North Slope producers will sell Alaska LNG gas at lease line

Three major North Slope oil producers told the Alaska Senate Finance Committee on Monday that they signed gas sale precedent agreements for Phase 1 of the Alaska LNG project and will sell gas at the lease line. Producers and lawmakers said that structure means midstream pipeline and treatment costs will not be deductible lease expenditures against oil production tax.

Hilcorp Alaska Senior Vice President Luke Saugier testified that Northstar is one of the fields where Hilcorp has a signed gas sale precedent agreement with Glenfarne to supply gas for Phase 1. ExxonMobil President Todd Griffith confirmed ExxonMobil has a precedent agreement for Prudhoe Bay gas. ConocoPhillips Vice President Barry Romberg announced ConocoPhillips signed its agreement May 18.

The agreements are non-binding, with pricing, volumes, and terms still to be finalized. "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. He added that "they contain pricing. We've agreed on pricing, we've agreed on volumes, we've agreed on terms, right? And there are other things that we have not yet agreed on that we continue to work on as we move forward."

Saugier said Hilcorp estimates less than $50 million in upstream cost to connect Phase 1 fields to a pipeline. "Because of that, because of what we already do, we estimate the cost to sell Phase 1 gas into a pipeline would be, we think, less than $50 million," Saugier said.

Lease line sale structure

All three producers confirmed they will sell gas at the lease line, the tailgate of their facilities, rather than tolling it through the midstream pipeline and treatment plant. "The reason that we have structured our agreements on selling gas the way that we have is to minimize the cost to Hilcorp, the upstream operator, to sell that gas, right? Our only upstream cost will be that connection into the pipeline, which will be right at, as you say, the tailgate of our plant," Saugier said.

According to AGDC, upstream gas producers are expected to sell gas at the inlet to the gas treatment plant, often referred to as the lease line or facility tailgate. Midstream costs for treatment, pipeline transportation, and LNG liquefaction will be recovered through separate tolling or tariff mechanisms.

ConocoPhillips tax counsel Marie Evans explained that the point of production for gas under Alaska statute is upstream of any gas pipeline system or treatment plant. "When you look at 4355.900, those definitions for the point of production for gas were specifically changed and modified back when was passed," Evans said.