All three major North Slope producers have signed Alaska LNG Phase 1 sale agreements — and they want their ownership to stop at the lease line

After decades of failed attempts at an Alaska gas line, Hilcorp, ExxonMobil and ConocoPhillips have all now signed non-binding gas sale precedent agreements for Phase 1 of the Alaska LNG project — and they've used those agreements to make something clear about how they want this project to work for them

All three told the Senate Finance Committee on Monday they will sell gas at the lease line — the tailgate of their facilities — rather than tolling it through the midstream pipeline and treatment plant. That structure has a specific consequence: the midstream pipeline and treatment costs won't be deductible against the producers' oil production tax. Selling at the lease line keeps the producers focused on upstream economics and leaves moving the gas downstream to someone else.

For Hilcorp, that someone else is Glenfarne. Senior Vice President Luke Saugier said Hilcorp estimates "the cost to sell Phase 1 gas into a pipeline would be less than $50 million" — essentially just the cost of connecting Northstar and other fields to the pipeline. ExxonMobil President Todd Griffith confirmed ExxonMobil's precedent agreement for Prudhoe Bay gas. ConocoPhillips Vice President Barry Romberg said his company signed May 18.

The agreements are deliberately limited. "These are non-binding commitments, and as it says, they don't trigger any gas deliveries or financial obligations. It's our continuing commitment to work together," Saugier said. The parties have agreed on pricing, volumes, and terms but, he noted, "there are other things that we have not yet agreed on that we continue to work on."

None of the three producers plan to participate in the midstream. "As an upstream entity, we do not intend to invest in the downstream part of this project," Romberg said. Griffith said ExxonMobil has "no plan to toll the gas through the infrastructure." Saugier put it most plainly: "Hilcorp has had internal discussions about how far through the value chain we want to own the gas. And the conclusion that we came to is we want our ownership to stop at the lease line."

Sen. Bert Stedman pressed for confirmation on the tax consequence: "the cost of the gas treatment plant and the feeder line up to Northstar will be a non-deductible expenditure against our production tax." Saugier confirmed. ConocoPhillips tax counsel Marie Evans noted the structure traces back to SB 138, the 2014 legislation that moved the statutory point of production for gas upstream of any pipeline or treatment plant.

The Senate Finance Committee is reviewing SB 2001, the governor's bill to replace the project's property tax with a volumetric tax based on the gas moving through the pipeline. The producers' lease-line position helps explain why the committee is paying close attention to who pays what at each stage of the project.