The state of Alaska and ExxonMobil Corp., BP plc, ConocoPhillips and TransCanada Corp. have signed a heads of agreement (HOA) for the proposed Alaska liquefied natural gas (LNG) project, which would provide gas to Alaskans and be one of the largest export projects of its kind in the world.

"As an equity partner, the state will play a critical role in setting the terms for decades' worth of gas production from the North Slope. In setting these terms, our goal will be to maximize the royalty value of the state's gas on behalf of all Alaskans," said Alaska Natural Resources (DNR) Commissioner Joe Balash.

The project includes a gas processing plant, 800 miles of pipeline from the North Slope and a gas liquefaction plant and export facility on the Kenai Peninsula. It could cost anywhere from $45 billion to $65 billion, according to separate estimates by Black & Veatch Ltd. and the producers.

A study by Black & Veatch released last year said that if the state were to take 20-30% equity interest in the project, it could provide the same or better revenue than collecting taxes and royalty alone (see Daily GPI, Nov. 19, 2013). Alaska officials have been 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.

Besides Balash, other state signatories to the HOA are Revenue Commissioner Angela Rodell and Alaska Gasline Development Corporation (AGDC) President Dan Fauske. In addition to the HOA, the two commissioners also signed a memorandum of understanding (MOU) with TransCanada defining the pipeline company's role in developing the pipeline portion of the project. Both documents are to provide guidance to the Alaska Legislature during its review of legislation Gov. Sean Parnell is expected to propose during the session beginning Tuesday (Jan. 21).

The HOA provides a roadmap for the Alaska LNG Project to ramp up the pre-front end engineering design (FEED) stage and establishes a framework for negotiating multiple project-enabling agreements. The HOA includes the state as an equity partner, provides gas to Alaskans, lays out proposed fiscal terms, and includes pro-expansion principles that will allow third-party access to all of the project components, including possible construction of a new LNG train at the liquefaction plant. It outlines significant participation by AGDC, including a new subsidiary to carry the state's interest in the project, and specifically recognizes that AGDC will continue to pursue an in-state gasline project known as the ASAP (as soon as possible) project.

The MOU with TransCanada is part of the wind-down of its Alaska Gasline Inducement Act (AGIA) license and describes an arrangement for the company to provide Alaska with transportation services for the state's royalty and tax share of gas flowing through the pipeline, including offtake points for in-state gas deliveries.

TransCanada would fund midstream development work and provide the state with an option to purchase up to 40% of the equity in the midstream component of the state's portion of the overall project before it moves to FEED. The MOU also provides that TransCanada will work with the state to expand the gas treatment plant and pipeline to additional, third-party gas producers on the North Slope.

Parnell has said he will ask the legislature to take up bills that authorize DNR to modify leases, allow the state to enter gas shipping agreements, revise the production tax for natural gas, authorize AGDC to participate in liquefaction and make other changes (see Daily GPI, Jan. 13). This legislation is intended to pave the way for the LNG project partners to spend hundreds of millions during the pre-FEED stage. During the subsequent FEED stage (prior to construction), billions must be committed to complete the project engineering and design.

"We will be asking for some new powers that will allow us to fully participate in the LNG project, but in working through the legislative process, we intend to maintain transparency in our decision-making process," Balash said. "While the series of steps needed to execute an LNG project are more complicated than a traditional pipeline project, it remains important to include the public at each major decision point."

Following approval of the legislation, the state and the companies expect to complete their pre-FEED work in roughly 18 months. The FEED stage lasts two to three years, after which a final decision is to be made on whether to proceed to construction.

In late 2012, the producers and TransCanada outlined their plans for LNG export after the state opted to pursue an LNG option rather than piping Alaskan gas to the Lower 48, where shale plays have saturated the gas market (see Daily GPI, Oct. 5, 2012). Last fall, the producers and TransCanada chose a site in the Nikiski area on the Kenai Peninsula as the most likely location for an LNG liquefaction and export facility. They had evaluated more than 20 locations (see Daily GPI, Oct. 8, 2013).

Various plans have been advanced over the last 30-plus years as to how to commercialize Alaska's vast gas reserves. For many years Prudhoe Bay gas, produced along with the crude oil which has been sent through the 48-inch diameter Trans-Alaska Pipeline System (TAPS) since 1977, has been re-injected to boost oil production.

A pipeline to carry Alaska gas south to the Lower 48 was first certificated in 1977 (see Daily GPI, Nov. 10, 1999). Since that time, various plans for building the link to the south or alternatively building a line to from the North Slope to the Alaskan coast for export of LNG have see-sawed in popularity with none able to justify the huge expense involved.

At one point in 2005 the three producers told state officials planning a pipeline to the Lower 48 that they could use an assumed throughput of 4.5 Bcf/d, which could be raised to 5.6 Bcf/d with additional compression (see Daily GPI, May 24, 2005).

"This commercial agreement, with its transparent set of terms, is Alaska's road map to developing our vast gas reserves," Parnell said this week. "This is truly a historic achievement. Not only have all the necessary parties aligned around a single project, but we're moving forward with a project that's on Alaska's terms and in Alaskans' interests."