Monday, January 20, 2014

State, producers, TransCanada ink key agreement on pipeline

Tim Bradner
Alaska Journal of Commerce

Gov. Sean Parnell and companies leading the North Slope gas pipeline project took a major step Jan. 14, signing a “Head of Agreement” statement that lays out terms for how the state could help facilitate the effort through an ownership stake and its fiscal terms.

The next step is up to the state Legislature, which convenes Jan. 21 for its 2014 session. Parnell will introduce a number of bills soon that will make the state’s involvement possible.

“The Heads of Agreement is another positive milestone and sets guiding principles, terms and conditions to progress work on the Alaska LNG Project,” said ExxonMobil spokeswoman Kim Jordan. “State of Alaska participation throughout the value chain will improve commercial alignment; provide the state with a seat at the table on the commercial terms of the project, as well as generate additional revenue for the state.”

State officials made more details available Jan. 15 on how it could partner with North Slope producers and TransCanada on the project, which is estimated to cost $45 billion to $65 billion. The deal also changes a licensing agreement with TransCanada under the Alaska Gasline Inducement Act, or AGIA, but it keeps the pipeline company in the consortium as a partner.

If the project moves forward, the state could earn $2 billion to $3 billion yearly in new revenues from gas sales, state Natural Resources Commissioner Joe Balash said in an interview.

Under the plan the state would commit to take its one-eighth royalty share of gas production in kind, or in the form of gas, for the duration of the project, and also take state production taxes as a share of the gas, Balash said.

The state Legislature will be asked to allow that change this spring, Balash said, and also to determine a percentage of the combined state share of gas production. The state royalty is 12.5 percent of production and adding the tax share would bring that to between 20 percent and 25 percent, with the number to be decided by the Legislature, he said.

Separately, the state has entered into a deal with TransCanada to finance, and at least temporarily own, a share of the pipeline and LNG project equal to the state’s share of gas, Balash said. The state will then enter into a shipping contract with TransCanada to transport the state gas to the LNG plant in Southcentral Alaska at Nikiski.

TransCanada would raise the estimated $6 billion to $7 billion needed for its share of pipeline construction, Balash said.

One major concern for the state in the arrangement would be having to market its own gas.

“Under that scenario, we might wind up with a lower price,” for LNG because the state lacks a marketing organization and experience and TransCanada would only ship the state’s gas.

“However, the producers have agreed to a ‘disposition’ agreement, under which they will be prepared to market our gas,” Balash said.

Under the agreement, the state also has the option of purchasing TransCanada’s share of the project when the contract to ship the state gas expires, which could be 20 years to 25 years, Balash said. Alternatively, the state can purchase 40 percent of TransCanada’s share prior to construction beginning, he said.

The pipeline itself will be organized as a joint undivided interest pipeline, meaning that each gas owner will agree to finance and own a percentage equal to its gas production share, essentially a group of separately-owned pipeline entities using one pipe and an LNG plant.

The Trans-Alaska Pipeline System was organized along similar lines when it was formed in the early 1970s to ship North Slope oil. Legally, each TAPS owner operates its own pipeline entity within TAPS, with Alyeska Pipeline Service Co. as the independent operating company.

The LNG plant in Nikiski will be handled differently, Balash said. TransCanada will have no ownership in the plant, and the state’s ownership will be held through a new subsidiary of Alaska Gasline Development Corp., a state corporation formed to build a smaller gas pipeline from the North Slope in the event the large industry-led project stalls.

Balash said AGDC will continue planning on its own project, which is a contingency to supply gas to Alaska communities. If the plan with the producer consortium moves forward, however, the state corporation would finance its share of the LNG plant with revenue bonds, state revenue commissioner Angela Rodell said.

If the Legislature approves statutory changes to enable the plan, which also includes converting the state’s net profits gas production tax to a flat tax on gross revenues, the companies are prepared to begin Preliminary Front-End Engineering and Design work, or pre-FEED, a step that will involve an expenditure of several hundred million dollars, Balash said.

Conversion of the net profits tax to a flat gross revenues tax is necessary because the net profits tax is volatlle, reacting quickly to price changes, which would make it more difficult to convert the tax to a share of gas and contract for capacity in a pipeline, Balash said. The flat-rate gross revenues tax simpler and more transparent, he said.

Also, if the Legislature approves the statute changes, North Slope producers have agreed to begin organized marketing efforts to sell the Alaska LNG including the state’s share, Balash said. The project would produce 15 million to 18 million tons of LNG yearly.

An important consideration in the deal with TransCanada — an element that is retained from the AGIA contract — is the pipeline company’s commitment to certain terms in financing that are to the state’s advantage in maximizing revenues.

The pipeline company has agreed to fund its share of the pipeline and Gas Treatment Plant on the Slope using a 75 percent debt and 25 percent equity investment ratio. That combination results in a lower pipeline tariff, Balash said, which means less shipping costs for state-owned gas, and higher state revenues.

The debt-equity ratio commitment was one of the state’s “must-haves” in its AGIA initiative in 2008 and 2009, and is one the producers have always balked at. It was one of the key obstacles confronting the current deal, too.

As the arrangement now stands TransCanada will retain its commitment on the debt-equity ratio but the producers will retain the flexibility in using whatever financing ratio is most advantageous to them.

Because the producers will be shipping their own gas, and not the state’s, and the state’s royalty and tax share would be converted to gas shipping by TransCanada, the matter is less important under the new deal.

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