Alaska Gov. Sean Parnell has the state moving ahead on a direction he took in 2011 when he asked the North Slope producers and TransCanada to work cooperatively on a liquefied natural gas project for Alaska’s natural gas.
The state is also moving ahead based on a study the Department of Natural Resources had done last year by Black & Veatch which found that a state equity position in an LNG project would benefit the state and the producers.
Parnell told the Alaska Support Industry Alliance Meet Alaska conference Jan. 10 that the state was working with the producers — BP, ConocoPhillips and ExxonMobil — and TransCanada on a proposal for the LNG project which would include a state equity position, a direction the Legislature would be asked to approve in its upcoming session.
And part of moving ahead on a cooperative LNG project was moving beyond the Alaska Gasline Inducement Act, AGIA.
Parnell said the state had amicably agreed with TransCanada to move from the AGIA license, which TransCanada was awarded in 2008, into commercial agreements. In addition to a memorandum of understanding with TransCanada, he said he expected a commercial agreement to be signed “very soon” to provide “a transparent set of terms and road map for Alaskans to consider. That commercial agreement is known as a heads of agreement for the Alaska LNG project,” he said.
Both documents, the MOU and the heads of agreement or HOA, became public Jan. 15 and available online at www.dor.alaska.gov.
MOU
The MOU, signed Jan. 12 by TransCanada and the commissioners of Revenue and DNR, covers the transition between AGIA and a commercial agreement. It states that a commercial agreement between the state and TransCanada would benefit the state but terms proposed in the MOU would not be effective until passage of enabling legislation.
The MOU proposes that TransCanada would hold an ownership interest in the midstream portion of the Alaska LNG project (the pipelines and the gas treatment plant) and the state would have an option to acquire a share of that interest, up to 40 percent. TransCanada would provide gas processing and transportation services for the state’s share of gas.
Once enabling legislation becomes effective and commercial agreements are executed for the pre-FEED (pre-front-end engineering and design) phase, the commissioners would initiate the process of making a determination under AGIA that the licensee’s AGIA licensed project is uneconomic.
HOA
The heads of agreement, signed by the state, the producers and TransCanada Jan. 14, says the parties are currently negotiating commercial agreements for pre-FEED to move to the next phase of the project, and wish to ramp up to the pre-FEED phase, estimated to cost more than $400 million.
Enabling legislation, as defined in the HOA, includes a confidential process so the administration could participate in developing terms for contracts, and would allow for contract terms addressing such issues as state participation; a state share of gas (royalty in kind and gas in lieu of production taxes); property taxes; upstream costs and lease expenditures; in-state gas deliveries; state LNG or gas sales contracts; and Alaska hire.
Upon passage of acceptable enabling legislation, the HOA says pre-FEED work would ramp up in the second quarter of 2014 and take between 18 and 24 months to complete.
Upon completion of pre-FEED work, the parties would individually decide whether to proceed with the Alaska LNG project.
Legislative review
The agreements, signed for the state by Natural Resources Commissioner Joe Balash, Revenue Commissioner Angela Rodell and Alaska Gasline Development Corp. President Dan Fauske, will be reviewed by the Legislature.
Parnell told Meet Alaska that he would ask the Legislature to take up bills authorizing the Department of Natural Resources to modify leases; allow the state to enter gas shipping agreements; revise the production tax for natural gas; authorize AGDC to participate in liquefaction; and make other changes.
AGDC, which continues work on an in-state gas pipeline project, will participate in the LNG project through a subsidiary approved by the AGDC board.
“This commercial agreement, with its transparent set of terms, is Alaska’s roadmap to developing our vast gas reserves,” Parnell said in a statement after the agreements were released.
Rodell said the “agreement is essential to establishing the commercial structure of this project” and will allow investors to move the project forward.
Balash said that the state, as an equity partner, would “play a critical role in setting the terms for decades-worth of gas production from the North Slope” with the goal of maximizing “the royalty value of the state’s gas on behalf of all Alaskans.”
Fauske said the agreement “reaffirms AGDC’s central role as Alaska’s gas pipeline company and further enables the corporation to explore every option for delivering gas to Alaskans at the lowest possible cost,” adding that AGDC is “moving full-steam ahead” with the in-state project, which is on schedule for an open season in 2015.
Reactions to the HOA from producers
Statements from the North Slope producers highlighted the benefits they see from state participation.
In an emailed statement BP said: “This agreement integrates the resources of all parties behind this potential Alaska LNG project. It sets out guiding principles for the parties to negotiate project-enabling contracts once the Alaska Legislature passes the enabling legislation.”
ExxonMobil said: “The Heads of Agreement is another positive milestone and sets guiding principles, terms and conditions to progress work on the Alaska LNG project. State of Alaska participation throughout the value chain will improve commercial alignment; provide the state with a seat at the table on the commercial terms of the project, as well as generate additional revenue for the state.”
ConocoPhillips said: “The intent of the HOA is to provide Alaskans with a roadmap for how the parties intend to progress the Alaska LNG Project. Consistent with the principles in the HOA, ConocoPhillips looks forward to working with the Parnell Administration and the Alaska Legislature to advance discussions on fiscal and commercial terms to help progress the project.”
