NIKISKI — Gov. Bill Walker is taking industry partners in the Alaska LNG Project to task for delays in resolving key issues affecting the large North Slope gas initiative.
“We have identified a lack of urgency in the parties’ resolution process,” the governor wrote in a June 15 letter to state legislators.
In addition, the governor said that the state now believes a constitutional amendment is needed for a long-term fiscal agreement covering tax terms with the North Slope producers.
On the negotiations, Walker said in his letter to legislators that, “The methodology that the Alaska LNG team adopted for identifying problems and issues is excellent. However, there does not seem to be much process associated with resolving issues between the parties, and certainly not one with a send of time urgency.”
In separate correspondence to senior managers of BP, ConocoPhillips and ExxonMobil, the three North Slope producers who are the state’s partners in the gas project, along with TransCanada Corp., Walker identified a delay among the parties in producing “term sheets” for project enabling contracts by mid-June despite an earlier agreement on the goal.
“Despite the efforts of all parties, it is clear we are not on schedule,” the governor wrote to the companies. That letter was sent June 8 and released to legislators, and the public, at a joint meeting of the House and Senate Natural Resources committees in Nikiski on June 16.
Walker identified a number of issues in his letter to the companies and offered state officials as facilitators to help the companies bridge differences. Consensus on several complex issues among the companies, and the state, must be concluded soon if a goal for a special legislative session in November to approve gas contracts is to be achieved.
Two of the most important agreements include the gas “balancing” contract that governs how gas supplies are to be guaranteed for the pipeline by the producers, which is made more complex by the fact that two fields, Prudhoe Bay and Point Thomson, will supply the gas.
A second agreement is needed for “governance,” or how the project partners will organize themselves to share costs and oversight for the upcoming front-end engineering and design phase, or FEED, and, ultimately, construction and operations.
The current governance agreement covers only the pre-front-end engineering and design, or pre-FEED, work now underway.
A separate issue is the needed deal on state fiscal terms, tax and royalty, between the three producers and the state. In addition, under the current arrangement, the state would conclude a long-term gas transportation agreement with TransCanada Corp. to ship state-owned gas, but Walker is exploring the idea of the state ending the TransCanada arrangement and shipping its own gas through direct state ownership of the pipeline and North Slope gas conditioning plant.
Walker is concerned about the pace of negotiations on most of these issues.
On the constitutional amendment, the governor said he now believes a state constitutional amendment is necessary for a proposed long-term agreement on tax terms with Slope producers.
“The state believes a constitutional amendment will provide the certainty that all parties would like,” Walker wrote in his letter to the producers.
Alaska’s constitution prohibits one Legislature from enacting a law that “binds” a future Legislature on taxes, which means that an agreement with producers establishing state taxes for any extended period for the gas project may not be legally possible unless the constitution is amended with language to allow the provision, the governor said.
There is no constitutional problem for a long-term agreement over royalty, only taxes. Under the plan now contemplated the state would take both its royalty and tax “in-kind,” or in the form of gas, which would amount to about 25 percent of total slope gas production. The tax portion of this would equate to about 13 percent.
However, once the royalty-in-kind and tax-in-kind decisions are made they would be fixed for a duration of several years, under the current plan.
At the Nikiski hearing, North Slope producers said their reading of the state constitutional language is that a form of contract could be fashioned that would pass constitutional muster.
“BP has looked carefully at this over several years and we believe the language of the constitution is sufficient,” to allow a fiscal agreement enacted by contract, said Dave Van Tuyl, BP’s senior manager on the gas project.
The producers have said this before but have also acknowledged that the contract, if developed and approved by the state, would best be legally tested at the state Supreme Court level.
A need for a public vote, if decided on, creates a big risk for the project if the public rejects it, and at the legislative meeting the producers say they could see no “plan B” of how a long-term fiscal agreement could be made following a public vote against the idea.
“Alaska voters have demonstrated an adversity to amending the constitution. They are also unpredictable. So, if the vote is held and an amendment fails, do you have an alternative path?” asked state Sen. Peter Micciche, R-Kenai.
Bill McMahon, ExxonMobil’s senior manager on the gas project, said there appeared to be none.
“This is one of the challenges with a vote. If the people say no, it is difficult to think of a recovery plan to provide predictable fiscal terms,” he said.
Rep. Andy Josephson, D-Anchorage, said a lot would depend on how the proposal is presented to the public, however. If it is specific, and tied to the gas project, the chance of approval is higher. If it is more generic, there is a possibility of failure.
Sen. Lesil McGuire, R-Anchorage, said getting a constitutional amendment through both houses of the Legislature, signed by the governor and on the ballot for the November 2016 state general election is very ambitious.
“This is a big deal, and it could affect the project schedule,” she said.
McMahon said a November 2016 vote might not affect the schedule, however.
“The critical path items for us is the environmental impact statement and the Federal Energy and Regulatory Commission certificate. If we can keep those on schedule, it might not affect the overall plan,” McMahon said.
The project participants have set a mid-2016 target date for proceeding into FEED, however, which would be a $1 billion to $1.5 billion commitment.
On other matters at the meeting, project managers told lawmakers that work on the or pre-FEED, is on schedule for completion late this year, and that about half of the $500 million budget for that has been expended to date.
Tim Bradner can be reached at tim.bradner@alaskajournal.com.
