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AKLNG negotiations slower than hoped Rutherford tells House Finance subcommittee state doesn’t expect to meet spring deadline, appropriation request being reduced KRISTEN NELSON Petroleum News
The state doesn’t expect to meet a spring target for completion of commercial agreements for the Alaska LNG Project, Department of Natural Resources Deputy Commissioner Marti Rutherford told a House Finance subcommittee Feb. 11.
As a result, the appropriation request for the North Slope Gas Commercialization Office is being reduced, she said.
Rutherford said the state thought they’d be much further along in negotiations for commercial agreements than they are now - and also thought they’d be much further along by mid-March. She said the state is still in the midst of discussions with each of the producers on a bilateral basis.
And that affects the budget request for the project. She said because negotiations are going more slowly than expected the state doesn’t believe it will be in a position to have to commit to three of the very expensive marketers included in the appropriation request.
A slide Rutherford used in her presentation says the state’s “gas team will continue negotiations at current levels into FY2017.” Fiscal year 2017 begins July 1.
Then, beginning in FY2017, the state gas team will ramp up marketing efforts.
The appropriation request is being reduced by $9 million, with the biggest chunk of that, $5.7 million, coming out of personal services, followed by a $3 million reduction in contractual services.
The change reflects a reduction in 10 positions. The governor had requested 21 positions, the revised request calls for 11.
Negotiations behind Rutherford acknowledged that commercial agreements are behind where the state had hoped they would be, but said negotiations always go at their own pace, with the need to find a middle ground that most closely meets everyone’s needs. There are four parties in the discussion, she said, and even among the producers parties have very disparate interests.
Initially the state had hoped to bring commercial agreements to a fall 2015 special session for legislative approval, but now, she said, it looks like the state won’t be able to meet the spring 2016 deadline either.
Rutherford said this also affects the DNR decision on royalty in kind, because certain of the commercial agreements must be in place before the DNR commissioner can make a royalty in kind vs. royalty in value decision. She said the department believes it will take as much as 60 days after all major terms are agreed to for a decision on whether taking gas as RIK would be in the state’s benefit.
Rutherford said while commercial negotiations for AKLNG are behind, technical project activities are moving along very well.
Scaling back Personal services included in the revised appropriation include three new positions: senior marketing negotiator, at $1.2 million in salary and benefits; market analyst at $285,000 in salary and benefits; and a marketing negotiator at $960,000 in salary and benefits.
Those individuals will assist the legal team and will also begin outreach to the marketplace, Rutherford said.
Once a marketing structure is identified, those position would move over there, she said, noting that the Legislature will have to provide the authority for that organization and they will have to be funded.
Services in the appropriation request include $15 million to the Department of Law for reimbursable service agreements for legal support for commercial agreements negotiation and drafting, estimated at $1 million a month for outside counsel. Rutherford said the Department of Revenue gets funding directly for their work on AKLNG, while the Department of Law’s money in general flows through DNR, although there is some $750,000 in Law’s own budget.
The bulk of Alaska Gasline Development Corp. funding is for their work on AKLNG infrastructure, although AGDC has some involvement in commercial negotiations.
The structure On the issue of marketing the state’s gas Rutherford said AGDC will be marketing in-state to utilities through an aggregator it will set up, buying gas from all the co-venturers and acting as the facilitator for the utilities that need gas for in-state use.
Marketing of the state’s share of LNG to foreign markets will be done by an organization outside DNR, Rutherford said, calling it as a joint venture or an equity organization completely separate from DNR.
DNR, she said, will have the same role it does with the state’s royalty oil - making sure the state gets its right share, but once DNR gets those molecules it will be transferring them to the marketing organization.
Rutherford said she thinks of that organization in much the same way as when the Permanent Fund was set up - the marketing organization needs that level of expertise, she said, although it will be dealing with the state’s gas rather than the state’s money.
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