Withdrawal agreement would allow state to buy Slope gas

  • Under withdrawal agreements negotiated between the State of Alaska, BP and ConocoPhillips, the state could end up buying natural gas from the producers if one or more quits the Alaska LNG Project. The price tag would be steep, however. If the state were to purchase ConocoPhillips’ 22 percent share of the 35 trillion cubic feet of North Slope gas reserves, the cost, at $4 per million British Thermal Units, would be $19.2 billion. Photo/Courtesy/BP America

Gov. Bill Walker released the agreement signed Dec. 4 by the state, BP and ConocoPhillips regarding the companies’ willingness to sell North Slope natural gas if either firm withdraws from the Alaska LNG Project.

The nine-page agreement states that the sales offer will be made to the State of Alaska if “mutually agreed commercially reasonable terms can be reached between the relevant party (the withdrawing company) and DNR (the state Department of Natural Resources).”

In a statement issued Dec. 8, Walker praised the companies for providing the letters: “This agreement ensures that there will be gas for a gasline if either partner withdraws from the project.”

However, whether that actually happens depends on whether “commercially reasonable terms” can be agreed on and whether the state would be able to finance such a large transaction before the Alaska LNG Project is built and operating.

Still, the fact that the two companies agreed to make the offer to sell gas and to negotiate in good faith, if needed, has given the governor the assurances he felt he needed, even if the letters are not binding.

Still, if such a purchase were ever made the costs would be huge. In an analysis, Janek Mayer and Nikos Tsafos, of the firm enalytica, estimated that if the state were to purchase ConocoPhillips’ 22 percent share of the 35 trillion cubic feet of North Slope gas reserves, the cost, at $4 per million British Thermal Units, would be $19.2 billion.

If ExxonMobil’s 32 percent share if North Slope gas were purchased, the cost would be $28 billion. ExxonMobil — the project manager for Alaska LNG — was the only one of the three Slope partners to not sign on to the withdrawal agreement.

Those would be on top of the $13 billion the state will pay for its 25 percent share of the Alaska LNG Project construction.

It might seem implausible that a company’s withdrawal would happen after so much has already invested heavily in the project — nearly $5 billion for all three firms if Point Thomson gas project costs are included.

Point Thomson is nearing completion of an initial phase to produce a limited quantity of liquid condensates starting in 2016, but the project is actually intended to be part of the larger gas pipeline and LNG project.

But despite sunk costs, things do happen.

“Preparing for failure is a fact of life, and Governor Walker is right to be concerned about the possibility that one (or more) producers choose to not pursue Alaska LNG. Several LNG projects have seen partners depart even at late stages of the project development,” consultants Mayer and Tsafos said in a paper presented to the Legislature.

Mayer and Tsafos made comments and presented their paper during closing days of a November special session of the Legislature, when word first circulated of Walker’s idea that the state purchase gas from a withdrawing party.

The consultants warned against attempting to have a sales agreement actually in place as a contingency, however.

“Withdrawal terms are common in most joint-venture agreements; however, there is no clear benefit in securing a detailed sales and purchase commitment from the producers at this stage of the project,” the two consultants said in their analysis.

An alternative they suggested is apparently what Walker has done.

“The state can explicitly set a framework for such an eventuality (a withdrawal) by creating a process by which the state and a reluctant producer enter into exclusive negotiations, in good faith, for the state or another nominated party to purchase the producer’s gas,” Mayer and Tsafos said.

The agreement with BP and ConocoPhillips appears to just commit the parties to good-faith efforts, and nothing more.

Walker was still happy, though.

“The gas availability agreement is the result of months of negotiations between the state and its partners, and brings the state closer to delivering North Slope gas to the world market and lowering energy costs for Alaskans,” he said in his statement.

In a briefing Dec. 5, the governor said, “We no longer will have to worry about (the companies’) competing projects around the world. This is absolute assurance that the gas will be available,” to the Alaska LNG Project.

Tim Bradner can be reached at [email protected].

12/09/2015 - 4:13pm