Friday, November 22, 2013

New study recommends state consider equity investment in LNG project

Tim Bradner
Alaska Journal of Commerce

State officials are mulling a plan to take an equity stake in a large Alaska gas pipeline and natural gas liquefaction project.

Such a move could ease fiscal issues that the project sponsors, North Slope producers BP, ConocoPhillips, ExxonMobil, and pipeline company TransCanada have cited. That’s a conclusion of a major study of state royalty issues released Monday.

The state contracted earlier this year with Kansas-based Black & Veatch to do the study. State investment in the project a one major recommendation.

“Having a direct stake could solve a lot of problems for us and the project sponsors,” said state Natural Resources Commissioner Joe Balash in an interview.

“Direct state equity participation in the (gas) project can provide key benefits to the state including alignment of interests (among the parties), transparency through the midstream portion of the supply chain, facilitation of third-party access to the midstream and potentially improved state cash flows along with improved producer economics,” the report said in its conclusions.

Black & Veatch outlined options for the state in improving fiscal terms in its study and said that without changes in the terms, a large LNG project may not be viable.

Balash said one of the biggest problems the companies have with the state’s current terms is the one-eighth royalty share and the state’s ability, under leases held by producers, to switch taking its royalty from in value, or cash payment, to in-kind, or in the form of gas, and to switch back and forth at six month’s notice.

“The sponsors have complained that the present structure has them obligated to finance 100 percent of the project but get only 7/8 of the benefits,” because they have the obligation to ship the state’s one-eighth royalty gas share through a portion of the pipeline they would have to fund.

If the state were to invest in and own a share of the project equal to its one-eighth share, or perhaps as much as 25 percent if the tax obligation was included, it could better align the interests of the parties, Balash said.

The producers and the state would each finance a share of the project sufficient to ship gas each party owns, he said. It would also spread risks, like cost overruns, more equitably.

Black & Veatch said the improved profitability of the overall investments could make the difference in making the project attractive enough for the producers to back it, Balash said.

If the state having a stake in the project solves a problem for the companies, it helps the state with other difficulties, Balash said. As an owner the state would have access to the inner workings of the project finances, which would help ensure the state’s tax and royalty collections wouldn’t be disadvantaged, he said.

Ensuring fair payment for tax and royalty assumed even more importance after the project switched from the original plan for an all-land pipeline to the continental U.S. to a pipeline and a large natural gas liquefaction project serving an export market.

Much of the state’s previous work on royalty terms became obsolete when the plan switched to include LNG, Balash said.

The gas treatment plant and pipeline will be regulated by the U.S. Federal Energy Regulatory Commission as far as tariffs and rates, but not so the LNG plant.

“FERC gives us a transparent process as far as it goes, but the LNG part of the project is more opaque,” Balash said. “The project sponsors are likely to operate this as an integrated venture, so we see opportunities for shifting profits in ways that could not be in our interest.”

Having a seat at the table helps the state solve this, he said.

One problem the arrangement would present, however, is it leaves Alaska with the obligation to market its royalty gas as LNG. That could be more than 1 billion cubic feet a day of gas per day if the state takes a one-fourth share.

Arrangements could always be made with one or more of the producers to market the state’s gas under contract but there would likely be fees associated with this, Balash said. Alternatively the state could set up its own LNG marketing organization, but such a group would always be at a disadvantage in competing for sales with others in the project, like BP and ExxonMobil with long experience in LNG.

Balash said one possible solution could be in working with TransCanada, which is now part of the project group but which does not have its own gas to ship, unlike other parties.

“We could become TransCanada’s customer,” Balash said.