Alaska has extended an agreement with TransCanada that sees the state offer subsidies for the firm's work on a natural gas pipeline and LNG export project in the state, a state official said Wednesday. The previous agreement expired June 30.
Governor Sean Parnell is still unhappy with the rate of progress on the project, but the state believes TransCanada and North Slope producers are making progress toward a key milestone, an agreement to begin pre-Front End Engineering and Design on the project, state Deputy Natural Resources Commissioner Joe Balash said in an interview.
Parnell had expected a pre-FEED agreement to be in place by June 30, but it was not. The pre-FEED step would represent the first substantial investment, estimated at several hundred million dollars, by the companies involved in the project.
TransCanada is working with BP, ConocoPhillips and ExxonMobil on the pipeline project, which is expected to cost $45 billion to $65 billion to construct overall if it is built.
TransCanada had requested a two-year extension of work commitments agreed to under its state license, which entitles the pipeline company to up to $500 million in state funds to support its work.
However, the state only agreed to a one-year extension, through October 31, 2015, Balash said.
As of June 30, the state has paid TransCanada $259.4 million under the subsidy agreement. Until June, the company had shared the subsidy with ExxonMobil, which teamed up with TransCanada in 2009.
In June, however, all four companies agreed to support a summer field program to gather technical data, and the subsidy is now being shared with BP and ConocoPhillips as well as ExxonMobil, Balash said.
Under the agreement, the state is paying 90% of the companies' costs, which must be approved by the state, up to $500 million.
Just how the subsidy is being parceled out between TransCanada, which holds the state contract, and the other firms, is unclear.
Under a previous work plan, the $500 million would be fully paid out by 2016, but if the companies agree to the pre-FEED work their spending would accelerate and the $500 million limit would likely be reached by the end of 2014, Balash said.
The state offered the license and subsidy arrangement in return for TransCanada agreeing to certain terms for its plans for a gas pipeline from the North Slope to Alberta, and a connection with existing TransCanada pipelines.
The terms include agreeing to use rolled-in tariffs on pipeline expansions, to facilitate access for new gas, and certain debt-equity relationships in financing, which would affect tariffs and state revenues from gas production.
Most importantly, TransCanada agreed to file for approval certificates for the Alberta pipeline with the US Federal Energy Regulatory Commission and Canada's National Energy Board.
Although the companies' plan has now switched from an all-land pipeline to an LNG export project because shale gas has transformed the Lower 48 states gas market, TransCanada is keeping its options open for a possible pipeline extension to Alberta at some time, TransCanada vice president Tony Palmer has said in briefings.
And though the state is shifting the license agreement to an LNG project in several stages, Balash said it is keeping TransCanada to its contractual agreement to file for a FERC application, although the deadline for that is now late 2015.
Balash said the state expects TransCanada to be back with another proposed contact amendment, this one focused entirely on the LNG project, by the end of 2013.
Balash said Parnell was disappointed that the pre-FEED benchmark was not met by June 30, but the governor was optimistic that the companies are moving in that direction.
"They appear to be moving into the pre-FEED, but they haven't agreed to it yet," he said. Still, the agreement of all four companies in June to contribute to costs of summer field work, "is a threshold step, although we would have liked to have seen more," Balash said.
The companies, in a statement, acknowledged that the field work would set the stage for further engineering, a reference to the pre-FEED work.
Balash also said the lack of a formal Joint Venture Agreement between the four companies so far is troublesome to the state. ExxonMobil and TransCanada do have a formal relationship under the Alaska Pipeline Project, but BP and ConocoPhillips are not part of that.
The project organization is still ad-hoc at this point, he said. "For example, there's no project office where you can see people from all four companies working together. TransCanada has an office in Anchorage, but there's not many people in it. Steve Butt, the ExxonMobil manager of the project, is based in Houston," Balash said.
"We remain optimistic that this will come together. If we see it in four months or so, that would be okay," he said.
Sources familiar with the project have said that the slowdown is caused partly by differing opinions on spending priorities among the four companies as well as lack of agreement on key terms, particularly on how the project ownership would be shared.
BP, ConocoPhillips and ExxonMobil have previously said they expect to own, and finance, a share of the project equal to their gas ownership on the North Slope. However, that leaves open questions about a stake for TransCanada, which owns no North Slope gas reserves, the sources said.
For its part, TransCanada has said previously it wants to own 51% of an Alaska gas pipeline.
The state has also offered, in the past, to take a 20% equity share of the project because of its royalty gas interest. A similar proposal may yet surface again.