Legislators comment
House Speaker Mike Chenault, R-Nikiski, and Rep. Mike Hawker, R-Anchorage, legislative movers behind AGDC, put out a statement on the agreements.
Hawker said he was “pleased to see this tangible evidence of alignment among all stakeholders in an Alaska gas project. We’ve tried many times to advance gas commercialization, but this is different. The stakeholders are working as partners with common interests, rather than as adversaries.”
Chenault said this progress on a gasline project is “exactly what I envisioned four years ago with HB 369 — alignment between commercial interests and Alaska’s needs.” But construction of a project is years away, he said, and “it’s important that AGDC continue progressing an in-state gas pipeline.”
“The best line is a big line in partnership with industry, but Alaska must be ready to take care of Alaskans if a big line doesn’t meet industry’s commercial benchmarks down the road.”
Members of the Senate majority were also encouraged by the agreement.
Sen. Cathy Giessel, R-Anchorage Hillside/Turnagain Arm/North Kenai, called this “a historic time for Alaska.” “We have now moved the ball to the next 10-yard line,” she said in a statement.
Senate President Charlie Huggins, R-Wasilla, said the approach was “completely different” than the way things have been done in the past. “This is a transparent process where basic principles are agreed on up front by all parties, and then we develop principles and legislation which will guide us to a binding commercial agreement.”
“This is what getting a big project done looks like,” said Senate Finance Co-Chair Pete Kelly, R-Fairbanks. “Whether we take baby steps or giant steps, the important thing is we are always taking the necessary steps to build that gas line.”
It’s a changing world
How did Alaska come to sign a heads of agreement for the Alaska LNG project? And how did it end up bailing on AGIA?
AGIA no longer fits the project, Parnell said Jan. 10 at Meet Alaska.
AGIA was a reaction to an agreement negotiated under the Stranded Gas Development Act, which itself, the governor said, was a reaction to an agreement privately negotiated between the Knowles administration and BP for a royalty reduction at the Northstar oil field.
“The administration presented the royalty contract for legislative approval in what we thought at the time as legislators was a ‘take it or leave it’ deal,” Parnell said, referring to a time in the late 1990s when he was a legislator.
Because of concerns over what the administration might negotiate for a gasline deal, legislators passed the Stranded Gas Development Act, giving the administration the authority to negotiate, “but with some sideboards,” Parnell said, and requiring that the deal come back to the Legislature for approval.
The Murkowski administration used the act to negotiate fiscal terms for a gasline with the producers, but the deal was rejected by the Legislature, Parnell said: “Neither legislators nor the public trusted the lengthy, private negotiation process, nor the contract terms” in the contract.
Birth of AGIA
The result was AGIA, passed under the Palin administration in 2007 at a time when “Alaskans’ trust in state government had vaporized. Gasline negotiations had gone badly, and public trust over that and other issues was at an all-time low,” Parnell said.
The mindset when AGIA passed was that all the terms of a deal had to be negotiated up front, he said, and with that in mind, AGIA enshrined “must haves” in statute in exchange for Alaska participation in a gasline project.
But times changed. When AGIA was passed, parties were not working cooperatively toward a project.
“AGIA changed that,” Parnell said. After TransCanada was selected as the AGIA licensee, ExxonMobil joined TransCanada and the two worked cooperatively with the state. Separately, BP and ConocoPhillips were cooperating on the Denali gasline project.
But something else changed.
AGIA’s focus was a to move gas through Canada to the Lower 48, addressing what was believed to be a sharp decline in U.S. natural gas production, Parnell said.
But at the same time AGIA was passed, in 2007, gas volumes in the Lower 48 began to increase dramatically as shale gas began to be developed.
When did it become obvious that Alaska North Slope gas wasn’t needed in the Lower 48?
Public acknowledgement came in 2011 when BP and Conoco closed down the Denali project, Parnell said.
Meanwhile, demand in the Pacific Rim was strengthening, the governor said.
Parnell said he “set Alaska on a different course” in 2011, challenging the producers and TransCanada to back an LNG project which would provide gas for Alaskans and LNG to be marketed worldwide.
The first step involved getting the gas: resolution of the Point Thomson litigation, the governor said. He characterized the state’s actions there as building trust and reward “through incremental, verifiable performance of work commitments.”
The state brought a related principle of “commensurate, proportionate commitments” to the gasline discussions, Parnell said.
“When it comes to the gasline, the state will verify progress and make new commitments through the legislative process at multiple points, and the companies via their board room decisions at multiple points.”
Parnell said he then called on the companies “to harden their numbers, and to identify a pipeline project and work schedule,” a benchmark met last fall when the companies selected Nikiski as the terminus for the gasline.
With the vote of the AGDC board of directors to create a subsidiary to participate in the Alaska LNG project, Parnell said: “For the first time in Alaska’s history, all the necessary parties have aligned to make an Alaska gasline project go — three producers, a pre-eminent pipeline builder, AGDC — an entity that can carry whatever state interest is required of it, and state agencies responsible for the people’s royalties and taxes.”
