State wants out of AGIA license with TransCanada

The State of Alaska is seeking to terminate its Alaska Gasline Inducement Act license agreement with TransCanada Corp., one of the companies working on a large Alaska natural gas pipeline and liquefied natural gas project, a state official state Commissioner of Natural Resources Joe Balash said Dec 22.

TransCanada is still considered part of the gas pipeline/LNG project team with North Slope producers, Balash said. The hope is that ending the license might actually simplify things for the companies in reaching a commercial agreement on the project.

Balash said circumstances have changed since the AGIA agreement was signed with TransCanada in 2009 to lead development of a gas pipeline, including that a joint venture has emerged that includes major North Slope producers.

Also, the project has changed from a proposed land pipeline to the continental U.S. to a pipeline across Alaska and a large LNG export project, he said.

 “The license agreement, awarded under the Alaska Gasline Inducement Act, contemplates a single sponsor, in this case TransCanada, developing the project,” under certain terms agreed on with the state, Balash said.

However, TransCanada’s partners, the North Slope producers, do not agree with AGIA’s terms.

“The AGIA statute does not work very well when it comes to a joint-venture in which some of the participants do not endorse the terms of the license,” he said. “This does not come as a surprise to TransCanada. We’ve worked closely with them and they are very aware of this.”

In a statement, TransCanada spokesman Shawn Howard said, TransCanada is continuing to work diligently with Alaska North Slope producers and the state to advance the Alaska LNG project.”

The AGIA license entitled TransCanada to $500 million in state payments for reimbursement for project planning work, of which about $300 million has been paid to date, Balash said.

In return, TransCanada committed to develop a project incorporating certain requests by the state including that a “rolled-in” tariff structure be used to pay for pipeline expansions and that a certain debt-equity ratio would be used in financing for construction that would better protect state revenues.

A rolled-in tariff for a pipeline expansion would have the cost of the expansion added into the tariffs, or transportation charges, paid by all shippers of natural gas whether they benefit from the expansion or not. The alternative is for the parties requesting the expansion to pay the costs, so that tariffs for other shippers do not change.

The debt-equity ratio requested by the state, and agreed to by TransCanada, is for no more than 30 percent of the project to be financed by equity, so that 70 percent is financed by debt.

The thinking was that if pipeline developers invest more than 30 percent equity it the increased pipeline tariffs would result in lower state royalty and tax payments.

However, the North Slope producers do not support the AGIA term, so a problem developed when ExxonMobil Corp. joined TransCanada as a partner in the project and more recently when BP and ConocoPhillips began participating in joint studies and conceptual engineering.

The terms of the ExxonMobil-TransCanada relationship are confidential and not shared with the state but ExxonMobil described itself as a partner in the Alaska Pipeline Project, which had been initiated by TransCanada after receiving the state AGIA license.

ExxonMobil was very clear from the start, however, that while it was joining TransCanada it did not agree with the AGIA terms and was not a party to the license.

However, the state’s cost reimbursement, now at 90 percent, was shared by TransCanada with ExxonMobil and now with BP and ConocoPhillips, the two other producers, but without those companies agreeing to terms of AGIA.

All three producers have said they will not develop a project under the AGIA terms.

Balash said the state simply overlooked the contradiction as planning and conceptual engineering on the project moved forward, but a more recent decision by the state to consider a major equity investment in the pipeline has led state officials to conclude the AGIA agreement itself should be scrapped.

“We considered ways in which we could simply amend the AGIA statute but in the end we concluded that just terminating it would be the simplest was forward,” Balash said.

In a Dec. 12 briefing on his fiscal year 2015 state budget proposal, Gov. Sean Parnell said he would not be seeking new appropriations for AGIA reimbursements to TransCanada.

State deputy commissioner of revenue Bruce Tangeman said reimbursements to TransCanada for work that has been done will continue to the end of the current fiscal year 2014, which ends next June 30.  

“There are still funds left in in the reimbursement account that were appropriated last year,” Tangeman said.

AGIA’s expansion provisions, requiring rolled-in tariffs, became cumbersome when the project switched from the all-land pipeline to one incorporating a large LNG export plant, Balash said.

Expansions of pipelines can often be done in small increments so that the rolled-in tariff provision would not be burdensome, Balash said, at least in the state’s opinion. However, expanding an LNG project usually involves adding another “train,” or LNG production unit, which can easily cost a billion dollars or more.

Under those circumstances how the expansion is paid for becomes an important commercial issue between the owners.

Also, the possibility that the state may take an equity position in the project removes one of the major original reasons for the AGIA license. The license, and its $500 million subsidy, was intended to give the state a way to achieve goals important to the state but not necessarily to the pipeline developers.

Being an equity investor is a more efficient way to do that because the state is at the table with the other companies as a full partner.

“AGIA was looked at as a kind of proxy for an investment, another way of being a partner,” Balash said.

If the state becomes a partner, AGIA-as-proxy is no longer necessary.

If the project is built it is estimated to cost between $45 billion and $65 billion, and would ship between 16 million and 18 million tons of LNG yearly mainly to markets in Asia.

The current goal is to have the project in operation in 2022 or 2023 but the companies have not yet made a decision that the project is economically viable and should be developed.

Tim Bradner can be reached at [email protected].

02/19/2014 - 2:55am