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Alaska News

Walker's gas line report spells out disagreements, project flaws

  • Author: Alex DeMarban
  • Updated: September 28, 2016
  • Published September 24, 2015

The Walker administration's long-awaited review of the $65 billion Alaska liquefied natural gas project concludes that the deal's structure "contains serious challenges" that will make it difficult to advance a project providing maximum benefit to Alaskans.

The analysis, initially announced in April as a 45-day review, says a key to overcoming the challenges is cohesion between Gov. Bill Walker and lawmakers.

Chief among the fundamental flaws in the huge project: as the partner with the most at stake, Alaska faces the greatest pressure to compromise, far more than the three giant oil companies also in the project.

Also illuminated are key disagreements gumming up negotiations between the state, ExxonMobil, ConocoPhillips, and BP, including that "certain" unnamed producers want long-term "fiscal certainty" on oil taxes, in addition to locked-in tax deals for the natural gas to be tapped.

"The state has consistently messaged to producers that the state is unwilling to provide fiscal certainty on oil for this project," the review says. "It is the administration's belief that the people of Alaska will not support a constitutional amendment that authorizes fiscal certainty on oil and unrelated taxes, and the economics of the project do not require it."

A key takeaway from the document, released Thursday, is that unless several pesky issues are resolved, the project won't advance into a detailed engineering phase that would cost each participant hundreds of millions of dollars. The decision by the parties to enter that phase is expected sometime next year.

ExxonMobil is "evaluating the report to fully understand its implications," said Kimberly Jordan, the company's public and government affairs coordinator for Alaska.

BP also did not offer an immediate assessment. "It's under review, we literally just got it today," said Dawn Patience, a BP spokeswoman.

ConocoPhillips is "still reviewing the governor's letter, but we agree that commercial agreements are critical to the project, and we're working to get transparent and equitable agreements in place," said Natalie Lowman, director of communications with ConocoPhillips Alaska.

The report comes days after state officials and oil company executives told lawmakers of potential delays on various fronts, and after a round of finger-pointing from Walker and ExxonMobil's top executive, Rex Tillerson, about the disagreements.

The report's own delay is tied in part to the Legislature's inability to complete a budget until June, a necessary step so money could be allotted to the effort, said Katie Marquette, the governor's press secretary.

"The other part was that those involved in the review were also in daily negotiations with AKLNG partners," she said.

The governor wrote the review with help from his gas line team, she said.

The report was announced the same day the governor said he would call lawmakers into special session in October, in part over Alaska LNG. One item that will be on the table, a tax that assesses a fee on unproduced North Slope gas reserves, is aimed at helping the state gain the "negotiating leverage" that the report says the state lacks.

Another measure on the special session table will involve whether the state will buy out pipeline builder TransCanada, a minority partner that currently represents the state in the portion of the project involving the 800-mile pipeline and the gas-treatment plant on the North Slope.

The buyout must be done before year's end and will cost Alaska about $80 million, the report says. It says the state will face larger up-front costs if TransCanada is not available to study and fund construction of the pipeline and the plant. But the state's revenue increases by $400 million a year during the first two decades of operation.

With the buyout of TransCanada, the state would also become a fully aligned partner in the project, with Alaska and the three oil companies each owning 25 percent of the facilities, including the liquefaction plant and marine terminal proposed for construction in Nikiski.

The project would ship long-stranded North Slope gas down the pipeline so it could be liquefied and shipped overseas for sale to Asian utilities.

While the 11-page report concludes that the technical aspects of the project can be resolved, the "structural and commercial" problems listed are numerous.

The analysis starts with five pages of history describing failed Alaska gas line megaprojects dating back to the 1970s, an ominous precursor for a project that in recent weeks seems to have grown increasingly uncertain.

As for partner disputes associated with this latest project, the report does not name specific oil producers. But asked recently which company was slowing the negotiations, Walker said he is pleased with the progress being made by ConocoPhillips and BP.

