Lawmakers hear Alaska LNG faces “significant economic headwinds”

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As if lawmakers don’t have enough on their plates trying to close a $3.5 billion budget hole, this week brought a reminder that the state is also trying to advance a natural gas mega — make that giga — project.

That would be Alaska LNG, the effort to build a pipeline from the North Slope to Cook Inlet.

With natural gas prices following oil in an extended plunge, lawmakers heard that the project faces “significant economic headwinds.”

Meanwhile, tension between the Walker administration and the state’s three oil company partners once again spilled into the open.

Lawmakers heard a series of updates on the Alaska LNG project this week. The upside? Technical progress is on time and on budget, according to project manager Steve Butt.

The downside? Just about everything else.

Representatives from ExxonMobil, BP and ConocoPhillips, the state’s three partners, testified Wednesday.

In his opening statement, Leo Ehrhard, Vice President for Commercial Assets at ConocoPhillips, said his company is “committed” to Alaska LNG.

“But we have to be realistic about the project in this current price environment,” he said. “And we have to be realistic about the challenges that sit in front of us.”

Those include oil prices at their lowest levels in over a decade, gas prices at their lowest levels in a decade and a half, and more LNG on the market than buyers can absorb. Prices will rise, Ehrhard said, but nobody knows when.

Meanwhile, for the project to move forward, the companies must complete a series of agreements among themselves — and with the state.

In a letter sent to the companies in mid-January, Gov. Bill Walker insisted those agreements must be submitted to the legislature by the end of the current session.

That seems unlikely, Ehrhard said.

“The governor has identified a list of agreements he would like to see completed before the special session,” he said. “This will be a very difficult task to accomplish.”

Representatives from ExxonMobil and BP echoed that point.

If that’s not ominous enough, Ehrhard went on to explain what would happen should ConocoPhillips decide to pull out.

“Should we find an impasse to these agreements, ConocoPhillips will not stand in the way of the project, and will make our gas available to the state.”

If that sounds like Conoco has one foot out the door, a spokesperson reiterated Friday that the company is “committed.”

But key deadlines are looming. The three companies are seeking what they call “fiscal certainty” — meaning, they want to lock in tax rates on the project to avoid the decades of litigation that followed the construction of the Trans-Alaska Pipeline.

That would likely require a constitutional amendment, which in turn requires a vote this November. If the partners miss the deadline for this year’s general election ballot, the next chance is 2018.

Walker says he can’t support an amendment unless the other contracts are signed — including agreements on the governance structure for the project, how the state would access its share of the gas, and, stickiest of all, an agreement among the producers themselves about how to supply the project.

In fact, the governor wrote, if the partners can’t agree, he will have “no other choice but to consider other options for commercializing Alaska’s gas.”

Speaking with reporters on Thursday, Walker was  vague about what exactly that might mean.

“Really, it’s just a matter of, I wanted to be clear what my expectations are,” he said.

Meanwhile, Senator Bill Wielechowski (D-Anchorage) asked the question on many Alaskans’ minds.

“How likely is this project to happen at this point, would you say?” he asked.

“I’m hesitant to put a number on it, since I’ve been working on this since 1992,” replied ExxonMobil’s  Bill McMahon.

But McMahon ticked off a series of factors in the project’s favor, including the fact that all three leaseholders and the state are working together — and he noted that by the end of this year, the project will have gone further than any previous effort.

In the end, he said, he’s bullish on Alaska gas.