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Vol. 21, No. 5 Week of January 31, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

Commercial difficulties

Gov. Walker threatens other alternatives; owners say negotiations difficult

KRISTEN NELSON

Petroleum News

While technical work on the Alaska LNG Project is moving along, progress on commercial agreements is not moving at the same pace. Those commercial difficulties were addressed Jan. 27 when representatives of the participants in the project updated the House and Senate Resources committees.

It became public in those hearings that Gov. Bill Walker sent a letter to the state’s partners Jan. 18, demanding completion of commercial agreements by the end of the 2016 regular session of the Legislature. The governor listed major agreements needed and said if agreement was not reached, “then I will have no other choice but to consider other options for commercializing Alaska’s gas.”

The administration believes that a constitutional amendment will be required for the fiscal certainty the producers require for investment in the project. Constitutional amendments can only go on general election ballots, and if a constitutional amendment doesn’t meet deadlines for the November 2016 general election, the next opportunity wouldn’t be until 2018.

The stage-gated AKLNG project is now in the preliminary front-end engineering and design phase. Advancing to the next phase, from pre-FEED to FEED, would occur at the end of this year and requires agreement by all of the partners - the state, BP, ConocoPhillips and ExxonMobil.

The state’s partners have said that one of the requirements for consideration of a move from the $500 million pre-FEED phase to the plus-$1 billion FEED phase would be fiscal certainty for the $45 billion to $65 billion project.

Scheduling difficulties

Marty Rutherford, deputy commissioner of the Department of Natural Resources, told legislators that while the administration is pleased with progress on the technical side of the project it is not pleased with progress on the commercial agreements. She said the administration was committed to the project but was very concerned at the slow pace of the agreements and noted that the governor had wanted a fall 2015 special session for legislative approval of the agreements and was now looking at a spring 2016 special session.

There is a deadline in June for legislative approval of a constitutional amendment to be on the November general election ballot, and that won’t happen until the Legislature has approved commercial agreements for the project.

ExxonMobil’s view

Bill McMahon, senior commercial advisor for project lead ExxonMobil, said there are teams dedicated to each agreement and said a key is making sure there is a clear understanding of each partner’s position and then trying to find ways to bridge gaps.

These are very complicated, one-of-a-kind agreements, he said, and it won’t be possible to move them forward until all the parties are ready.

When it comes to making a decision to move to FEED, ExxonMobil will look at the cost and execution schedule, the outlook for Federal Energy Regulatory Commission permits and other permits, market confidence and the business environment. He said fiscal and commercial agreements would need to be in place, and said ExxonMobil has a special interest in mutually acceptable fiscal terms, because projects must be extremely cost competitive to survive market ups and downs.

BP

Dave Van Tuyl, regional manager for BP in Alaska, said progress has been made on commercial agreements, but there is still much work to be done. He said BP understands the governor’s statements on the need to make progress and agrees, but, he said these are agreements are complicated and each party has its own needs and concerns.

He said from BP’s perspective it is essential that the agreements are done well and said it will take time to make everyone comfortable. Van Tuyl said he couldn’t tell legislators when the agreements will be done, but said they need to be done fairly and done well and having all of them complete in the given time period will be a challenge.

ConocoPhillips

Leo Ehrhard, vice president of commercial assets for ConocoPhillips, said ConocoPhillips continues to support the project, but in light of weak oil and gas prices the project faces stiff head winds. He said the company has to be a careful steward of its cash, including investment in AKLNG, and said ConocoPhillips will work with project partners to find savings in the 2016 spend for the project.

On the commercial agreements, Ehrhard said they haven’t made the progress they’d hoped and said it would be very difficult to complete the complicated agreements before a special session. The gas supply agreement is foundational and very important to ConocoPhillips, he said, as it governs the amount of gas to be supplied to the project from Prudhoe Bay and Point Thomson.

Ehrhard also said the commercialization of Alaska North Slope gas is important and in a situation of impasse ConocoPhillips would not stand in the way of the project going forward.

Oil tax issue

Asked how a change in Alaska’s tax policy on oil tax credits and the minimum tax would affect the gas project, Van Tuyl said that from BP’s perspective a successful AKLNG project will depend on a healthy base oil business. He said BP is working on doing what it can to improve its cost base at Prudhoe Bay, but said an increase in oil tax would be an additional challenge on top of those the project already faces.

McMahon said he supported Van Tuyl’s comments and also said an increase in oil taxes would impact ExxonMobil’s decision to enter the FEED phase and also its final investment decision.

Ehrhard said ConocoPhillips agreed with those comments.



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