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June 2015

Vol. 20, No. 25 Week of June 21, 2015

Legislators get update on Alaska LNG

Project work on schedule for 2016 FEED decision; fiscal certainty from state needed; continuing role of TransCanada uncertain

Kristen Nelson

Petroleum News

Legislators got a required update on the Alaska LNG Project June 16, hearing from the project manager, commercial group members and the administration.

The presentation was made to a joint meeting of the House and Senate Resources committees held in Nikiski, where legislators also had an opportunity to view the proposed site of the liquefied natural gas plant. An update on the project is required every four months.

Steve Butt of ExxonMobil, the Alaska LNG project manager, said $294 million has been spent to date, $187 million on the preliminary front end engineering and design phase of the project.

While it’s not part of the Alaska LNG project, natural gas from Point Thomson on the North Slope will be necessary for the project, and Butt said the third well for the initial production system at the field is near completion. Point Thomson will initially produce condensate, with natural gas reinjected into the field; new wells and gas processing facilities will need to be built at the field. Prudhoe Bay, expected to provide the majority of natural gas for AKLNG, will also require modifications and new facilities which will be managed by BP, the unit operator.

Western Cook Inlet route

Among the work completed, Butt said, is a technical rationale for the western route in Cook Inlet. He said the route, designated “RevB,” is complete, and aligned with the Alaska Gasline Development Corp., which is working on a smaller alternate line in the event AKLNG fails to move forward.

He said that before detailed work was done the preference was for the eastern route because that would not require crossing the Susitna River.

But, he told legislators, once the Susitna is crossed construction is pretty easy, without the challenges presented in the mouth of Knik Arm - on the eastern route - where silts are laid down in such volume that the weight settling on a pipeline could be a problem.

The technical rational for the western route includes:

•A shorter overall pipeline length than the eastern route;

•The onshore portion of the western route avoids Captain Cook State Park, the Susitna Gunnery Range, agricultural areas and critical wetlands;

•Comparable onshore construction costs and schedules to the eastern route;

•Significantly fewer offshore construction challenges, including: closer to deeper water, lower current, fewer shipping interruptions, less protected species impact, avoiding Chugach Electric Association buried power cables; and

•Relatively stable seabed as opposed to active seabeds on the eastern route.

Offtake application in July

Bill McMahon of ExxonMobil, presenting for the commercial team, said the project hopes to be in a position to put in a formal application to the Alaska Oil and Gas Conservation Commission for gas offtake at Prudhoe Bay in July, and have a final ruling on Prudhoe Bay offtake before the end of the year.

On the issue of agreements which need to be reached, McMahon said ExxonMobil believes good progress is being made. Dave Van Tuyl of BP said the challenge is that all agreements are substantive and time is limited, but said BP has committing to putting the necessary resources to work on each agreement to get them done, with separate teams working on them, so they’re not all going through the same funnel.

Darren Meznarich of ConocoPhillips said they’re working hard on agreements and hoped they would have made more progress by now; the focus, he said, is on problem solving, trying to find solutions.

Vincent Lee of TransCanada said the firm transportation services agreement with the state was the most relevant to TransCanada, and current discussions are on hold because the administration is looking at different options. TransCanada holds the state’s interest in the pipeline portion of the project, and pays the state’s contribution for that work. Under the FTSA, the state would agree to pay TransCanada for shipment of natural gas on TransCanada’s share of the pipeline, reimbursing TransCanada for the monies it puts into the project by paying for gas shipment. Gov. Bill Walker has indicated that he wants the state to exercise its option to buy out TransCanada, an option it can exercise by the end of this year.

What’s most important?

Asked where the Legislature should be focused, McMahon said property tax legislation, the payment in lieu of taxes; review and ratification of fiscal contracts; and any commercial agreements what require legislative agreement.

Dan Fauske, president of the Alaska Gasline Development Corp., said to him the gas balancing agreements were the most daunting. He said the agreements mentioned would benefit the project, but without gas balancing there is no project. We need to get that done, he said, calling progress slow.

Van Tuyl said another item, in the purview of the administration, is a royalty in kind election, which is something the commissioner of the Department of Natural Resources must do to allow the state to take royalties in kind, making up a portion of the 25 percent state gas ownership, the remainder of which would come from the state taking its production tax in gas.

Constitutional amendment?

Asked if a constitutional amendment would be needed to allow fiscal certainty for the project, Van Tuyl said BP is confident with existing language in the constitution.

Fauske said he’s watched and listened to that debate, and hopes it won’t be required because of the time it would take to get a constitutional amendment on a general election ballot, but said it appears that it will be required.

Ken Vasser, general counsel for AGDC, said he wasn’t speaking for the state, but the constitutional question on taxes is whether one Legislature can bind subsequent Legislatures, and said the state constitution is clear - the ability to tax won’t be given away.

He said he thinks a constitutional amendment will be required if part of the agreement for the project is setting taxes and having those taxes apply for a number of years.

McMahon said the first time a vote could happen would be in the 2016 general election, and he said as long as other critical work continues, the project could maintain its schedule for first gas. He said, however, that ExxonMobil shares BP’s view that the constitution is sufficient as it is. He said one of the challenges of a public vote is that it will be a solid answer, and if the people say no, it’s difficult to think of what recovery plan you have to provide a durable and predictable fiscal plan.

Van Tuyl said if a constitutional amendment were offered in the context of a specific set of facts and a contract agreed to and passed by the Legislature that might be an easier thing than a vote in the abstract.

McMahon said he agreed with Van Tuyl, that if a constitutional amendment approach is taken it will be critical to have the contract known and available to people so they would know what they were signing on to - so they would see the prize.

Property taxes

Commissioner of Revenue Randy Hoffbeck said the administration was working on a simplified methodology for property tax levied on the AKLNG project. Bills were introduced late in the session, he said, to get the issue out for discussion.

Hoffbeck said there has been good feedback and some proposed changes, and discussions on the language with both the producers and the Municipal Advisory Gas Project Review Board. He said significant progress had been made in discussions with the producers and with the MAG group, with language being worked. He said the administration wants a simple method that’s robust and dependable and is moving forward with that task.

He also said that within the last month the administration is working more diligently on payments during construction, with a meeting in early July on how impact payments - payments for impact on communities during construction - are done elsewhere.

Property tax, Hoffbeck said, is a very large portion of total government take and the most consistent of tax flows because it is not price related. Because it is so important, it can’t be dealt with any earlier than the rest of project economics.

Hoffbeck said the state will likely be the largest recipient of property tax, so it’s not just a municipal issue, and said that part of the puzzle, the split between the state and municipalities, is still ahead. And that part of the puzzle, he said, does not involve the producers, just the state and the municipalities.






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