Former Alaska Gasline Development Corp Chairman of the Board and current board member Dave Cruz was gracious enough to invite me out to his hangar at the Palmer Airport to give a verbal history of the Alaska natural gas pipeline. Cruz and his wife of 35 years, Dana, started Cruz Construction in 1981. Cruz, at the age of 60, still looks fit enough that he could work side-by-side with the younger generation of his employees.
Cruz, who had no desire to go to college out of high school, went to Valdez in 1976 as a truck driver. He started his company in 1981 and never looked back. He actually started in the timber industry and quickly learned he would not be able make a living with timber. He went from working the pipeline to the North Slope where he currently has year-round operations.
"One of the biggest rewards I've had is having the opportunity to work on the LNG project. Most people don't understand that we only have one pipeline project and that's Alaska Stand Alone Pipeline (ASAP). AKLNG is not a pipeline project. AKLNG is a machine and is permitted as a machine. With that machine you would put natural gas in at Prudhoe Bay and you run it down the line and you get LNG out at 800 miles. When you talk about FERC filings and all that's where it gets confusing. People will say there is two pipelines. No, there is only one," Cruz said.
Cruz then backed up to 1976 when people on the Trans-Alaska Pipeline System knew that the gas pipeline would be next.
"There were guys quitting the oil pipeline to get on the gas pipeline in '76. There have been multiple and multiple of attempts to build a gas pipeline. They all failed for one reason or another so here we are forty years later. In 2002 the state of Alaska had a vote for ANGDA (Alaska Natural Gas Development Authority). We voted to have a pipeline. Done, not to have producers or anyone else but to do it ourselves. In 2010, Anchorage having brown outs became more and more apparent. They've been feeding off of Cook Inlet since about 1959 and the resource eventually runs out. At that time the legislature said enough is enough. They created ADGC," Cruz said. "In the wisdom of the Legislature, we got problems in Anchorage, and southcentral Alaska. We've got more problems in Fairbanks because they are on oil and coal. They've got air emissions problems. So enough is enough."
From an AGDC power point presentation titled ASAP overview dated Jan 9, 2014, in April of 2010 HB 369 mandated that Alaska Housing Finance Corporation facilitate development of a plan for an in-state pipeline project. July of 2010 AHFC established AGDC as a subsidiary corporation to take over project planning and execution. April of 2013 HB4 mandates AGDC to advance an in-state gas pipeline from North Slope to Fairbanks and Southcentral to an open season and sanction. That project is ASAP or the in-state pipeline.
"There was no corporation. Our original corporation was appointed by Gov. Parnell in 2013. We stood the corporation up from nothing. Our mission at that time was very clear. ASAP was to start from Prudhoe Bay to Point MacKenzie area. That has a 30 mile lateral into Fairbanks. It has as many off take points as we want to put in. When you need to get gas to Delta Junction or the Canadian border, you're not going to build a pipeline. You're going build an off take that a truck can haul either compressed natural gas or LNG from a terminal where you're making it," Cruz explained.
"The mission we had was a 36 inch pipe called an ANSI 600. The measure of success of this project from the legislature was if we could engineer, design and construct this pipeline and deliver LNG into Fairbanks at a cost less than importing LNG from another place. That could be anywhere in the world. If we could do that, we would build this line. It would be a no-brainer. So that was ASAP," Cruz said.
Cruz then turned to the future of natural gas.
"Natural gas is a logical export for Alaska because the world is moving to natural gas as a fuel. One of the neatest things I'd seen was in Las Vegas. My wife and I were returning our rental car and I come down the hill to McCarran International Airport. When I look across there's this giant commercial fueling set up that has got a bunch of trucks sitting over there and there's a UPS truck sitting there. And I look and there is no diesel. It's all natural gas. The taxi cabs are running on natural gas, the delivery trucks are running on natural gas and it's obvious. When you see that on the spectrum that we are looking at now it's like wow this is getting real. And we're a state that has the largest known reserves. When I say that…that's not what we have to go find, we already have it. We don't have to drill a well. It's there, we already beat a lot of the headaches other states have who have to go find it," Cruz said.
