Negotiations among producers challenging AK LNG timeline

Progress has slowed in fiscal negotiations among the state’s partners in the Alaska LNG Project, raising concerns that agreements might not be in place to meet critical deadlines.

At the top of the list of eight agreements still needing to be resolved is the Gas Balancing Agreement, the foundation necessary for the other issues to fall into place, project leaders told the Senate Resources Committee Jan. 27.

Representatives from BP and ExxonMobil stuck mostly to vague boilerplate statements, saying the negotiations are hitting “speed bumps,” that should in a way be an encouraging as a sign the tough issues are being addressed.

Bill McMahon, a senior commercial advisor for ExxonMobil, said the project must have “agreeable, competitive and durable” fiscal terms for each party — the State of Alaska, BP, ConocoPhillips and ExxonMobil.

“The key is making sure we have a clear understanding of positions and making sure we find ways to bridge those gaps,” McMahon said to the committee.

ConocoPhillips Vice President of Commercial Assets Leo Ehrhard offered more telling testimony, saying the project faces “significant economic headwinds” as oil and natural gas prices have fallen. LNG prices in Asian markets have slid by up to 60 percent since early 2014, the beginning of major work on the project, he noted.

As it stands, the $45 billion-plus Alaska LNG Project has made it farther than any of the other previous attempts to monetize the massive North Slope natural gas resource.

“Should we find an impasse on these agreements, we will not stand in the way of the project and will make our gas available to the state on commercially reasonable terms,” Ehrhard said.

In early December, the state received commitments from BP and ConocoPhillips to sell their shares of gas to the state for “commercially reasonable terms” in the event either pulls out of the Alaska LNG Project for any reason.

Analysis of the potential purchase found the state would have to come up with $19.2 billion to purchase ConocoPhillips’ 22 percent share of the project’s gas at a price of $4 per thousand cubic feet. That would be on top of the $13 billion-plus the state is already committed to for its quarter-share of Alaska LNG Project construction costs.

The three producers and the state are collectively paying more than $690 million for the current preliminary front-end engineering and design phase, or pre-FEED. A decision to move to the full front-end engineering and design, or FEED, will require a commitment of $2 billion or more among the four parties proportional to their ownership shares.

“In these times we have to be careful stewards of our cash,” Ehrhard said.

Negotiating the Gas Balancing Agreement, also known as the gas supply agreement, is mostly up to the producers, the companies acknowledge. It determines how the parties, each with varying shares of gas in two fields, Prudhoe Bay and Point Thomson, will manage offtake from the fields.

After the Gas Balancing Agreement there are seven other issues that must be hashed out. According to Gov. Bill Walker’s administration, they are as follows: byproduct handling terms; field cost allowances; modifications to state leases for the Point Thomson field; marketing agreements; project governance agreements; system use agreements; and in-state gas sales.

Department of Natural Resources Deputy Commissioner Marty Rutherford said the state is involved in the negotiations but is not a signatory to the balancing agreement. (Editor's note: Rutherford told the Journal in a follow-up interview that she misspoke in her committee testimony and that the State of Alaska is a signatory to the agreement.)  She noted the producers have been good at recognizing the state’s share in the process.

Having two fields to draw from provides security that gas will always be available, but it adds challenges as well.

The agreement becomes increasingly complex when accounting for field downtime, for maintenance or otherwise, on top of making sure each party can get its gas off the field when the market wants it.

These issues are usually resolved earlier in the process through field unitization that helps simplify the agreements, Ehrhard said. In the case of Alaska LNG, blending varied ownership of multiple gas fields into one pipeline adds to the challenge.

“We have probably the only project in the world that’s being sourced from two separate fields with separate interests across those fields,” he said.

Once in place, the Gas Balancing Agreement provides the state with a path to its 25 percent share of the project’s gas derived through royalty and tax payments, according to Ehrhard.

“We see that it’s unlikely, from just the amount of time that’s left in front of us, to try and conclude an agreement of this complexity,” he said. “On the commercial side, we’re just not as far along as we’d like to be. We’d like to be in a position to have this agreement behind us.”

Walker has said for several months the fiscal terms of the project need to be hashed out by sometime this spring in order to hold a special legislative session so the state can give its approval, or not.

The long-term commercial agreements will bind the parties together for at least the 25-year initial life of the LNG export project. They also need to be done soon so the administration can draft a constitutional amendment required to allow the state to enter long-term the financial contracts, which amount to tax commitments.

The Legislature must vote on and approve the amendment in time to send it to the Division of Elections by June 23, the deadline for placing it on the general November ballot, at which point the voters will take up the issue.

Because amendments to the state Constitution must be taken up on a general election ballot, falling short of the timeline likely means delaying the project at least two years.

Rutherford told the Senate committee that much progress has been made on the technical side of the project, mainly aimed at reducing costs, but the administration is concerned about the pace of the negotiations, as the governor noted in a Jan. 18 letter to the Alaska leaders of the producers.

“We will have to step up the pace in order to meet the spring special session,” Rutherford said.

In his letter, Walker wrote that he is “increasingly concerned” about the progress of the negotiations, given a 2015 deadline set out in the original Heads of Agreement to have fiscal terms completed has already passed.

“I have been extremely patient in allowing the negotiations to proceed in the hope that the parties will reach alignment on the agreements necessary to move the AK LNG Project forward and thereby commercialize Alaska’s gas,” the governor wrote.

He continued to explain that he would seek to move a gas project forward in other ways if the parties fail to reach alignment in 2016.

“If the parties do not reach alignment on these important contracts and issues, then I will have no other choice but to consider other options for commercializing Alaska’s gas,” Walker wrote. “In addition, absent any such alignment on all of these agreements and issues, my administration will be unable to support any fiscal contract that the producers may seek, or a constitutional amendment supporting such fiscal contract.”

Pre-construction work is all but complete on the state-led Alaska Stand-Alone Pipeline project, but the economic viability of the smaller project is seriously questioned.

02/04/2016 - 12:56pm