Alaska's LNG project legislation explained

EDITOR'S NOTE: This article is written for publication in the media by a federal agency whose goal is to transparently coordinate permitting and construction of a pipeline that delivers Alaska's natural gas to the Lower 48.

Negotiations between the state of Alaska, major North Slope oil and gas producers and pipeline company TransCanada toward a partnership to develop the proposed Alaska LNG project will follow directions approved by state legislators April 20.

The measure, Senate Bill 138, was one of Gov. Sean Parnell's main legislative initiatives this year. It passed the Senate 16-4 and the House 36-4.

The legislation amends multiple state laws, allowing negotiations to proceed toward the state becoming an equity partner in the multibillion-dollar project -- one of the world's largest liquefied natural gas export plants. Passage was essential for the five-party deal that will govern designing, permitting, building and operating the project.

Project teams this summer will ramp up preliminary front-end engineering and design work, known as pre-FEED, estimated in the hundreds of millions of dollars and expected to run through next year.

Full engineering, design and permitting would follow, estimated at more than $2 billion, with an investment decision whether to start construction possible by 2019 and gas flowing four or five years after that.

The legislation allows the state to take ownership of about 25 percent of the gas produced for the project in lieu of receiving payments for its royalty share and production taxes. The state would then sell its 25 percent of the gas and use the proceeds to pay its processing, pipeline and liquefaction expenses, depositing the balance in the state treasury.


The state would take an ownership stake in the LNG plant equal to its percentage of gas flowing down the line and would contract with TransCanada for the company to take the same percentage ownership on behalf of the state in the pipeline and North Slope gas treatment plant.

Signing a deal with TransCanada to stand in for the state on the pipeline and treatment plant would save the state from having to come up with about $6 billion to $7 billion for a 25 percent stake in those components at the same time that the state would be funding $6 billion to $7 billion for its 25 percent stake in the LNG plant. In return for signing on for the pipeline and treatment plant, TransCanada would be allowed at least a 12 percent return on its equity investment, built into the tariff it will charge for moving the state's gas.

Referred to as "enabling legislation," the changes in state law now will activate negotiations under two documents signed last winter:

1. The Heads of Agreement signed in January by the state and North Slope producers ExxonMobil, BP and ConocoPhillips and TransCanada covering joint ownership of the project, fiscal and other terms, and

2. The Memorandum of Understanding signed by the state and TransCanada, setting out terms for their pipeline arrangement.

Under the governor's plan, as outlined in January, state and company negotiators would present the contract and other commercial terms to legislators next year, likely in a special session in the second half of 2015. Though pre-FEED would be under way, the project would not proceed to full engineering, design and permitting until lawmakers approve the contracts, and until all of the parties feel more comfortable with the project's economics.

A project impact fund to cover municipal expenses during the construction boom -- such as police, fire, schools and social services -- and a negotiated annual payment based on gas flow in lieu of municipal and state property taxes also will be covered in the negotiations.

The producers and TransCanada estimate construction costs of the Alaska LNG project at $45 billion to $65 billion (2012 dollars) to cover:

• One of the world's largest gas treatment plants on the North Slope to remove carbon dioxide and other impurities.

• About 800 miles of pipeline and eight compressor stations to move the gas to a liquefaction plant at Nikiski on the Kenai Peninsula about 60 air miles south of Anchorage.

• The liquefaction plant, which would include three production lines with a total output capacity of 15 million to 18 million metric tons of LNG per year -- about 2 billion to 2.4 billion cubic feet of natural gas per day. The plant would be among the world's largest.

• LNG storage tanks and two tanker berths at the Nikiski site.

The pipeline would have at least five points along the route where Alaska municipalities, utilities and commercial customers could take gas for local distribution. The state will decide the locations of those offtake points later.

Alaskans have long talked and dreamed of a pipeline to move North Slope gas to market and have seen multiple proposals come and go over the past 40 years. High development costs and lack of gas buyers to pay those costs have been the problem, but rising demand for LNG in Asia may create enough of a market opportunity for an Alaska project to succeed. However, developers in British Columbia, the U.S. Gulf Coast, Russia, East Africa, Australia and elsewhere are looking at the same market, and Asia buyers are pushing for lower prices in the competitive battle among potential suppliers.

