LNG on hold for another 15 months

The U.S. Federal Energy and Regulatory Commission has told Alaska’s state gas corporation, Alaska Gasline Development Corp., it will have to wait another 15 months for an Environmental Impact Statement and federal approval for the $43 billion Alaska LNG Project.

In a letter, FERC also told AGDC it still needs to answer a number of technical questions about the state’s application to the federal agency for authorization to build the project.

The delay is a blow to Gov. Bill Walker’s hopes of getting the project approved by FERC in late 2018 and construction underway in 2019. Under the governor’s previous timeline the project would be completed and the first LNG shipped in 2024.

“AGDC has been working toward a final investment decision in 2019 on the $43 billion state-led project, which would move Alaska North Slope gas to market, producing up to 20 million tons of LNG per year at a liquefaction plant in Nikiski, on Cook Inlet. Waiting until 2020 for federal approval will likely change the state’s development schedule,” said Larry Persily, an independent energy analyst, in a written analysis of the FERC decision.

Persily is a former federal natural gas pipeline coordinator.

Until the FERC decision is made AGDC may not conduct any on-site construction, and developers typically do not place orders for pipe, equipment or materials until final government approvals come and the project owners and investors agree to begin work, Persily wrote.

What is also important about the FERC delay is how it will affect negotiations now underway between AGDC and Chinese companies interesting in buying liquefied natural gas and investing in the project.

Walker had also hoped to have that wrapped up by December but it is difficult to see how potential customers can commit billions of dollars to Alaska LNG without the state, as project developer, having the final federal approval in hand.

Persily also questioned whether AGDC will have the resources to meet the extended regulatory schedule. The state corporation is spending about $5 million a month with much of the money spent on regulatory work related to the FERC application, he wrote in his analysis.

By June 30, the end of the current state fiscal year, AGDC will have about $30 million on hand. A $5 million-a-month spend rate would deplete AGDC’s cash in six months, well short of FERC’s schedule for a March, 2020 approval.

Faced with a $2 billion-plus state deficit and a need to dip into Permanent Fund earnings to balance the budget, legislators are in no mood to give AGDC more state money.

What is possible is that potential investors may step with interim financing. Keith Meyer, AGDC’s president, said the corporation will be soliciting about $800 million in equity investment later this year for final engineering needed for the project, and it is always possible that this could be expanded to include some operations “gap” financing.

Meanwhile, the state corporation will be busy for the rest of the year answering FERC’s remaining technical questions, and among those whether the Matanuska-Susitna Borough’s Port MacKenzie, on Knik Arm, should be reevaluated as a terminus for an 800-mile, 42-inch natural gas pipeline and a large LNG plant. The pipeline is now planned to be built across upper Cook Inlet to a plant site at Nikiski, on the Kenai Peninsula.

AGDC officials will meet with FERC staff in Washington, D.C. March 22 to go over how the agency wants the Port MacKenzie reevaluation done as well as a similar reevaluation of Valdez as an alternative.

When Nikiski was selected by an Alaska LNG Project team then led by North Slope producers, the advantages of ample land availability at Nikiski compared with Valdez was cited as a factor.

It later turned out that the industry team had analyzed the wrong location on Knik Arm, Point MacKenzie instead of Port MacKenzie (the two are five miles apart and offer differing terrain).

Mat-Su Borough manager John Moosey said there is ample industrial land around Port MacKenzie.

Meanwhile, AGDC is responding to FERC’s 569 recent questions and data requests sent to the state corporation on Feb. 15. A number of them were answered on March 7 and AGDC says it will provide answers to most of the remaining requests by April.

Several questions will not be answered until June, however, and AGDC said it needs clarification during the March 22 meeting on about 75 of the questions.

Among the questions FERC wants answered is how AGDC will mitigate impacts on public lands and recreational lands. Last year AGDC told FERC it would submit these after completion of the final EIS. However, FERC said it needs the information to do the EIS.

Another thorny issue FERC has raised is whether Alaska LNG will pay property taxes to municipalities along the pipeline route including the Matanuska-Susitna Borough. AGDC says it wants a negotiated “payment-in-lieu-of-taxes” with municipalities, but the structure for this has not been agreed on.

If the project were to pay conventional property taxes it would add about $1 billion a year in operations costs, but what is more important is that property taxes paid during construction, before the project is operating and generating revenue, would have a serious effect on Alaska LNG’s economics, which are already thin.

The idea of a PILT is to restructure the payments so that the burden is lower during construction, with this offset by higher payments later.

The problem for municipalities is that they must pay for the impacts of construction activity, such as additional police, school and social service costs related to new population the construction would attract.