Rep. Mike Hawker, R-Anchorage, said the project is going through a "difficult transition" as the new governor brings his views and philosophy to a process initiated by his predecessor, Sean Parnell. He said the Legislature is ready to collaborate with the administration to get the project done.

"I think the challenges we face may have more to do ... with changing horses in midstream than anything that may have been wrong with the horse we were riding before," Hawker said.

He said the governor has identified legitimate challenges, but added that they have been anticipated for some time.

The report notes that a key issue bedeviling the three-year-old effort is the incorrect assumption, including in enabling legislation Senate Bill 138, that all partners are equally motivated to get the project done as soon as possible.

In fact, the producers, who own the leases to the massive quantities of North Slope gas needed for the project, have their own "economic and strategic concerns" dictating their view of how quickly the project should proceed.

That "divergence" appears to be compounded by the slump in oil prices, which affects each company's ability to invest. The company with the slowest approach has the upper hand, the study said.

"Part of the lack of alignment derives from some producers having other LNG projects that are competing with AKLNG, both in terms of markets and access to corporate capital," the analysis says, speaking to the producers' global gas portfolios. "An unfortunate consequence of this process is the AKLNG project will only proceed on a pace set by the schedule of the producer who is most reluctant to proceed."

"This results in all parties negotiating to the least common denominator (again)," a reference to past, failed projects. "Because all AKLNG parties must agree on every issue of every commercial agreement, the party that most wants a project is pressured to make the most concessions to advance the project."

The state, therefore, must have the ability to proceed without partners who are moving too slowly, the report says. The state also needs the ability to acquire the interest of partners that back out, or get a reasonable commitment that their gas will be part of the project, such as by being sold to the state or another party for shipment.

The state's gas line team, led by consultant Rigdon Boykin, is attempting to negotiate withdrawal agreements that could set those terms. But the team is unsure if the state can secure the "gas commitments" needed from the producers, as well as the engineering data needed to proceed, without duplicating work that's already been done on the project, the review notes.

Another problem: The administration wants the pipeline diameter increased to 48 inches, up from the current 42 inches, because it will ultimately lead to greater revenue -- lower operating costs will repay the larger up-front investment after 14 years. The larger line can ultimately handle larger volumes of gas and can be more economically expanded to allow oil and gas companies currently not part of the project a chance to contribute new gas discoveries, if they happen.

Despite the advantages of the larger pipe, other partners are resistant to allowing "easy access and low cost expansion to third parties," the report notes.

In response to Walker's concerns, the private companies recently voted to study the larger-line concept at an estimated cost of $40 million, a process that could take six to eight months.

Hawker pointed out the report offers a "bit of a paradox."

"The governor's first complaint is he's worried about taking too much time to complete negotiations," Hawker said. "His second point is he wants to re-engineer the pipeline, which will cause a six-to-eight month delay."

Other issues listed in the report include:

  • The partners don’t agree when the project should enter the final engineering phase, known as FEED, when detailed engineering studies would be conducted to put flesh on more basic reports already filed with the Federal Energy Regulatory Commission.
  • The state does not agree to pay field costs associated with the state’s royalty gas produced at Prudhoe Bay leases, despite a 1980 royalty agreement requiring it. In part, the policy is justified because the state already allows the producers to deduct those field costs against their oil production tax, as part of generous incentives implemented after 1980.
  • Also, the state's Natural Resources commissioner, Mark Myers, cannot make a critical decision on whether the state's royalty gas should be taken as cash or as gas for 25 years, until the other major issues are tied up.

    Myers said that, by law, he must make the choice that brings the most value to the state. With so many issues currently unsettled, deciding which option would bring the most value would be speculative.

    "We need to know the framework so we know what we're paying in costs," he said.

    He said the state's team is diligently trying to resolve the issues so the state can make the royalty decision and complete the project, including by looking at analytics, conducting modeling, and meeting with the producers.

    "We are systemically working to get to a decision so it doesn't delay the project," he said.

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