Governor calls for ‘full project review’ of Alaska LNG

Gov. Mike Dunleavy has initiated a “full project review” of Alaska LNG, the state-led major gas project, a spokesman for the Alaska Gasline Development Corp. said

Jessie Carlstrom, spokesman for the state gas corporation, said “AGDC plans to seek strategic investors as part of the project viability review in 2019 in order to advance Alaska LNG and share in the risk.”

“We will keep the Dunleavy Administration and Alaska’s Legislature apprised of any potential strategic investors prior to entering into agreements,” Carlstrom said in an email.

Meanwhile, sources reported that talks are underway between the state administration and North Slope producers about becoming part of the project again. The sources, familiar with the gas project, spoke on background and do not wish to be identified.

Three North Slope producers, BP, ConocoPhillips and Exxon Mobil, were partners with AGDC in doing preliminary engineering and regulatory work until the companies withdrew in 2015, citing low energy prices and sub-optimal returns expected from investments in the $43 billion gas project.

Former Gov. Bill Walker decided to continue work on Alaska LNG mainly on regulatory work and marketing.

“We will complete the Alaska LNG project permitting process with the Federal Energy Regulatory Commission (FERC), continue commercial negotiations with potential customers, and seek private sector partners to help advance the project and share in the risk,” Carlstrom said in the email.

“AGDC plans to seek strategic investors as part of the project viability review in 2019 in order to advance Alaska LNG and share in the risk,” he said. An initiative previously planned for an equity investment solicitation led by Goldman Sachs is meanwhile on hold, Carlstrom said in the Despite the 2015 decision to withdraw as partners, all three producers voiced continued support for the project. “We are committed to support of Alaska LNG and we are now working to understand the priorities of this administration and AGDC,” BP spokeswoman Meg Baldino said.

Dunleavy’s desire to reengage with the three major slope producers first came to light last week in a presentation by new revenue commissioner Bruce Tangeman to the Senate Finance Committee.

The governor had always been uncomfortable with the state leading the huge project, mainly because of the risks. “The risk is significant, and we’re not comfortable in shouldering that,” Tangeman told the senators Jan. 23. Dunleavy also did a shakeup recently at the state corporation, replacing some board members and terminating AGDC’s former CEO, Keith Meyer.

Slope producers BP, ConocoPhillips and ExxonMobil were previously part of a four-party consortium that included the state gas corporation. The group completed a $600 million Preliminary Front-End Engineering and Design for Alaska LNG but in 2016 the producers pulled away.

“It wasn’t that the companies weren’t interested but at the time they wanted to slow the project and reduce cash calls,” since low oil prices were eating into available cash for the companies, Tangeman told the Senate committee.

As a partner in a four-party consortium the state had the option to continue work with the AGDC as owner and manager, with efforts focusing mainly on securing federal regulatory approvals and marketing. To stop working, much of the investment in a federal Environmental Impact Statement for a FERC operating certificate would have been lost.

In 2016 the companies said the project’s projected rate of return is too low for them as an investment, but they also said that an alternative commercial model, such as state ownership, might work if combined with a long-term institutional-type investor willing to accept a lower rate of return.

The three slope producers said they support even the state-led approach and two of them, BP and ExxonMobil, have agreed to price and volume terms under which they would sell gas to AGDC. Negotiations with ConocoPhillips continue.

In the marketing effort, former governor Walker landed a coup in late 2017 when the state reached agreement with China’s Sinopec to negotiate purchases of 15 million tons per year of the project’s potential 20 million ton of annual LNG exports.

The agreement also called for the state-owned Bank of China to do financing and China Investment Corp., China’s state sovereign wealth fund, to consider an equity stake.

The original goal was for contracts to be signed by late December 2019, but that was extended six months given the current U.S.-China trade battle.

When Dunleavy was elected he promised to take a fresh look at the project and concluded it should continue work toward securing a Federal Energy Regulatory Commission certificate, and to continue marketing. A more thorough review in now underway.

AGDC’s plan was to consider a direct state investment, perhaps through Alaska’s $60 billion Alaska Permanent Fund. That was of concern to Dunleavy and state legislative leaders.

The issue of risk, mainly from construction cost overruns, is a paramount worry for the new state administration. There is also concern over who would manage construction, a giant undertaking that would be beyond the capability of the state gas corporation.

Sinopec, a large Chinese energy company, has managed and built large projects, but it said last. fall would not manage the Alaska LNG construction because it has no experience working in Arctic conditions.

In contrast, the slope producers have a record of successful construction in the Arctic beginning with the Trans Alaska Pipeline System in the mid-1970s.