Alaska's Walker Presses ANS Producers for more Progress on LNG Export Project

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Alaska Gov. Bill Walker (I) notified three Alaska North Slope oil and gas producers that he will consider other ways to generate revenue for the state if more progress is not made on reaching operating milestones for the Alaska Liquefied Natural Gas Project before the legislature completes its regular session.

Walker asked state lawmakers to consider reinstating a tax on unproduced ANS gas reserves when he called them into an October special session to discuss gas issues because he felt that commercial agreements with BP PLC, ConocoPhillips Co., and ExxonMobil Corp.’s Alaskan affiliates were taking too long to reach (OGJ Online, Sept. 25, 2015).

Noting that he previously said that commercializing the abundant ANS gas resources is “my highest priority,” Walker said in his Jan. 18 letter to the affiliates’ top officials, “Given Alaska’s $3.5-billion annual deficit, we have no option other than to monetize this valuable asset as soon as possible.

“Prior to the start of the 2016 regular legislative session, I want to reiterate my expectations for the milestones that BP, ConocoPhillips, and ExxonMobil must reach concerning the development of [the project],” he said. “It is my understanding that you and your teams are aware of and working towards these milestones.”

Walker sent the letter to BP Exploration (Alaska) Inc. Pres. Janet L. Weiss in Anchorage, ConocoPhillips Alaska Inc. Pres. Joe Marushak in Anchorage, and ExxonMobil Development Co. Vice-Pres. for Arctic Projects Jim Flood in Spring, TX.

He said the state and the producers entered into a heads of agreement in January 2014 that laid out an agreed-upon roadmap for the project. It involves construction of an 800-mile gas pipeline from Prudhoe Bay to Nikiski, south of Anchorage, and a liquefaction plant and export terminal there.

Contingent on agreements

“Among other things, the HOA contemplated that a legislative session would be held in 2015 to ratify any commercial agreements negotiated by the parties to advance [the project],” Walker told the officials. The HOA also contemplated that “such project-enabling agreements” would be reached before the state’s Natural Resources Commission determined whether to take Alaska’s royalty-in-kind for gas produced for the project, he said.

“Unfortunately, these project-enabling agreements have not yet been agreed [upon], largely as a result of the producers’ failure to reach alignment with each other, and with the state, on gas balancing terms and other issues,” the governor said.

He acknowledged that ConocoPhillips and the state entered into a gas availability agreement (GAA) on Dec. 4 that ensures gas would be available for the project if BP and/or ConocoPhillips withdrew from it.

Based on commitments the two companies made leading up to the GAA, and commitments ExxonMobil’s Flood made on the issue as well as subsequent correspondence from that company, Walker said he decided to continue pursuing commercial terms for the project and not propose reviving the gas reserves tax, “at least for so long as such negotiations are progressing and deadlines are met.”

He said he was satisfied with the present gas commitments from each company, and did not consider it necessary to refine them further. Walker also said he had been extremely patient in allowing the negotiations to proceed so the project would move forward, but added that the parties failed to meet the HOA’s contemplated 2015 deadline.

“I am increasingly concerned about the lack of progress to allow the Alaskan LNG Project to proceed,” Walker told the officials. “I am determined to take significant steps to commercialize Alaska’s gas in 2016, preferably by advancing the [project] but, if the parties fail to reach agreement, than through other approaches.”

He said before the 2016 legislative session ends, he expects the producers and the state (along with the Alaska Gasline Development Corp.) to reach:

• A gas supply and balancing agreement, including any associated dedication agreement and supply forecasting agreement.

• Byproduct handling terms.

• A field cost allowance.

• Lease modifications and conversions at Point Thomson on the North Slope.

• Joint-venture marketing agreements and acceptable producer offers, as required by Senate Bill 138, to purchase, dispose of, or market the state’s royalty gas “on the same, or substantially similar, terms” as the producers sell, dispose of, or market their own gas through the project.

• Members’ agreement and other associated governance agreements, including terms for expansions, long-term release of unneeded capacity, and use and development of common infrastructure for LNG/GTP trains.

• A system use agreement.

• Domestic gas sales, including a commitment by each producer to offer a pro rata amount of gas through the Alaska LNG Project for domestic needs on commercially reasonable terms.

“If the parties do not reach agreement on these important contracts and issues, then I will have no other choice but to consider other options for commercializing Alaska’s gas,” Walker said. “In addition, absent such alignment on all of these agreements and issues, my administration will be unable to support any fiscal contract that the producers may seek, or a constitutional amendment supporting such a fiscal contract.”

In his Jan. 21 State of the State address, delivered 3 days after sending his letter, the governor said reaching commitments with the three ANS producers to make certain gas is available for a gas pipeline, whether or not they remain participants, was a significant step forward.

“The reception we received in Japan in September from the Asian marketplace following my presentation at the LNG Producer-Consumer Conference was extremely encouraging,” he told state legislators. “The very first shipments of LNG into Japan came from Nikiski in October of 1969. That is the longest-honored contract in the history of LNG. The market has not forgotten that and stands ready to work with Alaska to ensure the pipeline is built and the LNG project at Nikiski is successful.”

Walker said his goal was to have commercial contracts necessary to make the project advance for legislators to consider before their session concluded. “The fiscal certainty our partners need before they make their final investment decision will require Alaskans to vote on a constitutional amendment,” he said. “We believe it is necessary for legislators and the public to see the terms of those concessions well before being asked to vote on them.”

Contact Nick Snow at nicks@pennwell.com.