Parnell: Multiple gas options in play

LNG project under way to provide natural gas to Interior; AGDC working in-state line; next benchmark up for large diameter line

Steve Quinn

For Petroleum News

Oil taxes may have grabbed more headlines, but advancing a natural gas pipeline project and marketing North Slope gas never fell off the draft board in Gov. Sean Parnell’s office.

Last fall, Parnell traveled to Japan and Korea to tout the state’s export prospects, highlighting decades of reliable Cook Inlet deliveries to Japan.

Later that fall, Parnell proposed a $365 million financing package to deliver North Slope natural gas to Fairbanks and other Interior communities. With the Legislature’s backing, he advanced this project (Senate Bill 23) and an in-state line (House Bill 4). Both bills received Parnell’s signature within the last month.

For the second straight year, he kicked off the legislative session by outlining expectations to advance a large-diameter natural gas pipeline.

News of two benchmarks for North Slope leaseholders ExxonMobil, ConocoPhillips and BP, and pipeline company TransCanada was expected no later June 20.

Those benchmarks are: a commitment to a full summer of field season work and enter the pre-FEED stage, also known as pre-front-end engineering and design, which means, Parnell says, committing hundreds of millions of “private sector” dollars.

Parnell spoke with Petroleum News about progress made toward marketing North Slope gas and advancing a pipeline project. This is the second of two-parts.

Petroleum News: You’ve has some fun signing some natural gas bills, starting with HB 4. What do you see as the value in advancing a natural gas pipeline project?

Parnell: Well, I think it’s at least two fold. The AGDC (Alaska Gasline Development Corp.) can carry the state’s interest in a 42-inch line with the producers or it can continue moving with other parties on its own line. That’s just the benefit of HB 4. It’s given us the opportunity to get Alaska’s gas to Alaskans. It’s made it flexible enough to achieve it one way or the other.

Petroleum News: On the shorter term, your LNG trucking proposal from the fall is coming to fruition with SB 23. Is this what you had in mind back in the fall?

Parnell: Absolutely. For the first time in Alaska history, North Slope gas will be commercialized for the benefit of Alaskans, particularly those in the Interior. Secondly, this Interior energy project will provide an energy distribution system not just for the near-term trucking solution, but it provides a distribution system for when a gas line is completed through Alaska.

Petroleum News: So would these two become compatible in any way?

Parnell: They already are. SB 23 authorizes financing for a gas distribution system. That distribution has to be in place for Fairbanks residents, for example, and other Interior residents, to benefit from a gas line. So they are already complementary.

Petroleum News: Let’s go back a year and a half. How has the Point Thomson agreement paid off toward a pipeline project? It’s pretty well accepted that Point Thomson is critical to advancing a large-diameter line.

Parnell: So far it’s hundreds of new construction jobs at the field. Next we should be seeing more liquids production from Point Thomson for the peoples’ benefit by 2016. Finally, there is significant value in positioning that field to feed a large-diameter gas line. There is more going on than people appreciate it. You should call the companies and ask for employment figures. I think because it’s on the east side of the North Slope — out of sight, out of mind for most. Unless you’re flying over that area, you wouldn’t know how much activity is going on in that area. It’s been an economic boom for Alaska companies when it comes to construction and trucking and contractors.

Petroleum News: Can you elaborate on what you envision with both projects possibly coming together? I know there have been some criticisms directed toward these prospects.

Parnell: I think too many people get stuck on what they see. I think what they see is AGDC working one project — the 36-inch line project — and they see the producers and TransCanada meeting benchmarks that I set in my State-of-the-State addresses under an AGIA framework in another project. What is seen are really two projects. What I envision is one project for Alaskans. Rather than seeing what is, I see what can be. Here’s what I mean by that. If the producers and TransCanada meet the benchmarks I set, then I envision AGDC carrying Alaska’s interest in the 42-inch line. If the producers and TransCanada do not meet those benchmarks, then I see AGDC moving forward with its own plans for a line. That’s, in short, the framework we have.

Petroleum News: Do you believe there has been enough movement for people who have been hearing about a natural gas pipeline for the last four decades to feel optimistic?

