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Parnell's LNG project challenged by rival Walker and some lawmakers; others intrigued

Lisa Demer

Gov. Sean Parnell’s newest proposal for bringing Alaska’s North Slope natural gas to commercial markets finds a biting critic in oil and gas lawyer Bill Walker, one of his challengers in this year’s governor race, and party-line division among state legislators. But others are intrigued.

The plan makes the state a financial partner with oil producers BP, ExxonMobil and ConocoPhillips and pipeline company TransCanada in a project estimated to cost $45 billion to $65 billion. It would take 10 or more years to build.

The amount of the state’s investment isn’t yet set, but the state expects to have a 20 to 25 percent stake in the liquefied natural gas project. Parnell says Alaska would initially commit $70 million to $90 million for the next phase of cost and engineering studies.

The governor advanced the project Friday with a new 49-page bill he sent to the Legislature.

Walker, a Republican running as an independent who has long sought a natural gas pipeline to Valdez, contends the commercial agreements the state has signed ahead of the legislation with oil producers and TransCanada show Parnell’s proposal could be costly for Alaska.

The agreements, which need Parnell’s bill to take force, lay out conditions that must be met for the LNG project to happen. Walker warns the agreements:

• Give oil companies “veto power” over state legislation that set tax terms for natural gas;

• Steer around a constitutional ban on binding future legislatures to a tax program by allowing oil companies to barter their gas production tax with natural gas instead of money; and

• Lead to secret negotiations for the detailed contracts needed to build the biggest infrastructure project ever in Alaska.

“I’m just angry that we’ve put ourselves back in a negotiating position with zero leverage,” Walker said in an interview. The one-party Republican rule in Juneau, Walker said, emboldens the administration to seize a chance “to run the table.”

One surprising element in the agreements is that the state would turn over all or most of its interest in the pipeline itself to TransCanada. That means TransCanada, not the state, would contribute to the cost of building an 800-mile pipeline, and the state would pay fees called tariffs to ship its natural gas through it, state officials say.

But the state would own a share of and help pay for an LNG plant and marine terminal proposed for Nikiski to ready the gas for export and ship it out.

FIGHTING BACK
A key Parnell administration official says that Walker is “grossly off-base” and is twisting the framework of a complex and promising project for political gain.

“I find it disconcerting that somebody who hopes to be governor is the first person to scream the sky is falling,” Natural Resources Commissioner Joe Balash said in an interview. Walker’s initial criticism came just a day after the state released what’s called a “head of agreement” with the oil producers and TransCanada — a road map to an LNG project that the governor’s legislation, Senate Bill 138, seeks to put into law.

“He’s saying this is a disaster without coming and talking to the agencies to find out more, to double check to see if he has it right, to wait for the hearings that are going to unfold in legislative committees,” Balash said. He questioned Walker’s expertise and motivation.

Walker wouldn’t back down.

“It’s obviously uncomfortable for them if they have to make a personal attack on me,” Walker said.

Parnell’s proposal amounts to another 18-month study — not the start of a liquefied natural gas export project that state leaders want, he said.

APPEAL IN ASIA
The new venture is just the latest in a string of proposals spanning four decades. It is sparking interest among industry watchers evaluating its potential for commercializing Alaska’s natural gas. Far less valuable than oil, the gas has been stranded on the North Slope.

But the gas has also been doing valuable work: For years the oil producers have been reinjecting gas into the ground to force far more valuable oil out of aging fields. That’s one reason the producers and some oil experts in Alaska have resisted an Alaska gas project.

Fadel Gheit, senior oil and gas analyst with investment firm Oppenheimer & Co. in New York, said the state’s involvement may convince Korean and Japanese utilities looking to buy gas to sign with Alaska out of the many other LNG projects under way around the world. Long-term purchase contracts are needed to finance the huge construction project.

“The state is putting its own dime in the project. … So that will give customers as well the companies much more comfort to see the state is taking part in it,” Gheit said in a telephone interview.

LNG projects, because they are so expensive to build, don’t offer extremely high rates of return, he said. Instead they provide predictable profits through those long-term contracts. “In a way, they are shielded from the volatility in natural gas price,” he said.
The project won’t be built unless the natural gas can be exported and sold for a profit, he said.

