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Parnell unhappy with pace of LNG pipeline project

Posted: July 2, 2013 - 1:26pm

Companies working on a large North Slope natural gas pipeline and liquefied natural gas project said June 21 they have started summer fieldwork associated with a more detailed engineering phase on planning for the $45 billion-plus project.

Gov. Sean Parnell is unhappy with the pace of work, however, and expressed concern that ExxonMobil, ConocoPhillips, BP and TransCanada, which are working jointly on the project, have not met a key benchmark so far in committing to pre-Front End Engineering and Design, or pre-FEED, on the project.

Parnell and other state officials had expected the pre-FEED commitment in the first half of 2013, or by June 30. The pre-FEED is important because it would be the first significant investment in the latest version of the Alaska gas project.

So far the companies have done conceptual engineering and planning. In the June 21 joint statement, the industry group said the summer fieldwork is related to the preliminary engineering.

“The summer field work is a key activity to support the project’s engineering, design and cost estimation work while also gathering data required for permitting the project,” said Steve Butt of ExxonMobil, the senior project manager, in a statement issued jointly by the companies.

In an interview with The Associated Press, Parnell said he would evaluate whether the progress by the companies warranted opening a discussion on fiscal terms for gas production. Parnell has linked meeting benchmarks to whether the state would consider changing its tax structure for gas.

The summer program involves about 150 people. This is in addition to more than 300 people working on engineering and other planning for the project.

By the end of the year the companies will have spent about $100 million since work began a year and a half ago on the latest version of the Alaska gas project, now planned for LNG exports.

The pace of the spending is picking up. As of March, $35 million had been expended, Butt told a legislative committee in a May 30 briefing, and as activity ramps up spending is increasing to about $3 million per month, he told the legislators.

State officials have said previously that the arrangements the companies have made among themselves to fund the summer fieldwork is an important milestone in itself because there is as yet no overall commercial structure for the project, no formal joint-venture agreement or consortium except for the TransCanada-ExxonMobil relationship and TransCanada’s contract with the state of Alaska under the Alaska Gasline Inducement Act, or AGIA.

Reaching agreement on the funding of the summer program could be seen as a precursor to a larger agreement to fund the pre-FEED work, which will involve several hundred million dollars.

However, the work currently underway also builds on about $700 million the companies have previously spent on planning and engineering for two previous plans to ship Alaska gas to the Lower 48 though a land pipeline to Alberta.

BP and ConocoPhillips worked together under a formal joint-venture on the Denali pipeline project. TransCanada and ExxonMobil worked separately on the Alaska Pipeline Project, a competing pipeline that was similar to the BP-ConocoPhillips Denali pipeline.

The previous efforts ended when it became apparent that shale gas has edged Arctic gas out of the North American market, for now at least. The companies switched to work together on an LNG export project, partly at the encouragement of Parnell.

BP and ConocoPhillips formally ended the Denali joint-venture but the Exxon-TransCanada project continues, and the terms of the state’s AGIA agreement, which applies only to the TransCanada process, has been switched to the LNG export option now being pursued.

In his own statement June 21, Parnell expressed disappointment that the pre-FEED was not achieved.

“The announcement (by the companies) simply does not reflect that the companies have budgeted or allocated hundreds of millions of dollars related to the pre-FEED, which is what they have previously indicated is required for this phase of the project. In short, the companies are making progress but not moving as quickly as Alaskans expect,” Parnell said.

Parnell did credit the companies with achieving two other benchmarks for 2013, including agreement on an overall definition and concept selection for the project by Feb. 15 and the agreement on the summer fieldwork.

The governor also praised the progress made on the Point Thomson gas and condensate project now under construction east of Prudhoe Bay. Point Thomson will produce liquid condensates from gas but it also is a key part of the eventual large gas project.

“Point Thomson is important to a large diameter gasline project, and this investment in the field has been significant,” Parnell said.

About 1,200 were employed at Point Thomson last winter and spring, and ExxonMobil, the project operator, achieved a 90 percent Alaska-hire rate through its contractors.

In a response to the governor’s statement, BP spokeswoman Dawn Patience said the companies “continue to make progress in moving this project forward as demonstrated by our commitment of 350 people and our anticipated investment of $100 million by year-end.”

“The state of Alaska plays a huge role in making this project commercially viable.”

The project is estimated to cost $45 billion to $65 billion in 2011 dollars, and faces huge risks and uncertainties. State fiscal terms, affecting production taxes on natural gas and royalty administration terms, are not yet resolved, a key issue for the companies.

There also are regulatory uncertainies, mainly in securing federal permits for building a buried gas pipeline through difficult soil conditions in permafrost, particularly a stretch of unstable, discontinuous permafrost through Interior Alaska.

If these problems are solved the project will still face tough competition from LNG export projects being developed in Australia, Russia, British Columbia and on the U.S. Gulf coast, said Larry Persily, federal gas pipeline coordinator.

Some of these are more advanced than the Alaska project, which is expected to be complete after 2022, Persily said.

“However, all of these competing projects have problems, just like Alaska,” with the Australia projects suffering big cost increases, political uncertainties facing projects in Russia and British Columbia, and questions over the long marine transport and Panama Canal fees for LNG shipped to Asia from the U.S. Gulf, Persily said.

“Alaska’s advantages are that it is closer to the Asia market, the gas reserve is known and the oil-producing infrastructure helps pay for it, and there is a known legal and political structure. There are no surprises,” Persily said.

Parnell’s handling of the gas project and the companies also attracted criticism from his opponent for reelection in 2014, ensuring that the gas pipeline will be part of the political debates in upcoming elections.

Bill Walker, an Anchorage attorney who is running against Parnell in the August 2014 Republican primary, said, “The failed (pre-FEED) benchmark is a consequence of handing the wheel to others whose best interests do not always align with Alaska’s best interest.

“We are further backing ourselves into inescapable corners where Alaska’s resources are not being developed for the maximum benefit of our people but are pawns on a worldwide chessboard that can be manipulated.”

Walker has been involved with gas issues for years through the Alaska Gasline Port Authority, a municipal group, and said he would have the state pursue a more aggressive role with a gas project, including helping lead the financing and construction of a project.

Walker said the North Slope producing companies have interests in competing projects elsewhere and are not giving the Alaska project a high enough priority.

For example, ExxonMobil recently filed an application with the Canadian federal government to build an LNG export project in British Columbia, Walker said. Tha company is also working on other LNG projects in Asia, the Middle East and the U.S. Gulf of Mexico. 

In his June 21 statement, Parnell hinted at the state becoming more involved in the project, noting the Legislature’s passage last spring of legislation expanding the role of the Alaska Gasline Development Corp., or AGDC, to “carry Alaska’s interests in a natural gas pipeline,” he said.

AGDC has been focused on engineering and design of a separate state-led gas pipeline project that is a fallback in case the industry project fails to proceed, but the corporation is also able to serve as a vehicle for state financial involvement or equity investment in the larger industry-led pipeline, if that is decided on.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.

 

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