon filing, a 2040 startup compared to 2025 would result in a reduction of about 1.5 trillion cubic feet in gas sales versus an increase in oil production of only about 100 million barrels.

Considering the billions of dollars the three producers have invested on the Slope, that sounds like a whole lot of motivation to make AK LNG happen on schedule.

Although it was bad enough, the gas reserves tax floated by Walker on Sept. 25 wasn’t the only discomforting thing he said at his press conference.

He dismissed as “absurd” a question about how the state would finance a quarter of a $60 billion project if it buys out TransCanada, or how it could finance even more if a producer pulled out.

Before the state could try to finance $15 billion, it will cost the state at least $108 million to buy out TransCanada, plus cash calls for the remaining pre-front end engineering and design, or pre-FEED, and another $500 million for its share of the $2 billion FEED process that is supposed to begin next year if all parties agree.

And if there’s no real budget reform passed in the 2016 session, credit rating agencies intend to rapidly downgrade the state’s credit status, which will only drive up any financing costs.

Walker went on to suggest that the state could sell part of its 25 percent share in the project to some of the Asian customers he recently met with in Japan as a means to finance the project.

He cannot be serious. It is an irreconcilable position to demand Alaska be in the driver’s seat of this project and also contemplate selling off pieces of the state ownership to Japanese customers who do not have the state’s best interests at heart.

Surely there are some over there who would be glad to spend a few billion up front that they can write off against cheap gas over 20 years, but does that sort of deal maximize the value of the resource for Alaska?

Walker said he wants “project certainty” from the producers, but at the same press conference he said, “the market is going to determine if it’s going to happen. The financial markets are going to determine if it’s viable.”

In other words, there is no way for the producers to give him a guarantee of project certainty at present when by his own admission the consumer and financial markets will determine whether AK LNG advances.

Finally, Walker once again cited the multiple LNG projects under consideration by ExxonMobil as reasons for the state to be ready to go it alone or without one of the current partners.

“I can’t control when we’re competing with eight other projects for one company, how we’re going to stack up in that queue,” he said.

For the leader of an “owner state,” Walker has plenty of control for how AK LNG stacks up, and his latest idea doesn’t do anything to move it ahead in line.

Andrew Jensen can be reached at [email protected].

Updated: 
11/24/2016 - 12:51pm