Alaska's big pipeline and LNG project: work continues, more decisions to be made.

• Author: Bradner, Mike
• Position: OIL & GAS

Things are rolling on the big pipeline and liquefied natural gas (LNG) project. A lot happened last spring and summer--all of it positive--but there are more big decisions to be made in 2015 and 2016. It's still far from certain that the giant project can be competitive against fierce competition in the Pacific LNG market. However, important steps are being taken.

Last spring the state Legislature passed Senate Bill 138, authorizing the state to participate financially in the project with the North Slope producers and TransCanada Corporation, a pipeline company. With the Legislature's blessing, the Alaska Department of Natural Resources signed preliminary agreements with the producers and TransCanada.

Agreement Review

First, the state agrees to take its royalty and production tax in the form of gas, or "in kind." Taking royalty in-kind is common (the lease form provides for it, and the state has traditionally taken most of its oil royalty in kind, selling it to in-state refiners). Taking the tax share in-kind is new, however, and to accomplish it the state had to convert its net-revenues tax on gas production to a gross revenues tax and set a tax rate, which was put at 13 percent. The combined royalty and tax share of gas works out to 25 percent.

Second, the state signed a preliminary agreement with TransCanada to ship the state's gas through parts of the project that TransCanada would finance and build. TransCanada's share of the gas treatment plant and pipeline is 25 percent, in line with the state's 25 percent share of gas that would be shipped.

TransCanada will finance, and own, 25 percent of the gas conditioning plant and pipeline, enough to be able to process and ship the state's in-kind gas, which will be 25 percent of the total production.

Third, Alaska Gasline Development Corporation (AGDC), the state's gas pipeline company, would finance and own 25 percent of the liquefaction plant at Nikiski, on the Kenai Peninsula. AGDC would process the state's share of gas into LNG. TransCanada will own no part of the LNG plant.

In terms of the state's financial commitments during construction, the state will pay only its 25 percent share of the LNG plant, which it will own. TransCanada will fund its 25 percent share of the construction costs of the gas conditioning plant and eight hundred-mile pipeline. The state will pay TransCanada for processing and shipping state-owned gas, which will be TransCanada's revenue from the project (the pipeline company will have no gas production) although much of TransCanada's revenues will go toward paying the costs of financing its share of the pipeline and gas treatment plant.

The state's main source of revenue will be from the sale of the state's gas as LNG. Preliminary estimates are that the state's annual revenue, net of payments to...