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Gas line project in flux as lawmakers wait for update from Gov. Walker

  • Author: Nathaniel Herz
  • Updated: September 28, 2016
  • Published March 22, 2016

JUNEAU — Alaska lawmakers are trying to keep the state's proposed $55 billion natural gas pipeline project on track even as low oil prices weigh down its three oil company partners, BP, ConocoPhillips and ExxonMobil.

While they wait for a promised update from Gov. Bill Walker, lawmakers have rejected the governor's request for nearly $40 million in pipeline funding, in part because some feared it could be used by Walker's administration to pursue an alternative project.

"We have to be very cautious that he just doesn't go off and do his own thing — or if he does, it's with the consent and consultation of the Legislature," Sen. Pete Kelly, R-Fairbanks and co-chair of the Senate Finance Committee, said in an interview. "Clearly, the project is in flux right now. But there remains a surprising amount of confidence by some pretty big players in this project, given the price environment right now. You'd think it would just be coming apart at the seams, and it's not."

The proposed gas pipeline would run about 800 miles from the North Slope, underneath Cook Inlet, to a liquefaction plant and shipping terminal in Nikiski.

The framework for the Alaska LNG project was originally proposed by former Republican Gov. Sean Parnell.

Walker, an oil and gas attorney who has spent much of his adult life promoting a gas line, criticized Parnell's ideas during his campaign in 2014 but promised to keep the project on track after his election.

At a news conference last month, Walker said low oil prices would likely force changes to the framework for the project, though he didn't specify what those would be. His office said more details would be available in early March, though Walker has since adjusted that date to next month.

In an interview Tuesday, he said it's taken longer "to flesh out what that would look like, if there was going to be change."

All three oil companies and the state have pledged to cover the costs of a $700 million preliminary design phase, called pre-FEED, that's set for completion this fall. The current discussion, Walker said, centers on the project's far more expensive next step: a $2 billion front end engineering and design phase, known as FEED, that the partners would use to make a final decision about whether to proceed to construction.

Under the project's existing framework, the deadline to decide on whether to proceed to the FEED stage is set for the middle of next year — though that could be extended if the companies and the state agree.

"We're just trying to anticipate what would happen in the event that all partners weren't going to go to FEED. What would that look like? What are the options at that point?" Walker said. "The advantage is, it gives us about a year's head-start on that discussion."

Walker didn't get more specific about each company's interest in continuing, but Rep. Les Gara, D-Anchorage, has said that the project appears to pose a particular challenge for ConocoPhillips. The company is the smallest of the three partners, and in 2012 it spun off its refinery assets, which can be highly profitable when prices are low and which have buoyed other companies.

ConocoPhillips' losses in 2015 were $4.4 billion, and it announced last month it had cut its 2016 capital budget by 17 percent, to $6.4 billion from $7.7 billion.

Asked about ConocoPhillips' current plans, spokesperson Natalie Lowman emailed the same statement it used to respond to Gara's remarks last month: "ConocoPhillips is committed to working through pre-FEED on the project and will evaluate our options when that stage is complete."

The two other companies will also be challenged to carry out the project with oil prices as low as they are now, said Fadel Gheit, a senior energy analyst at Oppenheimer & Co. in New York.

The crash in prices over the last two years has left companies operating in a "new normal" in which they're more cautious about investment, Gheit said. Even ExxonMobil, the world's largest publicly traded oil company, is treading carefully, he added.

"They're not going to jump headfirst without making sure that there is water in the pool," Gheit said in a phone interview. "Exxon is just as stingy with its dollar like everybody else. Everybody is looking over their shoulders."

ExxonMobil spokesperson Kim Jordan declined to comment. But a BP official, in a prepared statement, suggested the company sees the low oil prices as a potential opportunity to cut down the project's price tag.

That's because the anticipated cost of the gas line construction is expected to drop, due to shrinking demand across the industry for the services and supplies needed to design and build it.

"We can't control oil prices, but we can control the cost at which liquefied natural gas can be delivered to the market," the statement quoted Dave Van Tuyl, BP Alaska's regional manager, as saying. "In the current low price environment there is an opportunity for Alaska LNG to make significant progress on delivering a competitive cost of supply project under the cost deflation across the industry."

Walker said his administration is looking at "every mechanism we can" to reduce the cost of the project. One thing he's pushed for in Washington, D.C., is a federal loan guarantee, which he said would require a ruling from the IRS.

If the efforts don't cut costs enough to get the companies' endorsement to proceed to the next stage in time for next year's deadline, one result could be a delay in the decision, said Larry Persily, a former federal pipeline official who's now oil and gas adviser to Kenai Peninsula Borough Mayor Mike Navarre.

One alternative that appears increasingly unlikely, Persily added, is for Walker's administration to push the project forward without the oil companies' participation, especially as the state confronts a multibillion-dollar budget deficit that's forced spending cuts.

In his budget for next year, Walker originally asked for about $40 million to pay for three state agencies' support work on the pipeline project. But lawmakers rejected that request — in part, said Kelly, the Fairbanks senator, because of fears it could be used to divert the project away from its existing framework.

Walker's administration has resubmitted a smaller pipeline spending plan for the three agencies, and some of the money is expected to be added back into the budget later in the legislative session.

But it won't include, for example, some $4 million that would have gone to the state Department of Natural Resources, for several high-paid state employees to try to sell Alaska's gas, and for travel to Asia to meet with potential buyers.

"As much as legislators want a North Slope natural gas project, they can read the prices in the newspaper too," Persily said. "There's skepticism among a growing number of Alaskans that we can overcome market forces."

Kelly said his colleagues' desire to stick to the existing framework for the pipeline project was one factor in the decision to reject Walker's initial request for money.

Another, he said, was simply the uncertainty surrounding the project, and the likelihood its rate of progress is going to slow down.

"It's a question mark, going forward, because things have changed," Kelly said. "And so we've just taken it slower."

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