Energy

State and ExxonMobil reach agreement on preliminary gas line sales

  • Author: Alex DeMarban
  • Updated: September 10
  • Published September 10

ExxonMobil has agreed in a preliminary deal signed Monday to sell its natural gas to the $43 billion Alaska LNG project, an important step as the state works to line up Asian utilities and other potential gas buyers.

In a related deal, called a letter of understanding and also signed Monday, the state will "effectively stay" the deadline associated with a 2012 agreement involving future development at the Point Thomson gas field.

With the extension of the old agreement, originally set to end Dec. 31, 2019, ExxonMobil and Point Thomson field partner BP will have time to take final steps needed to sell that gas to the state project, officials said.

"ExxonMobil is demonstrating their commitment (to the Alaska LNG project)," said Andy Mack, state natural resources commissioner. "We are demonstrating our flexibility."

"This precedent agreement is good for Alaska and ExxonMobil and represents a significant milestone to help advance the state-led gas line project," said Darlene Gates, ExxonMobil Alaska president, in a statement. "As the largest holder of discovered gas resources on the North Slope, ExxonMobil has been working for decades to tackle the challenges of bringing Alaska's gas to market."

The deals signed Monday are important milestones for the state's Alaska LNG project, officials said.

The "precedent" gas-sales agreement with ExxonMobil is similar to one the state signed with BP in May. That set terms for price and gas volume, and was a first step to a final deal with BP the state hopes to reach before the end of this year.

As with the BP agreement, state officials Monday said the details of the agreement with ExxonMobil, including terms for price and volume, are confidential.

The deal leaves ConocoPhillips as the remaining major North Slope gas holder that has not signed a similar preliminary gas-sales agreement with the state.

Lieza Wilcox, a vice president with the state's gas line agency, said the state hopes to soon reach an agreement with ConocoPhillips.

The Alaska LNG project seeks to export vast quantities of North Slope natural gas in an 800-mile pipeline, super-chill the gas into a liquid in Nikiski in Southcentral Alaska, and ship the liquefied natural gas overseas in tankers.

In a separate effort, the state is working with three major China-owned institutions — oil company Sinopec, China Investment Corp. and Bank of China — in hopes they will invest in and support the project. The state has targeted the end of this year for a final deal with those companies.

The state is also working with several other potential gas buyers for the project, including PetroVietnam and Tokyo Gas.

China has threatened to slap tariffs on imports of liquefied natural gas from the U.S., in retaliation for tariffs on China goods proposed by President Donald Trump.

The threat of additional costs has complicated a project that seeks to sell much of its gas in China, and would like to reach long-term sales agreements with buyers in that country.

"There's no question that the politics around tariffs makes people think (about) what commitments they're making," said Wilcox. "That's why we're glad it's not only our option."

"What's also been clear is that China has not really slowed down purchase of LNG so far this year, so we expect that market to continue to grow," she said. "We hope the trade issue will be resolved far ahead of (a final investment decision planned for 2020.)"

In 2012 under then-Gov. Sean Parnell, ExxonMobil and the state agreed to a deal that set future options for development at the Point Thomson field. The goal was encouraging the company to take steps supporting the gas project, considered critical to the state's economic future. If development criteria were not met, ExxonMobil risked losing acreage by year's end 2019.

ExxonMobil met part of the agreement and in 2016 began producing some condensate oil in a complex process that involves producing natural gas, pulling out the condensate oil, then forcing the gas back underground at extremely high pressures.

But ExxonMobil, citing flawed equipment, has struggled to meet production goals of 10,000 barrels daily. Producing more condensate oil with that method, one of ExxonMobil's development options, appears complicated, officials said Monday.

But producing some condensate oil, and selling Point Thomson gas for use in the Alaska LNG project, allows the state and the company to get the best value out of the field, Mack said.

To reach the goal of gas sales from Point Thomson, the state has agreed to extend the Dec. 31, 2019, deadline, allowing the company and partner BP additional time to do the work to support development of the Alaska LNG project.

The state still maintains the right to enforce the consequences of the earlier deal for Point Thomson, including revoking leases if needed, Mack said.

But the state recognizes the challenges at the field. It wants to find a scenario that benefits all sides, thus leading to Monday's extension, Mack said.

The extension will end when development is approved for the Alaska LNG project, with the final investment decision, or if the state notifies ExxonMobil and BP that the LNG project is no longer advancing.

If the extension ends, the companies will have up to 30 months to approve additional development at the Point Thomson field, or risk losing acreage at the field as originally envisioned in the 2012 deal, the state said in a release.

The development options at Point Thomson, however, include increasing production of condensate oil, the process that has proved difficult so far.

The LNG project, supported by Gov. Bill Walker who's vying for re-election as an undeclared candidate in November, is a political lightning rod given its large cost and potential financial risks to the state.

Challenger Mike Dunleavy, the Republican candidate for governor, said a gasline project must make economic sense and be led by the private sector.

"Without further information, and with too many unanswered questions, we don't know if today's news represents a positive step forward for the project. What we do know is that press releases don't build pipelines," he said.