"The first board meeting we had was at the Dena'Ina center in Anchorage. There was a diverse representation at the meeting ranging from producers such as Exxon to construction to legislators and other various industries that would have interest in the project. It was a great group that sat there. I remember the facilitator said let's go around the table and get everyone's expectations on the project. One by one we went around the table. There was a unanimous theme amongst everyone there. We are not here to study a pipeline project. We are only to get one done. We are not going to talk about this anymore. That was our initial statement as a board right from the get go," Cruz said. "Then it gets into the challenges. The ASAP line had an environmental impact statement done by others when we got it. We needed a supplement. The federal government at that time was the Obama administration. Bureaucracy changes and the players change in these agencies. A simple supplemental environmental impact statement has taken us five and a half years. Welcome to Alaska. A mined permit here is about 25 years. A mined permit in British Columbia is about two years. A welled permit in North Dakota is about seven days.
"The one question people ask me about the pipeline is who is going to build this? I ask people from all walks of life what do Alaskans do better than anyone else and the answer I usually get is tourism. I say the answer is energy export. We've been doing it for 40 years. We're the experts," Cruz added. "As we start to move forward and everything is a go we start to hear about another pipeline. This after so many failed attempts and the Alaskans were saying we're done. We are going to build this thing. We have to take care of Fairbanks and we have to take care of rural Alaska we have to do something for long term needs of this state. Now we're starting to hear about this gigantic machine. It would be the largest LNG plant ever built in the United States. A 42-inch pipe six inches larger than the ASAP line. This is a greenfield development meaning it will be built from scratch. Then under the Parnell administration the state gets involved in it. AKLNG surfaces with Exxon in the lead with BP and Conoco as partners. The state came in as a 25 percent partner in liquefaction only. If that project would have gone forward the state would have owned 25 percent of the plant in Nikiski. We would have written a check for $7 billion to be a partner. That would not have included the land. We are the state's gas experts so we took the project over. We didn't have a lot of say because it was full speed ahead with Exxon in the lead. About $550 million was spent on studies again. The state was a minority partner so we get to sit in the meetings but it was like go get us some coffee Dave and you can listen. There were milestones to meet and Exxon met those milestones. Then Bill Walker becomes governor and this was his passion project so we continue to go forward."
Cruz reemphasized that this was not a pipeline but a machine so then FERC gets involved. "The decision for the project to go or no go was Dec. 31,, 2016, It requires a change to the constitution on how we get paid for our resources. Senate Bill 138 that is the structure of AKLNG. Those are guidelines for the AKLNG corporation. Every two weeks every legislator receives an update via email. The legislators are the board of directors in a sense", according to Cruz.
"Moving forward to 2016, there had not been a lot of opposition to the pipeline. The big three companies were moving forward with a huge gas treatment plant on the North Slope, 800 miles of pipeline down to Kenai and they bought property in Kenai and they were going to build this massive LNG terminal."
"The state of Alaska was not offered the opportunity to buy that land and it's probably good that we didn't. They came up with a pre-FEED analysis. It was touted to be about $65 billion for this project. Exxon through optimization reduced the price to the high $40 billion range. That's a massive cost. Trump only needs $5 billion to build that wall." Cruz stated.
I thought that was a clever comparison.
"Next is running the FEED (Front end engineering and design) so your dead serious. Your spending huge amounts of money. You are basically getting everything put together. You go through FEED and everything looks good there so then you move to FID (Final Investment Decision). Now we are coming down to Dec. 31, 2016. According to the JVOA (Joint Venture Operating Agreement) if they voted to not go to FEED then that data from Pre-FEED and the $550 million that was spent would go to cyberspace until June 30 of 2017. Then it would be gone. None of the partners could use that and it could not go to another project. Our partners at that time informed us that they are not going to vote to move this thing forward. The problem with AKLNG at that time was that oil was down. That was an equity deal and so the four partners had to come up with the funding to build it," Cruz said.
What about the speculation that these oil companies never wanted this because they are oil and natural gas is a competing resource. Cruz says he never had seen that as a factor.
"They needed the natural gas to pressurize the reservoir and it's an astronomical amount of gas that gets pushed back down into the ground everyday at Prudhoe Bay. The other thing is you have a partnership with three entities with global projects that are competing with the project you are partners in and so it gets a little bit tougher. Why would they want to develop Alaska when they are right on tidewater in places like Australia or the Philippines and they are for profit corporations? But so is AGDC. We are a for profit corporation as well. Everyone is chasing this market, everyone knows that Asia is going to be this market," Cruz said. "After they decided to not to move forward and we decided to take it over. We got $550 million of data plus the rights to AKLNG for taking the project over for the twenty five percent investment of that amount. We paid no more than that. That was at the deadline date of Dec. 31 of 2016."
