BP, AGDC reach deal on North Slope gas

  • Alaska Gov. Bill Walker, second from left, chats with BP staff at Prudhe Bay as BP Alaska Region President Janet Weiss looks on in this May 22, 2015, photo. On Monday the state and BP announced a binding deal on price and gas volume for the major producer to sell into the Alaska LNG Project. (Photo/Courtesy/Office of Gov. Bill Walker)

BP and the Alaska Gasline Development Corp. announced May 7 that they have reached agreement on the primary terms of a gas sales contract to supply the $43 billion Alaska LNG Project.

The major North Slope producer and the state-owned corporation in charge of bringing a long-sought North Slope natural gas project to fruition signed a binding gas sales precedent agreement May 4, which includes gas price and volume figures, according to an AGDC release.

BP holds a 26 percent interest in and is the operator of the Prudhoe Bay oil and gas field. It also holds a 32 percent stake in the Point Thomson gas field, which is operated by majority owner ExxonMobil. With roughly 28 trillion cubic feet, or tcf, of gas in Prudhoe Bay and another 8 tcf of gas available in Point Thomson, BP has rights to about 9 tcf of gas from the fields.

The company has also assisted AGDC behind-the-scenes in advancing the Alaska LNG Project since the state took control of the project from the producers in January 2017.

BP has regularly noted that its North Slope gas holdings are the largest undeveloped asset in its global portfolio.

“BP has a long history in Alaska and Prudhoe Bay,” BP CEO Bob Dudley said in a release issued by AGDC. “We are very pleased to be part of the state’s vision to bring Alaskan natural gas to new and expanding markets globally. We think this is good for the state, good for BP and good for the environment.”

In a statement from his office, Gov. Bill Walker said he thanked BP for its commitment to Alaska LNG in a call with Dudley.

“This agreement means Alaskans are one step closer to finally monetizing the vast reserves of natural gas on the North Slope. The end result will be thousands of jobs, a significant reduction in energy costs to power homes and businesses, and cleaner air. Having BP — one of our longtime participants in this project — commit its share for the gas on the sale underscores the progress we continue to make to build a stronger Alaska,” Walker said.

AGDC President Keith Meyer noted the gas sales agreement, the details of which are expected to be finalized later this year, is another important aspect of the project the corporation has succeeded in advancing over the past year.

“We have secured the customers; we have progressed on the pipeline build with regulators and the finance community and now we have a commitment that there will be gas to sell and put through the pipeline,” Meyer said. “I look forward to continued negotiations to secure supply from other North Slope producers.”

Meyer and Walker said in separate interviews that without forgetting the Nov. 9 signing of a nonbinding joint development agreement with three Chinese-owned mega corporations for potential project financing and LNG sales — a signing in Beijing witnessed by both President Donald Trump and China President Xi Jinping — reaching firm North Slope gas sale terms is a momentous achievement for the project because it means another fundamental aspect of Alaska LNG is coming together.

“Not to disparage the meeting between the two presidents, which was quite significant; however, in Alaska, for sure this is the biggest deal,” Meyer said. “This is the first time I think in the history of talking about a (gasline) project, any project, that the producers have actually committed gas to a particular project. So, to me, this is a very, very significant milestone.”

With resolution on the major issues of price and volume, further negotiations with BP will revolve around the details of the definitive agreement, “but none of those, I don’t think, will be deal killers,” he added.

The terms of the deal are confidential, but it would have AGDC purchasing gas from BP just prior to it entering the North Slope gas treatment plant at the head of the 800-mile pipeline and marketing it globally as LNG in Nikiski.

Smaller quantities of utility-grade natural gas would also be marketed to Alaska communities and industrial customers along the pipeline corridor, or as small-scale LNG for use in other areas of the state.

Meyer has repeatedly said the corporation has set a benchmark price of about $8 per thousand cubic feet, or mcf, of gas delivered to Asia to be competitive with Gulf Coast LNG projects that have much lower capital costs but higher transport expenses on each LNG shipment to East Asia markets.

