ANCHORAGE — A lack of progress in negotiations between the state’s producer partners on major Alaska LNG Project agreements is likely to throw the project off schedule, according to a key member of the Walker administration.
Deputy Department of Natural Resources Commissioner Marty Rutherford said in an interview that BP, ConocoPhillips and ExxonMobil are still working on the structure of the Alaska LNG Project’s critical Gas Balancing Agreement after more than a year of negotiations.
Rutherford is the state’s lead negotiator for commercial terms on the project, Gov. Bill Walker has said.
The Gas Balancing, or gas supply, Agreement is the underpinning contract for at least seven more issues that must be resolved within several months to keep the project on track, according to the administration. It provides a framework for the companies — each with a different share of North Slope natural gas dedicated to the project — to pull their gas from the fields at certain times without upsetting the overall operations of the project.
Even if the Gas Balancing terms were reached immediately, she said, it would still be “highly, highly unlikely” that all the agreements could come together in time because it still takes months to finalize agreements met in principle.
Rutherford noted she always thought the Alaska LNG Project commercial terms would be wrapped up in time for a spring 2016 special session, but she also characterized the general challenge of several-party negotiations, regardless of the topic.
“Two-party negotiations are tough; three are very difficult and four are — it’s hell,” she said.
Company representatives acknowledged the slow pace of the negotiations in recent testimony before state legislative committees.
Gas supply agreements are common in joint-venture LNG projects, but disparate ownership in the Alaska LNG Project’s two major gas fields, Point Thomson and Prudhoe Bay, makes this negotiation particularly challenging, ConocoPhillips Vice President of Commercial Assets Leo Ehrhard told the Senate Resources Committee Jan. 27.
The agreement dictates how gas is “lifted” from the field under normal operations, but also during downtimes for maintenance on one field or the other. Gas draws must also jive with when customers want LNG from the $45 billion-plus export project, further complicating matters.
On top of all that, each party comes to the table with differing risk perspectives and policy goals in a time of particular financial stress, given the state of world oil markets, Rutherford noted.
“There have been some pieces we haven’t even begun (negotiating) yet because the foundational, what I call the threshold agreement, hasn’t been landed, even structurally,” she said.
Walker sent a letter to the company leaders in Alaska on Jan. 18 expressing his concern over the lack of progress. He said the state would seek other alternatives to commercialize its gas if the parties don’t reach an agreement by the end of the regular legislative session, which is in late April.
The governor has said for several months he hoped to have a comprehensive set of project agreements in place for the Legislature to review late in the regular session so a special session to vote on the agreements could be held shortly thereafter.
A special session would also include a vote on a constitutional amendment needed for the state to enter into long-term contracts — tax policy — for the initial 25-year life of the project. The Alaska Constitution prohibits one Legislature from taking the authority to tax away from future bodies, which locking the state into a 25 percent share of the project’s gas would seemingly do.
“There is an absolute certainty that a constitutional amendment is needed if the fiscal agreements that the producers want contain the Legislature suspending their power to tax,” Attorney General Craig Richards said to the Senate Resources Committee Jan. 29.
Richards noted many, if not most, states have similar clauses in their constitutions. He also said the Stranded Gas Development Act, an earlier attempt to monetize North Slope natural gas, included fiscal terms that would have required an amendment as well.
Because the public must vote on the amendment in a general election, the Legislature’s vote needs to happen in time to get it to the Division of Elections before June 23, the deadline for getting it on the November ballot.
If any of that falls apart, the project is all but delayed for at least two years until the 2018 general election.
The timeline was imposed by the producers’ prerequisite to have fixed project tax terms, Rutherford said, which added deadlines for the fiscal term sheets and the subsequent constitutional amendment.
Ehrhard also said the agreements are necessary for the project to enter the full-fledged front-end engineering and design, or FEED, stage. The decision whether to enter FEED has been expected sometime next year.
Despite the challenges, the parties are continuously negotiating.
“We’re working hard to try to get breakthroughs on all fronts with the hope that the unlikely could happen,” Rutherford said. “We’re totally focused on trying to make these dates.”
Gas supply from each field is also an issue for the state, she said, but not on the level it is for the producers because the state holds an equal 25 percent share of gas in each field through royalties and the proposed tax share to be taken in-kind.
The negotiations started even before the Walker administration took office in December 2014, but began in earnest about a year ago. Last June the producers asked the state to step aside so they could work on the issue themselves and the State of Alaska was invited back to the Gas Balancing table about a month ago, according to Rutherford.
• Elwood Brehmer is a reporter for the Alaska Journal of Commerce. He can be reached at elwood.brehmer@alaskajournal.com.
