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Legislators get quarterly LNG update All parties concerned by slow progress on commercial negotiations; work on technical side progressing as expected; 48-line an issue KRISTEN NELSON Petroleum News
Progress is being made on the technical side of the Alaska LNG project, but legislators, the administration and producer partners in the project all noted the slow progress of negotiations for commercial terms at a Sept. 9 quarterly project update to the Senate and House Resources committees. And representatives of producers in the sponsor group - BP, ConocoPhillips and ExxonMobil - continued to express concerns over fiscal terms for the project and the state’s intentions on ownership of the midstream portion of the project.
Legislators did, however, get a pretty positive report on progress on the technical side of the project from Steve Butt, AKLNG project manager. He told legislators that technical work was going well. Modules are being assembled at Point Thomson which along with Prudhoe Bay will provide natural gas for the project, he said, and the project has done extensive work with the Prudhoe Bay operator, an advantage the integrated project has over previous pipeline-only projects.
The pipeline route has been finalized, Butt said, with some more work to do on some sizing issues.
And $243 million has been spent through July on pre-FEED, front-end engineering and design, he said.
The initial design for the LNG plant and marine terminal was 72 percent complete through the end of July, Butt said, with initial design for the pipeline 78 complete initial design for the gas treatment plant 86 percent complete.
Size of the line The project is working with the federal pipeline regulator, the Pipeline and Hazardous Materials Safety Administration, to confirm the pipeline design basis and special permit conditions.
A 42-inch pipeline was selected, and is in the testing phase, based on the known and discovered natural gas at Point Thomson and Prudhoe Bay, and the system size which makes sense to monetize known gas over a 25-year period, Butt said.
But Gov. Bill Walker has requested that the project look at a 48-inch line, and testing is needed for the 48-inch line to make sure it would work, Butt said. He discussed a comparison of the two pipe sizes which indicated that the 42-inch line would have the lower capital cost of the two, but the 48-inch line would have a lower operating cost. While the 42-inch line would have more construction risk than typical pipelines in the U.S. because the pipe is 22 percent heavier than other North American gas pipelines, the 48-inch line would have more construction risk than the 42-inch line and would be 59 percent heavier than typical pipelines in the U.S.
There would also, Butt said, be concerns about the Cook Inlet crossing because of the additional weight of the 48-inch line. He said the project team is a lot less confident in the ability to lay a 48-inch line across Cook Inlet because of the challenge of high tidal movement and mud and areas close to shore where you can’t get a lay barge in.
The cost issue Butt said the project team has recommended spending a few tens of millions in the existing budget for an apples-to-apples comparison of the 42-inch and 48-inch lines, to test the 48-inch pipe to the same level as the 42-inch, but said there has been no decision yet.
There is a pending motion to take money out of the budget to study a 48-inch line, and ExxonMobil has agreed, but other parties have two weeks to make that election. Under the joint venture agreement all parties have to agree to allocate the money, he said, and a change in the project from a 42-inch line to a 48-inch line requires agreement by all parties, Butt said.
The 48-inch pipe had to be ordered for testing and it will take months for the pipe to be made up. He said the pipe should arrive in early 2016 and then testing will begin.
Butt also said the 48-inch pipe is harder to build and said the project has not been able to find a mill in the U.S. which can do 48-inch pipe. There are other 48-inch pipes, he said, including the trans-Alaska oil pipeline, but other 48-inch lines in the U.S. don’t have the pipe thickness required for the gas pipeline, just the diameter. He said operating pressure and length are the issues and in Alaska where the ground moves the line has to be built under strain-based conditions. He said there is a 52-inch line in Turkey, but it is thinner and weighs less than the proposed 42-inch pipe for the Alaska project.
Cost by stage Butt reviewed the stages of the project: concept selection; optimization (pre-FEED); define (FEED); and execution.
Each stage, he said, is about reducing risk and uncertainty as you increase spending. Illustrating the increase in spending, Butt said costs are some $35 million a year in concept; $35 million a month in pre-FEED; $35 million a month in FEED; and $35 million a day in the construction phase.
Asked what the project needs from the state, Butt said the project needs some clarity on what role the state will play and how it wants to be represented in the midstream and how the state plans to fund additional activities.
Commercial issues The commercial side of the project, the sponsor group, was represented by Dan Fauske, president of the Alaska Gasline Development Corp.; Bill McMahon, senior commercial advisor, ExxonMobil; Lee Vincent, director of major projects development, TransCanada; Dave Van Tuyl, regional manager for BP in Alaska; and Darren Meznarich, ConocoPhillips Alaska project integration manager for Alaska LNG.
