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Alaska Weighs Equity Stake in North Slope Gas Project

A study commissioned by the Alaska Department of Natural Resources (DNR) on the commercial aspects of the Alaska liquefied natural gas (LNG) export project that the three major North Slope oil producers (ExxonMobil Corp., BP plc, ConocoPhillips and TransCanada Corp.) are pursuing says the state would benefit from having an equity stake in the pipeline and LNG project.

 

The study examined Alaska's royalty rates and terms, which are managed by DNR. Alaska officials are concerned that cutting royalties to stimulate project development could undermine payments to the state's Permanent Fund and limit the amount of gas available to Alaskans. A 20-30% equity investment in the project could provide the same or better revenue than collecting taxes and royalty alone, according to the study.

 

"If we do it right, direct state participation in the project can allow the other project sponsors to structure their business and financing in whatever way benefits them," said Natural Resources Commissioner Joe Balash. "That would leave us free to structure our share of the business in whatever ways maximize the benefits to Alaskans."

 

The project cost has been estimated at $45-65 billion (see Daily GPI,Oct. 5, 2012). A 20% stake of the low end of that range would represent a $9 billion investment by the state.

 

The study also indicates that taking the state's royalties for gas production "in value" may protect Alaska interests better than taking the royalties "in kind." If the state were left to market LNG itself, it could end up receiving lower prices overseas for its share of the gas, according to the study.

 

The project would pipe natural gas from the North Slope to a tidewater port in Southcentral Alaska. Gas would be available to Alaskans and also liquefied and shipped to Pacific Rim markets. The project would provide cheaper in-state gas supplies, billions of dollars in annual state revenues and new economic opportunities for thousands of Alaskans, according to DNR.

 

"The goal of thestudy is to inform near-term decisions about the fiscal aspects of an LNG project in Alaska -- big decisions that involve our royalties, taxes, or even a potential equity stake in the project, said Balash.

 

The 191-page Alaska North Slope Royalty Study, produced by Black & Veatch, analyzes issues that state agencies and legislators will consider before setting fiscal terms for a gasline. The study examines LNG market conditions and the global supply chain, reviews fiscal terms that have been established for successful LNG export projects around the world, and looks at the commercial risks of various business structures for an Alaska project.

 

According to the study, an LNG export project can compete for a place in the Asian LNG markets, but it will likely take changes to Alaska's fiscal terms to ensure a successful project. "We have some work to do, but the good news in this report is that we don't have to sacrifice our royalty revenue in the future to get a project going," Balash said.

 

Asian interest in LNG from Alaska has been substantial; however, officials have been warned by the federal coordinator for Alaska gas pipeline projects that prospective customers won't wait forever for a project to be completed because they have other supply options around the globe (see Daily GPI,June 3). "We're not the only ones out there. We have to be cost-competitive with Alaska gas if you're going to get any project built in the state," Larry Persily, the federal coordinator, said earlier this year.

 

A "misalignment of interests" among the state and project sponsors could lead to diminished value for the state's royalty, the study found. North Slope lessees pay a minimum of 12.5% royalty on all hydrocarbons produced and sold. The value of that royalty is measured at the lease after transportation costs are deducted. Depending on the business and financing structure chosen by project sponsors, those transportation charges can be higher or lower -- with the opposite impact on royalty values.

 

"If we can find a way to better align our interests with the project sponsors, we can ensure Alaskans get the full value of their ownership of the resource," Balash said.

 

DNR said that in the coming weeks it will publish additional work regarding the value of in-state energy opportunities and expansions of the pipeline and/or the LNG plant.

 

Last month, the state and project backers said the Kenai Peninsula would be the most suitable site for a natural gas liquefaction plant associated with the project (see Daily GPI,Oct. 8).

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