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State delivers gas contract to producers Van Meurs says government take best of any deal supplying frontier gas to Lower 48, among best of any long-distance supplies Kristen Nelson Petroleum News Editor-in-Chief
Alaska Gov. Frank Murkowski announced Oct. 6 that he had delivered a contract for gas line fiscal terms to BP, ConocoPhillips and ExxonMobil and expected to receive “an affirmative response from the producers within the next few days.” The governor said the contract meets the six principles he laid out for a contract: that Alaska receives a fair share of revenues from the gas line project; that Alaskans have access to the gas; that explorers — companies that don’t currently have gas reserves — have access to the line; that the line is expandable; that Alaska has an equity position in the line; and that there are provisions for Alaska jobs and job training.
The governor also said municipalities impacted by project construction “will receive direct monetary consideration.” Van Meurs: Best deal possible for Alaska Consultant Pedro van Meurs, the state’s advisor on the contract negotiations, said his “job is to make sure that Alaska gets the best deal that is possible.”
In terms of “government take” — the share of profits the government gets — “the Alaska deal is the best deal in the world” for areas supplying frontier gas into the Lower 48, better than the Mackenzie Valley, Nova Scotia, Venezuela or Trinidad, said van Meurs, an international energy consultant who works for governments.
The government take is also “among the highest anywhere supplying any market” from a large distance.
He said the state believes “this deal is also fair for the producers. This should allow them to create an internationally competitive project” because of the structure, innovative for North America, “whereby the state will assume equity risk in the project and both share and drastically change the risk-reward balance for the industry so gas companies see the minimum rate of return necessary for a very high-risk project like this while the state gains the maximum benefit.” Van Meurs: ‘the Qatar methodology’ Van Meurs said the state’s equity participation “is a very significant incentive and that is very important” for the producers.
State equity participation is based on “the Qatar methodology,” he said.
Qatar, “the most successful exporter of LNG in the world,” uses “the methodology of equity participation. This is what got them where they are today,” van Meurs said. “We learned from them and consequently what we did is follow the same overall methodology of monetizing gas that the competitors of Alaska are using.”
The Stranded Gas Development Act, he said, was passed so that Alaska could compete internationally in an arena where “all the competing nations that have large-scale gas export projects do this on a contractual basis, don’t do it on a normal license basis, and that is what Alaska had to compete with. And if you can get firm terms here and wishy-washy terms there, we go for the firm terms.” Van Meurs: Reserve-production ratios an issue Van Meurs also brought an international perspective to the question of why the producers would build an Alaska gas pipeline project.
“The biggest problem that companies have today around the world — the major oil companies — is to maintain their reserve-production ratio,” van Meurs said. Companies are “snapping away at opportunities” because if they don’t maintain their reserve-production ratio it “will have massive impact on the value of their shares, because a low reserve-production ratio means low share value.”
“… Right now there is not a single oil company in the world that doesn’t have enough cash to snap up any opportunity that is there. And consequently the large oil companies are in a ferocious competition with other investors to maintain their reserves,” he said.
At 35 trillion cubic feet Alaska gas reserves would be the largest increment companies could book.
The biggest “if” is future gas price, and how the companies feel about what the price of natural gas will be in three or four years, van Meurs said. But because of the size of the Alaska gas reserve, “which is one of the very few large gas reserves in the world, if they can monetize it now, they will definitely like to do that as soon as they can, as long as they believe that the future gas prices will support the economics of this project.”
Murkowski agreed. “What’s the incentive for the producers to develop this project beside the fact that they hold the gas reserves? Why I think it’s fair to say the ability to book the value of their gas reserves on their balance sheet is certainly a significant factor that is very meaningful at least to some of those companies.” Van Meurs: work commitments in contract Van Meurs said he has more than 1,400 international contracts in his database with which he can compare the Alaska contract.
“The quality of the legal work, the quality of the non-fiscal terms, is the best that I have seen from many international contracts. … Enormous effort went into specifying and protecting the interests of the state,” he said.
Van Meurs singled out the work commitments in the contract, calling them “the best of … any long-term large-infrastructure project that I have seen.” The commitments the state got “are not just a little bit better — significantly better than anything of any large-distance project in the world.”
He said “as soon as the contract is signed, within a few days, the companies will be obligated to start the work.”
“The contract does not include a date specific for the start of construction. That would be impossible to fix because you don’t … know what happens in the regulatory process: there could be delays in that…”
So while the work program is “very specified,” and the companies “will be required to diligently pursue that work program … certain things can be sidetracked for certain reasons and that is a reasonable situation in a very complex big project of this nature, so that is why there is some flexibility in that.”
The contract is also strong in the areas of Alaska hire and Alaska training, he said.
And there are assurances that Alaska communities will be able to access natural gas for the lowest possible price. “In fact it has unique provisions that I haven’t seen anywhere else to protect Alaskans in this respect,” van Meurs said. Van Meurs: as big as it gets “This deal is the largest deal in the world by a factor of two or three,” he said. Sakhalin in Russia is some $12 billion and Azerbaijan is also a large deal, but the Alaska project is $20 billion-plus.
“The big difference between this large deal and other very large deals in the world is that in this deal all of the investment has to be made up front. You cannot export gas if you don’t have a pipeline,” he said, whereas in many of the other big projects “development could take place in phases and some of the production could be sold once you were constructing the project, so that is much lower risk.”
The project is so large that all three of the companies have to be in it, van Meurs said.
Because major investments in the project won’t start for three or four years, there is economic uncertainty: “We don’t know what the economic conditions may be four years from now: if the gas price is $2.50 four years from now, this is not an attractive project.” Whether or not the project is economic, he said, “depends on what happens between now and four years from now.”
Murkowski said this is no “run-of-the-mill” contract.
“This is as big as they get. This is as complex as it can be,” he said.
“This is so large that the risk is not undertaken by one of the three major oil companies… They have chosen to share the risk as opposed to assuming it individually… It’s so big that no one company wants to underwrite the risk. It’s so big that this project I don’t think would have come together without the participation of the state…” Van Meurs: Companies should sign now Van Meurs said that it is in the interest of the companies to sign quickly: if they delay, he said, it might cost them more next year if the price of gas continues to be high.
He said that in his work for other governments he is starting to be asked what can be done to raise the government take because the prices are now high: “If the producers don’t want to sign this year I think next year they may have to pay more.”
But it is also in the interest of the Legislature to agree to the contract now, van Meurs said.
Alaska should “do this deal quickly and pass it quickly through the Legislature,” he said, because international liquefied natural gas could change the competitive picture.
“LNG technology is improving every day. It is not impossible … that 10 years or five years from now, LNG transportation costs will be 30 or 40 percent less … than what they are today.”
If that happens, van Meurs said, “very large gas resources will become available from all over the world for the North American market and the competition for Alaska will be much stronger.” Murkowski: Room for other projects As for the other applications the state has under the stranded gas act — from TransCanada and the Alaska Gasline Port Authority — Murkowski said the proposed contract provides for four takeoff points for gas within Alaska, at the Yukon River, Fairbanks, Delta and in the Glennallen area.
Those takeoffs, he said, “would provide the opportunity for any of the proposed LNG projects, specifically the one by the port authority, to take their gas” at one of the takeoff points, probably Delta or Glennallen, “and under an open access that FERC will hold for the bids on capacity, why that project could become a reality if indeed it meets the other tests associated with the financing as well as contracting for the volume of gas.”
The North Slope gas pipeline will go through Canada, “and what arrangement if any there might be between TransCanada and the producers and the State of Alaska is another step that we’ll be addressing if indeed the contract is accepted by the producers.”
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