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February 2014

Vol. 19, No. 6 Week of February 09, 2014

Legislative consultants, parties, start MOU, HOA discussion

The Alaska Senate Resources Committee is working through the heads of agreement, HOA, and memorandum of understanding, MOU, for an Alaska LNG project. While the state was a participant in negotiations for the documents, which if authorized by the Legislature would put the state on a path for equity participation in an LNG project taking natural gas off the North Slope for sale into Asian markets, the documents are not binding without passage of enabling legislation which the committee was scheduled to begin considering Feb. 7, after this issue went to press.

The committee heard from the Legislature’s consultants Feb. 3 and from North Slope producers, TransCanada and the Alaska Gasline Development Corp. Feb. 5. Representatives who worked on the HOA discussed the document with the committee. The MOU is between TransCanada and the state, so of the Feb. 5 panel members, only Tony Palmer was involved in those negotiations.

What’s different?

David Van Tuyl, regional manager for BP Exploration (Alaska), said the HOA tells LNG markets that the key players are united behind a single project.

Bill McMahon, ExxonMobil senior commercial advisor, said assets in Alaska are a key part of ExxonMobil’s international portfolio and told the committee the Alaska LNG project was recently moved to ExxonMobil Development Co., which has the duty to develop megaprojects.

Pat Flood, supervisor of the Alaska LNG team at ConocoPhillips, said the Legislature must decide whether the state wants to participate and at what share of its gas molecules, and noted that the administration needs the ability to work confidentially with the companies to move the project forward.

Tony Palmer, vice president of major project development for TransCanada, said TransCanada thinks “it’s historic” to have all the parties before the state with an aligned proposal, and believes this is a project that can compete in the LNG market. Palmer told legislators some terms of the MOU are more beneficial to the state than terms under AGIA, the Alaska Gasline Inducement Act.

Dan Fauske, president of AGDC, said AGDC has a project going forward, the in-state ASAP project. The Alaska LNG Project, he said, makes even more sense than AGDC. But ASAP will continue to move forward, and if it can be blended into the large export project, “so much the better.”

Impression something’s happening

The consultants, Janak Mayer and Nikos Tsafos, formerly with PFC Energy and now partners in enalytica, were hired by the Legislative Budget and Audit Committee to provide analysis for legislators. Both were part of the PFC Energy week-long global LNG industry symposium held for legislators in August.

At the time of the symposium, Tsafos said, the impression was that there were a lot of different plans for Alaska natural gas.

He said the HOA and MOU, announced in January, give analysts the impression that something’s actually happening.

The HOA covers all segments of the project while the MOU is about the midstream portion.

The midstream could be structured with just producer ownership; with producer and state ownership; or with producers, state and a third party, which involves terminating or leveraging the existing AGIA license, Tsafos said.

Strengths and weaknesses

If the midstream is owned only by the producers, there is significant potential for disputes over allocation of value and setting the optimal level for a midstream tariff, Mayer said, as well as expansion, since the focus would be on commercializing the producers’ resources, not that of third parties. There could also be uncertainty over the tariff for in-state deliveries of the state’s gas.

Positives from producer ownership include their proven abilities to execute projects, but Mayer noted that midstream is becoming less of a focus for the majors. There could also be issues over work done to date, he said.

If the state takes an equity position in the midstream there is more bias for expansion, Mayer said, but more of a burden on the state, with stronger alignment between the state and producers, but reliance on the state to drive expansion.

With the MOU between the state and TransCanada, strong producer-state alignment is maintained, he said. TransCanada would be an advocate for a project that encouraging expansion and would have incentive to drive expansion. The state could use its capacity to carry gas to local markets and TransCanada brings execution knowledge and expertise, Mayer said, while the producers would reinforce cost discipline.

Another bidding round?

Mayer said the state could go out for a new round of bidding for a pipeline partner, which could lead to either a lower or a higher rate. Looking back to AGIA, Mayer said there is the question of how many bidders there would be (only one bid under AGIA, TransCanada’s, was found to be complete). A new third party would likely have less influence in current negotiations, there would be uncertainty over the fate of work already done and HOA negotiations could slow down in anticipation of a new bidding process and license award.

—Kristen Nelson






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