A joint-venture marketing arrangement for North Slope liquefied natural gas announced Sept. 21 between ConocoPhillips and the Alaska Gasline Development Corp., the state gas corporation, is a step toward a similar arrangement that had been discussed earlier but rejected among the four partners now in the current Alaska LNG Project.
During a trip to Singapore the signing of a Memorandum of Understanding was announced by AGDC and ConocoPhillips that will guide negotiations toward a joint-venture marketing program.
ConocoPhillips had pushed the idea during negotiations among the parties and the state on Alaska LNG commercial terms, and with the state’s support, but the idea was strongly opposed by Exxon Mobil Corp., one of the Alaska LNG partners and the largest owner of gas reserves on the Slope.
“ConocoPhillips has always supported joint-venture marketing and we see this as a first step,” company spokeswoman Amy Jennings Burnett said. The other two major North Slope gas owners, BP and ExxonMobil, will be invited to join the effort.
BP would not comment on the proposal and ExxonMobil is considered unlikely to change its position.
Potential issues
Aside from commercial complications for larger companies, who now do their own LNG marketing, a combined marketing entity may raise anti-trust issues, people familiar with North Slope gas point out.
Joint-venture LNG marketing essentially involves two or more owners pooling their resources into a dedicated marketing organization and staff. That compares with what some call “equity” marketing, or essentially each gas owner selling its own LNG through individual marketing units and staffs.
One variation of a four-party JV marketing is two gas owners, or even three, pooling their LNG for sales. Also, the current Heads of Agreement document among the four parties gives the state the option of contracting with a producer company with a marketing organization for sales of state-owned LNG. That eliminates the state having to set up its own marketing group.
Another variation of this is the state contracting with all three of the producer companies to sell a portion of the state’s gas, so that there could be, in theory, three separate, competing marketing groups all selling a portion of the state’s gas along with their own.
There is a certain logic in this in that the state’s royalty gas share, and its tax share, is an approximate 25 percent share of each producer’s production.
State lacks marketing staff
For gas owners like the state who do not have existing marketing staffs there are obvious advantages in teaming up with a major producer because the state can take advantage of the expertise of the industry partner.
One advantage of separate arrangements with all three producers is the state having the benefit of the strengths of the separate companies, who all compete in gas and LNG marketing. There could be a lot of flexibility for the state in such arrangements, particularly if they are for set periods of time.
Setting up a dedicated JV marketing group with all four gas owners would have the entity as its own marketing and contract organization so that LNG sales contracts are signed by that entity rather than individual companies.
ExxonMobil has not commented on its objections to four-party JV marketing but one possible reason, aside from antitrust worries, is that large companies with their own LNG marketing may prefer to keep things that way because it gives them great flexibility in negotiating contracts.
For example, a large company would sign a gas sales contract with a large LNG buyer and could guarantee supply from several places the company might produce gas and make LNG, for example LNG from Alaska, Indonesia or elsewhere.
For the customer there is the knowledge that supply sources are diversified and that if a company has a production problem at one place the shortage will be made up with supply from elsewhere.
Backstop arrangements like this are possible among participants in JV marketing too but it raises more complications, and those can worry customers who are concerned, most fundamentally, with security and regularity of supply.
The nature of a joint-venture marketing program that could emerge from the AGDC-ConocoPhillips negotiations is unknown, and AGDC said Sept. 28 that it cannot now release copies of the MOU, which the state gas corporation has signed.
Other issues
According to AGDC’s Sept. 21 announcement, the MOU also commits the state and ConocoPhillips to work together in general to promote the Alaska LNG Project in the market. Once the JV is formed, it is anticipated that initial efforts would focus on gathering LNG information in support of gas and LNG supply arrangements.
“The JV would also seek to establish terms for sufficient and reliable supply of gas to the project, resolving longstanding project gas supply assurance issues,” the AGDC announcement said.
The mention of gas supply assurance issues speaks to another problem that was not resolved in the four-way commercial negotiations, a “gas balancing” agreement among the three producers and the state setting out terms for handling possible production upsets in either the Prudhoe Bay or Point Thomson fields, which would both supply gas to Alaska LNG.
ExxonMobil, BP and the state own gas in both Prudhoe and Point Thomson but ConocoPhillips’ gas is mostly in Prudhoe Bay, and the gas supply agreement is a major priority for the company, ConocoPhillips officials have said several times.
If there are complications in a field-level gas balancing agreement much of what the balancing agreement would have accomplished, in making up supply shortfalls between the producers, could also be accomplished within a four-party JV marketing group. That is one possible reason ConocoPhillips, with the state’s support, pushed the idea.
In its announcement, AGDC also said, “the MOU anticipates that other producers or third parties could join the JV, make gas available via wellhead sales, or commit to tolling arrangements with the Alaska LNG Project.”
A tolling arrangement is where the Alaska LNG Project would ship gas for a third-party gas owner and charge a fee, or toll.
