AGDC, producers approve 2016 spending

Alaska Gov. Bill Walker said he gave the OK Dec. 3 for the state to vote “yes” on continuing work on the Alaska LNG Project after receiving commitments from two North Slope producing companies that they would not withdraw from the project without negotiating to sell their gas.

That same day the partners in the project, BP, ConocoPhillips, ExxonMobil and the state, voted to approve a $230 million 2016 budget and work plan to complete preliminary engineering work. The state’s share of that is 25 percent, or about $57 million.

BP and ConocoPhillips signed the agreement making the assurances on a withdrawal to Walker Dec. 4, a day after the partners’ vote to approve 2016 spending. ExxonMobil, the third partner in Alaska LNG and the project manager, did not sign on to the agreement.

The company did vote to approve the 2016 budget along with the other partners, however.

Walker was previously worried that an exit from the project by one of the Slope producers at a critical time could leave the project stranded without enough assurance of throughput for financing and construction. Costs are estimated at $45 billion to $65 billion.

In a briefing Dec. 4, Walker said having assurances from two of the three producers is good enough. He said he had spoken by telephone with senior officials at ExxonMobil, the holdout in joining the withdrawal agreement, and was given verbal assurances similar to those from BP and ConocoPhillips. 

“Now we know we have gas committed to the project, and this is critical. A piece of pipe without gas is no good,” Walker said.

On ExxonMobil, the governor said, “it is still a partner and is continuing to work in good faith,” on the Alaska LNG Project. 

The withdrawal agreement between the state, BP and ConocoPhillips was released Dec. 8 and states that good faith efforts to sell gas to the “state or its designee” will be made by either company withdrawing, and that gas would be made available under “mutually agreed commercially reasonable terms.”

The agreement states that what is “commercially reasonable” shall be at the sole discretion of each party. It also has a “no liability or damages” section that states no party is required to enter into an agreement and cannot be held liable for any sort of damages to the project, including loss of actual or potential profits.

Sources familiar with the exchanges said the phrase “reasonable terms” implies agreement from both buyer and seller on prices and other terms. It is similar to language that now exists in state oil and gas leases under which an oil company lessee has an obligation to develop and sell resources if reasonable terms are offered.

This is the “duty to produce” covenant that the governor and Attorney General Craig Richards have often spoken but it has proven difficult to enforce in lawsuits brought in other states involving similar language in leases, the source said.

Walker originally pushed for more definitive terms of a potential sale agreement from a withdrawing partner, which might have involved setting a price, but appears to have backed away from this, possibly because of the complexities of the issue and the uncertainties it would have raised for the entire gas project.

In his Dec. 4 briefing the governor said the state itself might be willing to buy gas from a withdrawing partner, and then resell it.

“This is one option we’re looking at,” Walker said.

The state’s gas corporation, the Alaska Gasline Development Corp., has the authority to purchase and sell gas, acting as a gas aggregator, through a subsidiary company formed last fall for that purpose.

AGDC’s intent with this, for now, is to buy and sell gas to Alaska communities, its officials told a legislative committee during a special session of the Legislature in November. Legislators on the committee pointed out that the legal charter for the subsidiary appears to be broad enough so that the state could resell gas, as LNG, in international markets.

Purchasing gas from a withdrawing partners would be a big financial undertaking for the state that would be on top of the state’s current commitment to finance 25 percent of Alaska LNG Project construction costs that could exceed $50 billion.

Alaska now owns 25 percent of the North Slope’s known 35 trillion cubic feet of gas and now owns the same percentage of the Alaska LNG Project after completing the purchase of TransCanada Corp.’s share of the pipeline and North Slope gas conditioning plant.

Previously, the state held 25 percent of the large natural gas liquefaction plant at the southern end of an 800-mile pipeline planned to be built from the North Slope. Having bought out TransCanada, the state how holds 25 percent of the pipeline and North Slope gas treatment plant, bringing its share of those into alignment with ownership in the LNG plant and the state’s own gas reserves.

Meanwhile, the approval of the 2016 project budget will allow the pre-front end engineering and design, or pre-FEED, to be completed, with a target date by mid-year.

Commercial negotiations are meanwhile underway among the partners on several agreements still needed, and these have to be completed before the next step is taken on the technical work, the final engineering or front end engineering and design, or FEED.

Steve Butt, the ExxonMobil manager heading the technical work on the Alaska LNG Project, said the latest target date for a decision on FEED is mid-2017. Butt said the project is still on schedule in terms of the original agreements among the companies.

There had been hopes previously that the FEED decision could have been made in late 2016.

The commercial negotiations include several issues including a complex gas “balancing” agreement among the producers who are part of the Alaska LNG Project which sets out how gas will be made available if there are technical upsets in one of the two fields supplying gas, Prudhoe Bay and Point Thomson.

A second important negotiation, on a so-called “governance” agreement, is on the legal and commercial structure for managing the project as it moves through the FEED process to a Final Investment Decision, construction and operation.

Currently the commercial structure in place, where ExxonMobil is project operator on behalf of itself and other partners, governs only the pre-FEED work now underway.

Eventually a stand-alone operating company similar to Alyeska Pipeline Service Co. might be formed to operate the project in its construction and operation phases, as Alyeska did for the Trans-Alaska Pipeline System.

Also pending is a deal to fix the state’s fiscal terms, on royalty and tax, for a period of years, very likely equal to the terms of LNG sales contracts. This will require an amendment to the state constitution that must be voted on by the public in a state general election.

The next general election is in November 2016. If the negotiations are not completed in time for the Legislature to approve the amendment by June 24, 2016, the next general election is in 2018, effectively delaying the Alaska LNG Project by two years.

The negotiators’ schedule currently calls for the agreements to be completed by spring in time for a special session of the Legislature following the end of the regular session. 

If things proceed as planned and the voters approve the amendment, a decision on final engineering, or FEED, in 2017 will allow the partners to make a Final Investment Decision in 2019, after which construction could start.

The project could then be in operation in 2025 and could export up to 20 million tons of LNG yearly.

Tim Bradner can be reached at [email protected].

12/09/2015 - 4:29pm