Administration seeks $17.7M increase for AK LNG budgets

The Walker administration wants to increase its gasline budget by $17.7 million to move its part of the Alaska LNG Project forward and that ask would be greater if not for the project’s struggling commercial negotiations, according to administration officials.

Gov. Bill Walker’s initial $35.7 million request for the North Slope Gas Commercialization office has been cut to $26.6 million because the state can’t move forward with its full marketing plan as hoped until underlying project agreements are in place Deputy Natural Resources Commissioner Marty Rutherford told a House Finance subcommittee Feb. 11.

Rutherford will become acting commissioner of DNR March 1 after the retirement of Mark Myers announced Feb. 16.

The ask duplicates $8.9 million appropriated this fiscal year for the project that is split between the Law, Natural Resources and Revenue departments, plus the new marketing money.

This past November during a special session called by Walker, the Legislature approved spending $160 million to buy out TransCanada Corp.’s share of the project in the pipeline and North Slope facilities and fund the state’s pre-front end engineering and design, or pre-FEED, technical work in 2016.

The administration’s revised $26.6 million request includes $21 million for outside negotiating counsel and marketing contractors and would also fund four positions with annual salaries and benefits up to $1.4 million for the state’s gas marketing lead, an existing but currently vacant position.

Three new positions for marketing negotiators and a market analyst totaling $2.4 million in compensation would be added to the Gas Commercialization office as part of the budget plan.

Rutherford acknowledged a reference to the “sticker shock” of a $1.4 million state Alaska LNG marketing lead position by Rep. Lance Pruitt at a time when budgets and jobs in nearly every state agency are being cut.

Lack of progress on the commercial side of the project means the marketing lead position would likely be filled by a contractor initially, Rutherford said in an interview. The full budget request must still be made, however, so the state is prepared to move forward if the pace and progress of the project increases, she added.

 “Our total request is $26.6 (million); it’s still a lot of money. I’m not going to pretend it is not,” Rutherford said. “But it is simply one marketing organization.”

The “incredibly complicated and incredibly competitive” nature of the LNG market the state is trying to jump into means paying for the best people available is a necessity, she said.

“They will be developing the state’s marketing team with a level of expertise that none of us possess in the state,” Rutherford said.

Whether or not the administration returns to the Legislature to ask for the full $35.7 million will depend on the pace of the commercial, or fiscal, negotiations between the state and the producers as well as what type of gas marketing arrangements the parties agree to.

How the state’s 25 percent share of LNG from the project is marketed, and how much that marketing will cost, will depend on the outcome of the commercial negotiations, according to Rutherford.

Those negotiations have been ongoing for more than a year, but terms of the foundational Gas Balancing Agreement between the producers, BP, ConocoPhillips and ExxonMobil have not been reached company representatives testified to House and Senate committees in late January.

Alone, the Gas Balancing Agreement determines how and when the companies — each with different ownership shares of the natural gas in the Prudhoe Bay and Point Thomson fields — can pull their share of the gas and get it to market. However, seven other contracts, including marketing terms, depend on having the Gas Balancing in place.

Senate Bill 138, the legislation that outlines the state’s role in the $45 billion-plus North Slope natural gas export project, called for a late 2015 special legislative session for the Legislature to review and rule on the fiscal agreements.

A “gasline” special session was held, but it was to buy out TransCanada, not approve the critical agreements. The administration has had hopes of getting the contracts in place for another spring special session, but Rutherford, one of the state’s lead negotiators, told the Journal that is unlikely.

She said the timeline slippage is somewhat understandable “given the complexities” of the four-party, megaproject negotiations.

SB 138 also lays out four possible gas marketing scenarios for the state possibly with all, or none, of the producers. Those scenarios are: a joint-venture marketing arrangement including the state and all of the producers; individual joint-ventures between the state and each producer, or two producers and the state; the state selling directly to a producer that must make an offer to buy the gas at close to market rates; or each party going it alone in equity marketing ventures.

The State of Alaska will participate or be completely responsible for marketing under three of the possible scenarios, Rutherford said to the subcommittee.

“If we are an equity marketer, basically we would be competing in the market against every other LNG marketer in the world, including our co-venturers,” she said.

The commercial agreements also set the backdrop for whether the state will take its 12.5 percent share of royalty gas “in-value” as cash or “in-kind,” as the actual gas molecules, a decision that will be made by the DNR Commissioner.

Rutherford said the department has prepped as much as it can for that decision and should be able to make it within 60 days after the upstream commercial agreements are in place.

An in-kind determination will likely lead to the producers paying their production tax as gas, which would fill the state’s 25 percent share of the project’s gas.

While production from the Alaska LNG Project won’t commence until 2025 at the earliest, Rutherford said the state needs at least some of the highly paid gas marketing experts on its team to start building relationships with potential customers in Asian markets now.

Eventually the Legislature will have to form a state gas marketing organization whether it’s in a joint venture or not, according to Rutherford. She compared the prospective entity to the Alaska Permanent Fund Corp.

“It needs to be as independent as possible, as nonpolitical as possible and as expert as possible,” Rutherford said about the state’s future gas marketing group.

DNR is leading marketing efforts currently because it is the state’s upstream expertise, which ties the department to buyers in need of supply certainty, according to Rutherford. Once the gas begins its journey down the 800-mile pipeline it would be transferred to the state marketers.

In-state gas

The Alaska Gasline Development Corp. is the state’s technical expertise in the project, also tasked with providing natural gas to in-state users. To the second duty, AGDC formed its own in-state gas “aggregator” subsidiary last fall.

AGDC Gas Aggregator Co. would amount to an intermediary to, as the name implies, aggregate the demand of the state’s gas and electric utilities looking to buy gas from the project, rather than forcing each utility to individually barter with the project’s marketing ventures, however many there may be.

The AGDC board is expecting to have an in-state program plan from the Gas Aggregator in June, according to discussion at the corporation’s Feb. 11 board meeting.

 

Updated: 
02/17/2016 - 4:05pm

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