Fauske said in introductory remarks that the state team believes the AKLNG technical team is doing well progressing design, engineering and permitting for the project, but said the state team is concerned about lack of progress on key commercial and fiscal issues. He said it appears not all parties are equally motivated to get the project built and said slow progress on some key agreements won’t allow completion in time for a special session of the Legislature this fall. Those key agreements include gas balancing negotiations which Fauske said are at a virtual standstill; governance and operating agreements which are not on schedule for a legislative review this year; lack of a fiscal or tax stability agreement; and lack of provisions for withdrawal by a party which would allow the project to proceed without interruption. The withdrawal provision is something Gov. Bill Walker wants included.
Fauske said the state team doesn’t intend to bring an incomplete package to the Legislature, but there are policy decisions and interim funding which may need to be resolved in a special session.
The state buyout proposal Asked about the governor’s plan for a buyout, TransCanada’s Lee told legislators the precedent agreement the state and TransCanada entered into in 2014 allows either party to terminate the agreement, and said that at the governor’s request TransCanada has been working with the administration on a process to allow the state to terminate the agreement and assume TransCanada’s interest.
Marty Rutherford, deputy commissioner of the Department of Natural Resources, told legislators that the total projected amount the state would be responsible to reimburse TransCanada through pre-FEED is estimated to be $108 million, including some $77 million TransCanada has paid in cash calls on the state’s behalf, some $18 million in TransCanada costs for pre-FEED, some $6 million in concept selection costs prior to pre-FEED and $8 million in carrying costs.
Rigdon Boykin, the state’s lead negotiator for AKLNG, and formerly bond counsel to the Alaska Gasline Port Authority, said TransCanada financing has been important, but over the long term that financing would probably be more expensive than any financing the state might be able to get from another source. He said that as the project moves forward, people will be more willing to take the risk of lending.
Rigdon Boykin Rutherford said the governor asked her to step down as AKLNG lead about two months ago, and Boykin then became intimately involved in AKLNG negotiations.
Boykin previously worked with the Alaska Gasline Port Authority, formed in October 1999 by a vote of the residents of the Fairbanks’ North Star Borough, the North Slope Borough and the City of Valdez. Walker was general counsel for the port authority and Boykin was advising the authority as bond counsel as early as the end of 1999.
Boykin said the state had pushed for joint venture marketing, and told legislators the state felt joint venture marketing would make a difference in aligning all the parties. But ExxonMobil decided for business reasons that they could not participate, so the state is trying to formulate individual joint venture marketing with the producers. He said joint venture marketing would help with gas balancing and lifting issues.
Boykin said ConocoPhillips was aligned with the state on joint venture marketing, but after pushing the issue with ExxonMobil for some four months and getting nowhere the state decided it had to accept ExxonMobil at its word that it was an extremely important issue for them.
Speed bumps expected BP’s Van Tuyl told legislators that it shouldn’t be a surprise that negotiations are difficult because each party has its own needs and concerns. If there were no speed bumps, he said, it would indicate the parties weren’t driving down the road. He said AKLNG is “critical to BP in Alaska” as well as to Alaskans, and said BP is committed to working out remaining issues as quickly and as fairly as possible.
Van Tuyl said progress was being made, and noted there were many very complicated agreements to be reached. It can be painfully slow and laborious, he said, and has involved long nights and long weekends. It’s frustrating, but it’s also a sign of progress, Van Tuyl said.
Disappointed in slowness ConocoPhillips’ Meznarich said ConocoPhillips was working hard to complete technical work and commercial and fiscal agreements, and said gas supply agreements are the most important from Conoco’s perspective. Certainty of gas delivery from Prudhoe and Point Thomson is necessary for marketing and financing, he said, but a fiscal package is also crucial to assure a solid commercial agreement.
On the governor’s desire for withdrawal terms, Meznarich said Conoco understands that the governor wants the project to move forward even if a partner drops out, and said Conoco has indicated it would make its gas available, but said the company’s primary focus is on being an equity partner in the project.
Fiscal terms, financing McMahon said ExxonMobil is a strong advocate for AKLNG. There are two key requirements for a FEED decision, he said, an agreement on acceptable fiscal contract terms, predictable and durable, and completion of pre-FEED work. He said ExxonMobil encourages action from the state and said the company supports a constitutional amendment allowing fiscal certainty, and supports getting that amendment on the ballot in November 2016. If we don’t make that window, McMahon said, November 2018 would be the earliest the amendment could be up for a vote.
He said commercial agreements won’t be completed for a special session, but said there are things the state can do, including property tax and approving financing.
Asked about challenges to the project, McMahon said the challenges are about cost and supply, and said all parties need to work together for the lowest cost of supply so the project can compete, and said there needs to be work on both big ways and little ways to lower capital and operating costs.
Key commercial agreements where progress has been made include tentative agreement on flow-related property tax after startup and on impact payments during construction, McMahon said.
The list of “remaining challenges” was much longer, including establishing the role of the state as a project participant; timely completion of key commercial and fiscal contracts; royalty decisions - lease modifications and royalty-in-king election by the state; legislation for property taxes; and legislation to authorize a public vote on a constitutional amendment providing durable and predictable fiscal terms.
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