Parnell: When I came into office, Point Thomson had not been resolved and the companies were not aligned on negotiating on a project together. Where we are today is what we have now is a corporation that is empowered to carry the state’s interest on a gas line and capitalized to carry that interest. We have four companies — Conoco, BP, TransCanada and Exxon — negotiating their commercial terms, and to me that’s progress. But I understand. Alaskans and I are frustrated as can be at not having gas at this point. But I also can look back over the last three years and see progress and see that we’re in a historic place and the state has never been positioned better to move forward on a gas line.

Petroleum News: At some point there will probably have to be fiscal term negotiations. Has SB 21 taken care of some of that or will there be more items to bring to the table?

Parnell: SB 21 resolved the competitiveness of the oil tax system. Anybody who runs gas through a gas line will want some different gas tax terms. What I’ve said multiple times is that we as the state will take commensurate, proportionate steps with companies that want to build a gas line. Meaning, don’t expect billions of dollars in tax changes unless you are willing to put billions of dollars on the table for a project.

For instance, back in the day of the Stranded Gas Development Act, the producers and the state had agreed on a framework for gas fiscals and certainty over a long period of time, but the producers had made no commitment commensurate with what the state had made, and I will not put the state in that situation. Instead, my view is this: the state has already committed up to $500 million under AGIA framework for reimbursing the licensee there. The state has already committed over $300 million to capitalize AGDC to carry the state’s interest in a line. With hundreds of millions of dollars in value already on the table from the state I am looking for the companies to put forth hundreds of millions of dollars of effort. That’s what I mean by commensurate proportionate steps.

This is a different situation than 10 years ago when companies were asking for fiscal certainty but then could come back for a second bite of the apple because they hadn’t made a specific commitment to sanction a project. Lots of work to do there yet, but we’re making progress.

Petroleum News: Do you have any timeline to offer?

Parnell: You’ve seen me lay it out very clearly in my State-of-the-State address. You can look at the 2012 benchmarks I set that were met. Now 2013 has two benchmarks that come due here very quickly. One benchmark was that they would conduct a full summer field season. The second benchmark was they would complete a pre-FEED commercial agreement, that’s a pre-front end engineering and design.

That pre-FEED is not sanctioning a $30 billion project. That’s not what that part is. That pre-FEED commercial agreement is the companies’ commitment to move forward on hundreds of millions of dollars of work related to pre-front-end engineering and design.

My design in putting in that benchmark is to bring the companies to a commensurate level of monetary commitment that the state has made under AGIA and with AGDC. The companies are spending tens of millions of dollars now; I want them committing to hundreds of millions in this next phase, known as pre-FEED in the industry.

That’s the commensurate proportionate step. If you read the words in my state-of-the state address very closely, it talks about “by spring.” Well as you know spring is a three-month period ending about June 20, so we’ll know very soon whether they are going to meet the benchmark of a full summer field season and the benchmark of a pre-FEED commercial agreement.

Petroleum News: For the next legislative session what would you like to be doing for the natural gas line?

Parnell: I’d like to see the companies moving forward with their pre-FEED commercial agreement. I’d like to see AGDC moving forward under its statute sharing information. The bottom line is we’ve got to get another summer field season in. We’ve got to get these parties aligned with a commercial agreement. And if not, the state has to continue its course in building our own.

Petroleum News: Resource Energy Inc. made some news about a completed feasibility study. Could this represent a buyer becoming a direct investor? What are your thoughts about this development out of Japan?

Parnell: Don’t think that was done in a vacuum. We signed an MOU (memorandum of understanding) with them months ago to accomplish just this. I met with their leader in Japan. Commissioner (Dan) Sullivan has had multiple meetings with them. In fact Commissioner Sullivan met with them before I went to Japan and Korea. We’ve been working with them and providing information under the MOU for quite some time now.

Certainly, they are doing just what we asked: presenting their findings to the state and presenting their findings to the producers who are involved in building the line. The producers have worldwide gas marketing organizations. The companies like REI and others, they represent investors in liquefaction facilities, in leases, in gas treatment plants, and we certainly are looking at all options.

Petr