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April 2014

Vol. 19, No. 16 Week of April 20, 2014

House Finance planning to amend Senate Bill 138

Governor’s enabling legislation for state participation in an Alaska LNG project in last House committee as Legislature winds down

Kristen Nelson

Petroleum News

As Petroleum News went to press Senate Bill 138, the governor’s enabling legislation for state equity participation in an Alaska LNG project, was in the amendment process in its last committee, House Finance. The committee received numerous briefings on the heads of agreement and the memorandum of understanding before receiving the bill from House Resources April 11. The Legislature is set to gavel out April 20.

House Finance members have expressed concerns over a number of issues, some raised by consultant Roger Marks, and some raised by the Legislature’s main consultants on the bill, Nikos Tsafos and Janak Mayer of enalytica.

Step by step or all in advance

Tsafos and Mayer highlighted what they see as the Legislature’s major decision in testimony April 11 and April 15.

On April 11 Mayer said that at a high-level overview much of the discussion comes down to commitments the state is making now and those it makes in the future — and how much it should try to nail down now and how much it should negotiate in the future.

The administration has described the process under the heads of agreement (signed by the commissioners of Natural Resources and Revenue, the Alaska Gasline Development Corp., BP, ConocoPhillips, ExxonMobil and TransCanada) and the memorandum of understanding (between the state and TransCanada), a process which is enabled in SB 138, as a step-by-step procedure, with the first step allowing the state to engage in pre-FEED (front-end engineering and design) work for an Alaska liquefied natural gas project.

Negotiations would result in long-term agreements requiring legislative approval and legislators would be consulted under confidentiality agreements as talks progress.

Mayer said from a legislative perspective it is difficult to think about decisions in the future, but he said the decision facing legislators was whether to approve an initial framework with partners committing to work together to go forward or laying it all out in advance, as was done under the Stranded Gas Development Act, before money is spent refining the project.

Marks says get in after sanction

Marks told the committee April 11 that he views the big questions before legislators as should the state get into the project before the project is sanctioned — the final investment decision; financing options other than through TransCanada; and whether the Alaska Gasline Inducement Act project can be declared uneconomic giving the state freedom to go forward without TransCanada, which holds the AGIA license. The MOU transitions the state and TransCanada out of AGIA and into a more traditional commercial arrangement under which TransCanada would put up money for the state’s share of the North Slope gas treatment plant and the pipeline, which the state would repay through a transportation tariff once gas begins to flow.

By delaying state participation until the project is sanctioned the state would eliminate the risk of spending money developing a project which doesn’t get built, he said.

Marks also said he thought the state taking its gas in kind rather than in value was a powerful economic incentive that could well make the difference to the producers in whether they do a project, but he said it would remove a lot of risk to the state if legislators required the producers to sell the state’s gas with their own at the same price.

Everything in parallel

Tsafos said whether legislators pass the legislation or chose a different path, the most difficult thing about LNG is that everything has to take place in parallel, not in sequence. You can’t sell gas unless people know you have gas; you can’t sell gas without knowing the cost of the project — which determines the cost of the gas.

You can decide in advance, Tsafos said, but because there are multiple parallel paths that are interdependent you have to decide everything up front.

On the issue of state involvement only after the project is sanctioned, Mayer said that would eliminate the financial risk to the state during pre-FEED and FEED, leaving the producers to bear all the risk. But the producers would have to decide to do that, he said, which would mean putting the HOA aside and starting from scratch and negotiating what he described as hundreds of pages.

Mayer said as a legislative consultant he finds slow escalating commitments going along with work to understand details of project and bring down risk appealing compared to past approaches.






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