The legislation, which the governor is expected to sign into law soon, would:

• Set the state's production tax share of gas at 13 percent, intended to replace what the state would receive if the tax were paid by check, not gas. When added to the state's royalty share of produced gas, generally 12.5 percent, the state would take about 25 percent of the produced gas. Any additional leases that feed gas into the project in future years would be subject to their own negotiated terms.

• Expand the Alaska Gasline Development Corp.'s job description to include the LNG plant and marine terminal. AGDC, a state agency the Legislature created in 2010, currently is limited to its original task of designing and putting together a business plan for a smaller-volume gas pipeline from the North Slope to Southcentral Alaska as a backup in case the larger, producer-led project fails. AGDC would hold the state's interest in the LNG plant and marine terminal if the larger project proceeds.


• Set up the Alaska Affordable Energy Fund with 20 percent of the revenue the state would earn from selling its royalty share of gas that moves through the Alaska LNG project after expenses and after the constitutionally mandated 25 percent deposit to the Alaska Permanent Fund oil and gas savings account. The new fund would be available for the Legislature to spend to help areas of the state that will not have direct access to gas from the project.

• Require the administration to disclose terms of the five-party contract, the state/TransCanada deal and other agreements to the Legislature and the public at least 90 days before the proposed effective date of the deals, which would be subject to legislative approval. Until then, the negotiations and much of the information discussed in those negotiations will be confidential under provisions in this year's legislation. Legislators and their consultants will be allowed to view material during negotiations if they sign confidentiality agreements.

• Require the producers -- if the state contracts with the companies to market the state's LNG -- to obtain the same or "substantially similar" terms for the state's gas as the companies get when they sell their own gas.

• Require all parties to the project to share in the costs of roads, bridges and other infrastructure needed during construction.

Provisions of the measure not written into state law but included as legislative intent or guidance to the administration include:

• The Alaska Department of Natural Resources and the Alaska Gasline Development Corp. shall prepare a report on plans to make North Slope gas available in the state.

• The governor shall establish an advisory planning group of municipal representatives and others to advise on the project, particularly municipal concerns.

• The Alaska Department of Revenue shall report to the Legislature on financing options for the state's investment in the project. The report also should include a plan for municipalities, Native corporations and individual Alaskans to invest in the project.


• The Alaska Energy Authority, Alaska Industrial Development and Export Authority, and Alaska Gasline Development Corp. shall develop a plan for delivering affordable energy to areas of the state that will not have direct access to North Slope gas.

Along with approving the legislation, lawmakers approved more than $85 million for the remaining few months of fiscal year 2014 and fiscal 2015 (starting July 1) to the Alaska Gasline Development Corp., Department of Revenue, Department of Natural Resources and Alaska Energy Authority for their work in the project negotiations and legislative reports, and the state's share of the preliminary front-end engineering and design work on the LNG plant. Additional appropriations would be required for future years.

TransCanada would pay for the preliminary work for the gas treatment plant and pipeline, but under terms of the Memorandum of Understanding between the state and the company, the state would reimburse TransCanada for its expenses back to January 2014 -- plus 7.1 interest -- if the project fails to proceed. The Alaska Gasline Development Corp. estimates the state's repayment liability to TransCanada could total $70 million by fiscal 2017.

Larry Persily is a former Alaska journalist, including stints as editorial page editor of the Anchorage Daily News, managing editor of the Juneau Empire, and twice editor of his own weekly newspaper. He also served in the administrations of three Alaska governors. He is now heading up the Office of the Federal Coordinator for Alaska Natural Gas Transportation Projects, a federal agency whose goal is to transparently coordinate permitting and construction of a pipeline that delivers Alaska's natural gas to the Lower 48.

Larry Persily

Larry Persily is a longtime Alaska journalist, with breaks for federal, state and municipal service in oil and gas, taxes and fiscal policy work. He currently is publisher of the Wrangell Sentinel weekly newspaper.