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Terms for Alaska LNG project go before state lawmakers

Posted: January 25, 2014 - 11:10pm  |  Updated: January 25, 2014 - 11:17pm

More details are becoming available on the agreement signed by officials of Gov. Sean Parnell’s administration with the North Slope producers and TransCanada Corp. on the proposed large natural gas pipeline and liquefied natural gas export project.

Companies engaged in the project endorsed the agreement for the Alaska LNG Project.

“This agreement integrates the resources of all parties behind this potential Alaska LNG project. It sets out guiding principles for the parties to negotiate project-enabling contracts once the Alaska Legislature passes the enabling legislation,” BP spokeswoman Dawn Patience said.

The “Heads of Agreement,” or HOA, signed by the parties acknowledges the project is in the Pre-Front End Engineering and Design, or pre-FEED, phase, long a key goal sought by Parnell. However, before the $400 million pre-FEED work fully ramps up, the Legislature must pass bills enabling key terms of the state’s involvement in the project.

“The intent of the HOA is to provide Alaskans with a roadmap for how the parties intend to progress the Alaska LNG Project,” according to a ConocoPhillips statement. “Consistent with the principles in the HOA, ConocoPhillips looks forward to working with the Parnell Administration and the Alaska Legislature to advance discussions on fiscal and commercial terms to help progress the project.”

Legislation is expected to be introduced soon in the state House and Senate, sources in the state administration said.

Lawmakers must approve the state’s taking of its production tax value of future gas in-kind, or in the form of gas, and to convert the state’s current net-profits gas production tax to a gross revenues tax.

Another decision legislators must make is the amount of the gas tax that would be taken in-kind, or as gas, Deputy State Revenue Commissioner Mike Pawlowski said in an interview.

The state’s royalty is 12.5 percent, which can now be taken in kind, as gas, or in value or cash, at the state’s discretion. If the state’s production tax on future gas production were converted to a share of gas production it would be equal to approximately 12.5 percent, bringing the total state share of gas to 25 percent.

However, legislators could opt to take less of the tax share as gas and leave some production subject to the current tax.

The agreement contemplates a combined state share of gas ranging from 20 percent to 25 percent, Pawlowski said. Lawmakers are expected to settle on the appropriate number in the 2014 session, he said.

A smaller portion of tax taken as gas would mean the state would ship less gas through TransCanada’s part of the pipeline and would sign a shipping commitment for less gas, but in making that decision legislators will weigh potential revenues from sales of the gas, as LNG, against revenues from traditional tax payments.

“TransCanada is pleased to continue working with the State of Alaska and North Slope producers to advance the Alaska LNG project,” said TransCanada spokesman Davis Sheremata. “We share the common goal of wanting to develop these important natural gas assets in a way that shows continued progress towards building Alaska’s energy future.

“In terms of shipping gas, using a more traditional commercial approach where TransCanada acts as the transporter for Alaska’s portion of gas under a long-term shipping contract means that TransCanada provides billions in capital investment, rather than Alaska.”

The TransCanada statement to the Journal said financing of the state share of the pipeline would amount to about $3 billion to $8 billion.

Pawlowski said converting the current net-profit production tax to a gross revenues tax, which legislators must also approve, is important because a net revenues tax reacts quickly to gas prices and gas production costs and because of that variability, and uncertainty, it does not easily convert to a share of gas production.

A gross revenues tax, on the other hand, does convert to a share of production just like the royalty, which is based on 12.5 percent of the gross revenues or one-eighth of production. The royalty can be converted to an in-kind share of gas.

Meanwhile, on the work anticipated under the agreement, pre-FEED engineering work would begin in late spring if the legislative approval is given.

“Pre-FEED is anticipated to take between 18 and 24 months to complete, with a determination on proceeding to the FEED, or full Front-End Engineering and Design, phase expected to occur within approximately 36 months after ramp up of Pre-FEED,” or by early 2017 at the latest, according to an analysis prepared by the Federal Gas Pipeline Coordinator’s office.

The full FEED work would involve an expenditure of several billion dollars, the analysis said. Meanwhile, the industry consortium working on the project will conduct a major field season in the summer of 2014 with about 300 people in to gather additional geotechnical and environmental data. The summer program is about twice the size of the 2013 summer field program, which cost about $150 million.

The expectation in the Heads of Agreement is also that by 2015 more definitive contract terms would be developed involving the state’s commitments to a shipping contract for the state share of gas production, which would be about 20 percent to 25 percent of the total.

The state’s shipping contract would be with TransCanada Corp., which would invest in a portion of the Gas Treatment Plant and pipeline sufficient to ship the state-owned gas.

State lawmakers would also have to ratify the shipping contracts.

The state would have the option of buying 40 percent of TransCanada’s share of the project before the project moves to the full FEED stage, but by Dec. 31, 2015, at the latest. Alternatively, the state has the option of purchasing all of TransCanada’s ownership at the end of the shipping contract for the state gas. Shipping contracts are typically 20 years to 25 years in duration.

TransCanada would have no involvement, however, in the large natural gas liquefaction plant planned to be built in Nikiski, near Kenai. A subsidiary of the state-owned Alaska Gasline Development Corp. would finance and own a share of the plant equal to the plant’s capacity used to manufacture LNG with the state-owned gas, again 20 percent to 25 percent.

AGDC would issue revenue bonds to pay for its share of the plant capital costs.

State officials involved with the project said that ADGC could invite other partners to join it in the LNG plant. Japanese companies like Mitsubishi Corp. and REI Alaska Inc., for example, have expressed interest in owning a share of an Alaska LNG project.

The project anticipates transporting 3 billion to 3.5 billion cubic feet per day of gas from Alaska’s North Slope. After gas consumed in-state and at the liquefaction plant, it is anticipated that about 2 billion to 2.4 billion cubic feet per day, or 15 million to 18 million metric tons per year, would be exported as LNG to Asian markets, according to the federal coordinator’s analysis.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.

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