“You would have to remember that the partners will be ConocoPhillips, BP and Exxon,” Gheit said. “They are not going to put 40, 50, 60 billion dollars at risk because they didn’t do their homework.”

If the state invests and becomes a partner, he said, “it’s a very innovative approach.”

A TAXING QUESTION

One of the biggest concerns for Walker is  a provision that would allow the oil companies to pay their gas tax in the form of natural gas, not money.

The arrangement would be set in contracts, which the Legislature couldn’t change, unliketaxes, which it could, he said.

The agreements already signed say the state would give each oil company “a one time, irrevocable election” to make their tax payments from then on with a proportionate share of their gas. Parnell’s legislation includes that provision.

“It’s clearly an end-run around the constitution,” Walker said.

But Balash, the natural resources commissioner, said if the Legislature later raised the gas tax, the state would then get more gas as payment.

But it wouldn’t be that simple. If that happened, the state would also need more pipeline capacity, which would cost money.

Craig Richards, a lawyer who works with Walker, said the contracts could be written by the administration to ensure oil companies don’t pay more in other ways as well.

Balash defended the provision as vital to making the project work. It puts the state on more equal footing with the oil companies, and also means more state investment, he asserted.

The state already owns about 13 percent of the natural gas that would be produced — its royalty share. The three oil producers own much more. By paying their tax through gas, the state’s ownership share of the gas — and its financial interest in the LNG project — increases.

The project doesn’t work otherwise, Balash said.

If the state ended up with a 25 percent share of the gas, it would be second only to ExxonMobil, based on how much of the gas resource each oil company has under lease.

That means TransCanada would hold a 25 percent interest in the pipeline, which would be important if it were to build and operate it, Balash said.

Exxon’s leases hold the most natural gas on the North Slope, particularly at Point Thomson, a rich natural gas field just now being developed.

THE CONSTITUTION

Back in 2007 when the Legislature was poised to pass then-Gov. Sarah Palin’s gas-line legislation, ExxonMobil’s Marty Massey testified that “we are willing to take geologic risks, we are willing to take cost risks, and we are willing to take commodity price risks, but we cannot take the risk of fiscal terms changing.” By that he meant the state’s taxes and royalties.

In February 2013, leaders of the Big Three oil companies and TransCanada wrote to Parnell that “a competitive, predictable and durable oil and gas fiscal environment will be required for a project of this unprecedented scale, complexity and cost, to compete in global energy markets.”

On the other hand, the Alaska Constitution says, “the power of taxation shall never be surrendered.”

As to the concerns about secret negotiations, Parnell has stressed that key steps will be vetted in a public process before anything becomes final. The signed agreements, for instance, depend on Parnell’s legislation, which will be aired in committee hearings. The detailed contracts expected to follow will get public review and the matter will return to the Legislature, perhaps in a special session in 2015, Balash said.

Walker says he’s also stunned at provisions that say the industry players could walk away from the project if they don’t get the desired legislation — essentially “veto power” over the measure, he said.

“To say that they are going to get a veto — that’s ridiculous,” Balash responded. “They can withhold their participation in the project, sure. They can do that today.”

Meanwhile, legislators are just beginning their debate over Parnell’s complex proposal.
Republicans have said they think Parnell is on the right track. Rep. Mike Hawker, R-Anchorage and a leader of an effort to get a smaller gas line if the big one fails, promised scrutiny but said he was glad to see the players “working as partners with common interests, rather than as adversaries.”

Democrats say they want a gas line, not a giveaway, reviving their buzzword from last year’s fight over cuts to oil taxes.

Rep. Les Gara, D-Anchorage, said he was concerned about smaller producers getting access to the pipeline to ship gas they might produce on the North Slope.

Under the Alaska Gasline Inducement Act, that was assured. And all pipeline users would have to share in expansion costs. But the Parnell proposal says the pipeline and LNG plant could be expanded, but the party seeking expansion has to pay.

Reach Lisa Demer at ldemer@adn.com or 257-4390.


By LISA DEMER
ldemer@adn.com
Contact Lisa Demer at LDemer@adn.com or on