Gov. Bill Walker has persuaded the state’s industry partners in the Alaska LNG Project to consider a larger pipe size that would be capable of shipping more North Slope natural gas, the governor said in a Sept. 4 interview with the Alaska Journal of Commerce.

Sources among North Slope producers confirmed the governor’s understanding.

“If the pipe is expanded the state and the producers have agreed to share the cost of the expansion,” said Katie Marquette, Walker’s press secretary.

Meanwhile, negotiations between the state and the industry partners are continuing.

“We’re not as close as I wish we could be. There are a number of significant issues we have to get closure on,” the governor said.

Walker is pushing for final agreements in time for a special session of the Legislature in late October.

On the pipe size, a 42-inch diameter pipe is currently planned for the project, but Walker would like to see that expanded to 48 inches. The larger pipe size is seen as a contingency to be able to efficiently move more gas from the Slope when that is discovered, which state geologists believe will happen once a gas pipeline in built.

At 42 inches in diameter the pipeline would transport about 3.3 billion cubic feet of gas per day, a volume sufficient to manufacture about 17 million tons of LNG yearly, on average. At 48 inches, the pipeline could ship more than 4 billion cubic feet per day. The project has received permission from the U.S. Department of Energy to export up to 20 million tons of LNG yearly.

Two other components of the Alaska LNG Project, the large gas conditioning plant on the North Slope and a major natural gas liquefaction plant at Nikiski, would remain at the current design capacity but can be expanded later with additional process units.

Changing the pipeline’s diameter is a decision that must be made now, however, because pipe is installed in the ground only once.

There were concerns that a late change in the project design could complicate the Federal Energy Regulatory Commission process now underway, but FERC has told the state it won’t be a problem, state administration officials said.

“FERC chairman Norman Bay met with the governor in August in Alaska and told the governor that the change in design at this stage will not complicate or delay the federal regulatory process,” Marquette said.

One complication with a larger diameter pipe is that the current plan involves high-strength steel that will allow the pipeline to operate at high pressure. There are just a handful of steel mills in the world that are equipped to make high-strength 48-inch pipe, while there are more plants able to manufacture high-strength 42-inch pipe.

With fewer manufacturers able to make the pipe, the Alaska LNG planners will be in a less competitive negotiating environment, which may affect the cost of the larger pipe. The only current cost estimate for the project is $45 billion to $65 billion.

There are 800 miles of pipeline planned, so the larger pipe size will be a significant cost item.

Pipe size expansion is just one of the project changes Walker is pressing for, but he has backed away from an earlier goal for the state to own a majority interest in the project so as to exert greater control.

The governor is now willing to accept 25 percent state ownership, the current arrangement with the industry partners, he said in the interview.

“My concern is not so much having control but having an agreement in place so that no one else can block the project from advancing,” Walker said Sept. 4.

His earlier thinking was that by owning a majority interest the state would be in a position to keep the project moving if one of the industry projects balked at a critical point. 

Walker now believes this objective can be achieved in other ways, he said.

To accomplish this, the governor wants an ironclad “withdrawn partners” agreement with the industry partners as a contingency in case one of the partners backs out.

“The companies are pushing strongly for an agreement on fiscal certainty (on state gas production taxes) but I want a strong withdrawn-partners contract that will give me peace of mind on project certainty,” he said.

The withdrawn partners contract is one of the key items now being discussed in state-industry negotiations.

Another request made earlier this summer that the governor has modified is a desired change in the project routing at the pipeline’s southern end so the pipe is closer to major population areas in the Matanuska-Susitna Borough to supply gas.

The project managers, led by ExxonMobil, have meanwhile settled on a more westerly route because it offers better soil conditions in crossing Cook Inlet to the planned site of a large LNG plant on the Kenai Peninsula.

If the western route is chosen the governor wants assurances that a lateral spur pipeline will be built to supply gas to regional consumers. The question of who will pay for the spur as well as another spur to reach Fairbanks is still unresolved, the governor said.

Marquette said it is possible that the Alaska LNG Project itself could pay for the spur lines. Alternatively the state would pay for them, she said. Walker said the matter is still being negotiated.

The governor also wants a more definitive agreement on a timetable, he said. The partners are to decide on moving to final engineering in 2016 and making a Final Investment Decision in 2018 or 2019, but Walker wants more certainty on this.

Meanwhile, items still being negotiated, the governor said, include the deal on fiscal terms with the state, a “must-have” for the gas producers; a gas “balancing” agreement among the producers to cover shortfalls in gas if there are operations problems in production; the withdrawn partners provision and other matters.

The governor has also said he will ask the Legislature for permission for the state to take over parts of the project now held by TransCanada Corp. Under an agreement signed with the pipeline company, TransCanada now holds the state’s 25 percent share of the 800-mile pipeline and gas conditioning plant on the North Slope, with the state owning and controlling 25 percent of the large LNG plant at Nikiski through the Alaska Gas Development Corp.

Under the current deal TransCanada would finance the 25 percent of the pipeline and gas plant and would ship the state’s 25 percent share of gas production through the capacity that it owns.

The governor is proposing that the state own the full 25 percent, taking out TransCanada’s share. In that position the state would ship its gas through capacity it totally owns, thereby maximizing profits.

However, the state would have the obligation to finance the total 25 percent of construction costs, a matter of concern to legislators given the state’s current fiscal outlook.

If the TransCanada share acquisition goes forward the state will have to repay the pipeline company for its costs to date, about $110 million by one estimate, and would be obligated, in the short term, to fund several hundred million dollars as the state’s 25 percent share of final engineering costs for the project.

The decision on proceeding to final engineering is likely to be made in 2016, which means the financial obligation could accrue to the state in its 2017 fiscal year, which begins next July.

Meanwhile, the agreement on fiscal terms would mainly cover the state gas production tax although state corporate income taxes may wind up being included. Conceptually, what is being discussed is an agreement that taxes would not change for the duration of an LNG sales contract, which would give certainty to LNG purchasers.

There are legal complications in any deal on taxes, however, because the state constitution has language barring any legislative action “binding” action by a future Legislative, in this case a change in the tax.

The gas producers feel some form of contractual agreement can be constructed that would meet the constitutional requirement, but Walker said the state’s attorneys believe a constitutional amendment approved by voters is needed to really settle the matter.

Progress has been made on one item, however, Walker said, a “payment-in-lieu-of-tax” agreement with municipalities and the state along the pipeline route to cover property taxes.

The “PILT” would give gas project owners more flexibility in paying property tax, which under the current system would be a $1 billion per year tax burden. The companies have agreed tentatively on an alternate methodology for the PILT, he said.

The negotiators are under a time crunch because the governor wants to call a special session of the Legislature in late October to ratify the gas project agreements and legislators must have 30 days notice before a special session can be called and they must have the agreements in advance.

Walker wants a special session because bringing up the gas contracts during the Legislature’s regular session, which begins in January, would risk getting the complex gas issues mixed in with other issues lawmakers must deal with, such as contentious budget and revenue matters.

Tim Bradner is a reporter for the Alaska Journal of Commerce.