With Alaska LNG financing, operational overhead, returns and shipping to Asia tidewater expected to total about $7 per mcf, that would leave roughly $1 per mcf of gas available for producers’ gas sales.

Under that scenario, BP would be poised to make up to $9 billion in revenue on its share of North Slope natural gas resources if the Alaska LNG Project is built.

The governor and AGDC head also said the gas sale terms will certainly remain confidential until negotiations with ConocoPhillips and ExxonMobil are complete. After that, what the state has been committed to might be made public eventually.

“I’m not going to say that (the terms) won’t (be made public). My expectation is that they will, but sitting here today I don’t know the exact avenue that they will come to know that,” Meyer said.

Walker added that he hopes the deal is fully disclosed, but again said he doesn’t know when that might happen. He also noted that he was the one to push for the joint development agreement to be made public, despite concerns from Chinese officials.

“I want to make sure that Alaskans are comfortable with the transaction, not at the expense of the transaction, but at some point I think it would reach a point where it is appropriate,” Walker said. “Certainly, when it reaches a point that requires legislative involvement and approval on some of the pieces, then, at that point I think that could be a time when things are more public. I’m very sensitive to that.”

BP expects the terms of the agreement will remain confidential, but it will be noted in the company’s annual report to the Securities and Exchange Commission once it is finalized, according to spokeswoman Dawn Patience.

ExxonMobil spokeswoman Julie King wrote in an email that the company appreciates its recent gas sale agreement meetings with AGDC.

“We hope to continue these discussions, and remain fully committed to working with AGDC to negotiate gas sale agreements under mutually agreed, commercially reasonable terms,” King wrote.

ExxonMobil led the project’s $600 million-plus preliminary front-end engineering and design, or pre-FEED, effort from 2013-2016 before slumping global oil and gas markets pushed the producers to suggest either slowing the project or offering the state to take the lead.

The state, BP, ConocoPhillips and ExxonMobil each contributed funding to pre-FEED based on their ownership shares of North Slope gas.

ExxonMobil had previously insisted on “fiscal certainty” regarding gas production taxes for the life of any gas sales agreement in order to sell its gas, which would require amending the state constitution specifically for Alaska LNG.

However, administration officials have said the companies are not owed such a concession if they are no longer substantial investors in the Alaska LNG Project.

Meyer said the fiscal certainty provisions are addressed in the agreement in a way that does not require the lengthy and contentious constitutional amendment process, noting at least BP is comfortable with the undisclosed plan and he expects ConocoPhillips and ExxonMobil to sign off on it as well.

“Basically, it’ll be able to insulate the deal from changes in the tax structure or fiscal terms for this particular sale. This sale is for a particular gas supply from a particular reservoir being Prudhoe Bay, but also Point Thomson, so it covers both reservoirs but it’s for a particular gas sale,” he explained. “We’re not trying to fix all the tax issues across the state; we don’t have the authority to do that, but we think we’ve got the pricing provisions covered such that the producer gets the benefit of their deal. It’s all part of the gas purchase and the LNG sale structure.”

Walker was hesitant to discuss how production taxes play into the deal, but said, “This is an area I’ve had some strong positions on in the past and I’ll just say I’m comfortable with this contract.”

ConocoPhillips Alaska spokeswoman Amy Burnett wrote in an email that the largest producer of North Slope oil is actively engaged in negotiations with AGDC on a wellhead gas sale agreement.

“We remain supportive of a state-led project because of the state’s opportunities to pursue options that are not available to a commercial entity that could significantly lower the cost of service,” Burnett wrote.

Meyer has also said the corporation is trying to reach a final investment decision on the project in the first half of 2019, contingent upon a favorable regulatory decision from the Federal Energy Regulatory Commission, which is expected to come in March 2020.

On March 27 AGDC announced it had hired the Bank of China — one of the three companies in the joint development agreement — and Goldman Sachs to solicit debt and equity investors for Alaska LNG.

Elwood Brehmer can be reached at [email protected].

05/08/2018 - 12:16pm