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Walker issues ultimatum to oil companies on pipeline project

  • Author: Nathaniel Herz
  • Updated: September 28, 2016
  • Published January 27, 2016

JUNEAU — Gov. Bill Walker has issued an ultimatum to the state's three oil company partners on the proposed $55 billion North Slope gas pipeline, threatening unspecified action if key agreements aren't reached by the end of the legislative session.

Walker, in a letter sent to the companies last week and released publicly Wednesday, said he's growing "increasingly concerned" with the slow progress developing project contracts and agreements that he wants finished by the end of the session in April.

"If the parties do not reach alignment on these important contracts and issues, then I will have no other choice but to consider other options for commercializing Alaska's gas," he said in the letter, dated Jan. 18 and addressed to executives at BP, ConocoPhillips, and ExxonMobil.

Since he was elected governor in 2014, Walker's relationship with the oil companies has been tumultuous. Walker, a former oil and gas attorney, has also battled with lawmakers over the state's framework for the pipeline project originally set up by his predecessor, Gov. Sean Parnell, with the help of Parnell's allies in the Legislature.

He's now trying to keep the companies on a timeline that will allow legislators to approve long-term financial and tax terms for the project before they leave Juneau. Those terms would then go before voters in November in the form of a proposed constitutional amendment, and letting the agreements slip too late could delay that vote — and progress on the project — until the next general election, in 2018.

"That is precisely the fear," Marty Rutherford, deputy natural resources commissioner and one of Walker's top gas line officials, said in an interview Wednesday.

Walker's letter, she added, comes in part as a response to the oil companies' desire for the long-term tax certainty, and to the deadlines they'll need to hit to keep the constitutional amendment on this year's ballot. Unless a tax scheme is in the Alaska Constitution, it can be changed by a simple majority in each house of the Legislature — an uncomfortable position for the companies that are expected to invest billions of dollars in the project.

"It's not a threat — it's an explanation," Rutherford said.

Walker's letter was first reported by The Associated Press after being referenced at a Wednesday hearing of the House Resources Committee.

State officials and oil company employees explained there, and at a subsequent Senate Resources Committee hearing, that one area of focus is what's called a "gas balancing agreement" — a key pact between the oil companies that Rutherford described as "foundational" to the project.

One BP executive, David Van Tuyl, described the balancing agreement in an interview as "amazingly complex." The pipeline would draw gas from two different North Slope fields — Prudhoe Bay and Point Thomson — where each of the companies has different ownership shares.

That arrangement might be unique in the oil and gas industry, a ConocoPhillips employee said at the Senate hearing.

The companies have to agree on how the volume of gas is divided among them, accounting for risks of disruption in supply and demand, Van Tuyl said.

What happens, for example, if there's a shutdown at the Point Thomson field, of which ExxonMobil owns nearly two-thirds, compared to ConocoPhillips' 5 percent, and gas production has to be increased at Prudhoe Bay, where each of the companies owns more like a one-third share?

"Are the owners of the interrupted fields somehow compensated, or do they get to put their gas in later?" Larry Persily, a former federal pipeline official who now advises the Kenai Peninsula Borough mayor, said in an interview. "Each of the partners has different ownership interests in the two fields, and everyone wants their gas molecules to get a priority and make sure that their interests are protected."

How close the companies are to reaching that agreement "depends on what day you ask," Rutherford said. But in his letter, Walker said contracts that need to go before the Legislature are being delayed by the "producers' failure to reach alignment with each other, and with the state, on gas balancing terms and other key issues."

The oil companies offered varying reactions. ConocoPhillips, in a prepared statement from spokeswoman Amy Burnett, said the company is working toward "transparent and equitable agreements."

But, she added: "The recent expectations established by the Governor will be very difficult to accomplish."

A BP spokeswoman, in response to questions, referred to prepared committee testimony from executive Van Tuyl.

"While there is still much work to be done, we continue to make progress. We understand the governor's statements about the need for additional progress," Van Tuyl's testimony said. "We agree."

A spokeswoman for ExxonMobil, Kim Jordan, said in an emailed statement the company "has been working diligently to find mutually acceptable terms to progress the Alaska LNG project and remains committed to doing so."

Asked how Walker would proceed if the agreements aren't reached by the end of the legislative session, his spokeswoman, Katie Marquette, emailed a prepared statement: "We will need to consider all of our options going forward."

"At this time, we do not know what all of those options would be," the statement quoted Walker as saying.

Walker's negotiating tactics with the oil companies have at times drawn criticism from Republican legislative leaders who helped set up the original framework for the pipeline's development.

Late last year, they objected when Walker threatened to propose a tax on natural gas reserves to accelerate negotiations by making it economically painful for oil companies to leave gas in the ground. But Wednesday, Rep. Craig Johnson, R-Anchorage, said he was unconcerned about Walker's recent letter.

"Nobody seemed to think much of it," Johnson, a member of the House leadership, said in an interview. "Sometimes when you have a goal, it's good to set a date."

Johnson said it was "reasonable" for Walker to try to keep lawmakers to their 90-day schedule for the legislative session. But he also pointed out that the gas balancing agreement being negotiated is so complicated that it's "precedent-setting."

"There's no off-the-shelf version of it," he said.

Correction: An earlier version of this story incorrectly described the process of gas balancing as based on the value of the gas. It is actually based on the volume of gas.

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