Agreements move Alaska gas line forward

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Release Date: 
January 15, 2014

The state of Alaska and the four companies planning a North Slope liquefied natural gas export project on Jan. 15 released agreements that aligned their interests in principle and laid out a roadmap for the project to proceed toward engineering, design and permitting work.

The Heads of Agreement document signed by the state, ExxonMobil, BP, ConocoPhillips and TransCanada lays out terms for the state to become an equity owner in the estimated $45 billion to $65 billion project and the next steps to move the work forward.

In a related action Jan. 15, the state released its Memorandum of Understanding with TransCanada defining that company's role in the midstream portion of the project — the 800-mile pipeline and massive gas treatment plant on the North Slope.

The HOA says the LNG export project is in a pre-front-end engineering and design, or pre-FEED, phase. Before fully ramping up that $400 million-plus phase over the next 18 months or so, the parties to the HOA are looking to Alaska lawmakers to enact legislation that would allow certain terms of the HOA to be finalized into a more definitive contract between the parties. The Legislature convenes Jan. 21 and the governor is expected to introduce his bill early in the session.

The more definitive contract terms, subject to later legislative ratification, would include a state investment for 20 to 25 percent ownership of the project, the state taking its royalty gas and gas taxes in the form of natural gas itself rather than as cash, and certain other terms.

"The Pre-FEED work is expected to ramp up in the second quarter of 2014, and is anticipated to take between 18 and 24 months to complete, with a determination on proceeding to the FEED phase expected to occur within approximately 36 months after ramp up of Pre-FEED," the HOA says.

"The purpose of Pre-FEED is to progress technical work that would provide each of the Alaska LNG Parties with sufficient information for evaluating the technical, cost and schedule aspects of the Alaska LNG Project. The Pre-FEED work, when used with other information regarding the commercial, legal, economic, financial, marketing, timing and other necessary aspects of the Alaska LNG Project, will assist the Alaska LNG Parties in determining how to proceed with the phased project development process, including whether to proceed to the FEED [front-end engineering and design] phase of the Alaska LNG Project. The FEED phase would involve the expenditure of billions of dollars to progress the Alaska LNG Project to the final investment decision ('FID').

The Alaska LNG project anticipates piping 3 billion to 3.5 billion cubic feet a day from Alaska's North Slope fields. After gas consumed in-state and at the liquefaction plant, about 2 billion to 2.4 billion cubic feet a day — or 15 million to 18 million metric tons per year — would be exported as LNG to Asian markets.

Besides commercial terms, the HOA addresses the hiring of Alaskans, use of Alaska businesses during construction, providing at least five off-take points along the pipeline where gas can be drawn off for in-state distribution, and capacity expansion of the project after it is built to handle additional gas production.

The state's separate agreement with TransCanada covers what it calls the midstream pieces of the project — the gas transmission lines for the Prudhoe Bay and Point Thomson fields on the North Slope, the treatment plant that would remove carbon dioxide and other impurities from the gas stream, and the 800-mile gas pipeline itself.

Under the agreement, TransCanada would fund the state's share of the pipeline cost and give the state an option to purchase up to 40 percent of the midstream portion before the project moves to its FEED phase. The option would expire no later than Dec. 31, 2015.

Investment in the liquefaction plant and marine terminal is not part of the state's deal with TransCanada.

The memorandum of understanding and attachments provide the state's reasoning for including TransCanada in the project, citing the company's "extensive pipeline experience and knowledge of northern pipeline conditions." TransCanada has an interest in almost 50,000 miles of North American natural gas pipelines, much of which run through northern Alberta. The company and its predecessors have worked on proposed Alaska North Slope gas pipeline projects for almost 40 years.

Since 2008, TransCanada has been working on a North Slope gas line project under the Alaska Gasline Inducement Act, whereby the state was reimbursing the company for most of its early development costs. That work originally focused on a pipeline to move Alaska gas to North American consumers, but the shale-gas boom ended that plan. In its place, TransCanada and North Slope producers in 2012 shifted to the LNG export project.

As part of this latest agreement, the state and TransCanada are ending work under the Alaska Gasline Inducement Act, which allows for mutual termination of the AGIA license if the two parties agree the project is uneconomic. The new five-party deal between the state, North Slope producers and TransCanada will replace the AGIA license as the path forward, according to the governor and his Revenue and Natural Resources commissioners.

Some remaining work eligible for state reimbursement, however, will continue under the AGIA license through June 30, 2014.

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