At that time oil was down and service companies were struggling but AGDC had to move forward. The president at that time Dan Fauske stepped down. AGDC then searched for a new president and that is when Keith Meyer became president of AGDC.
"When you play in this game you have to get the best of the best. We used a headhunter out of Houston, Texas. We wanted an energy guy that was real. We wanted someone who was in the prime of their career that had actually done something. So, we found Keith Meyer. He was the only one we had found that had been in natural gas his entire work history. We had one chance to get this right. We have a market window that is happening as well. We reference 2025 as the year we have to get this gas going. When we hired Keith, we needed him to do two things. We need gas customers and gas supply agreements with producers," Cruz said. "Part of our enabling legislation is on these pipelines under SB138 if we have a natural gas project we have to offer Alaskans, cities and municipalities and the twelve regional corporations the opportunity to invest in this before we do an initial public offering. That's pretty cool. When you look at it someone from Alaska could own an inch, a foot, a mile. Pipelines are very stable in the sense of long-term returns."
Meyer, with his mission in hand, went out to secure customers and producers.
"We had a full-scale sales initiative with the Asian customers. We had a gas summit that we hosted at the Alyeska Resort with the Japanese, Chinese and Korean companies. We had several days of meetings and events," Cruz said.
Under the direction of Parnell both the ASAP project (36-inch pipeline) and AKLNG project (42-inch machine) were both to be looked at equally. One could not be ahead of the other. Same thing when Governor Walker took office. But only one project will be built.
"When you do a development, you have to be large enough to catch the attention of big customers. That is the one thing that AKLNG has been able to do. When Meyer launched his sales initiatives and customers were asking how much we are able to produce and how much reserves do you have that is what Alaska is able to do. We check off a lot of the boxes. This is good news and we are no longer waiting for a multi-national corporation to do something for this state," Cruz said. "Meyer goes forward with his sales initiative. The legislature is very serious on their oversite of us. I knew we were having success on these gas customers. Meyer delivers back to our board fifteen letters of intent. These are not easily obtained because first you have to reach an agreement with the governments in Asia and then you can negotiate with the companies within those countries. The next phase is to negotiate those LOI's into contracts."
Fast forward to today and I circle back with Cruz on the replacement of four board members and the firing of Meyer after receiving a $296,000 bonus on top of his $550,000 annual salary. This made Meyer the highest paid employee for the state of Alaska.
Cruz knew that ADGC would get two new board members because of the change in state commissioners but was surprised by the firing of Meyer.
"We serve at the pleasure of the governor and you got a new boss in charge," Cruz stated
For me it was surprising to pay Meyer a handsome bonus and then be let go a couple of days later.
"We did an executive search for a world class gas person. His salary and bonus was in line with a person of that caliber. That's the kind of salaries these guys make. We don't make that stuff up. For what is worth Mr. Meyer did not want the bonus he asked for the opportunity for a stock option. That's how much he believed in the project," Cruz said.
Meyer's salary was vetted under the Walker administration.
"We serve at the pleasure of the governor and this new governor pledge is to cut the budget. That's what he said he was going to do and you got to start somewhere so I guess he started with us." Cruz surmised.
Where does this move put AGDC with now 16 letters of intent in hand when negotiating for contracts?
"We have a very strong commercial staff that Meyer oversaw. People that we are dealing with have to understand that we are a for profit corporation of the state of Alaska. We have to gain their confidence that the state of Alaska is not going in a different path. Gov. Dunleavy has told me straight out that he is for resource development. We have to basically continue to get to long term contracts. To clarify on the LOI's six of them have entered into the HOA phase. That is heads of agreement otherwise known as a term sheet. Then come long term contracts so we are well on the way. We have to convince our buyers that we are still in business which we are doing today and that we can still deliver," Cruz said. "I was very concerned about the transition but I have confidence that AGDC can work through this. I know the new chairman and vice chairman very well. These are all people that are pro development."
Parnell is still an advisor to Dunleavy, and according to Cruz he is a huge asset in this because he has the experience level under his management of the state and that is when AGDC was formed as well as the ASAP project and AKLNG came in under his Governorship.
The indication from what I am hearing is that ASAP for this administration is more desirable than AKLNG.
"I've been told that by many legislators. It's a less of a risk profile. Because all you are is a standing pipeline. We're just transporting gas and we are not refining it. We're just hauling gas. They like that and we'll have the permits for that as soon as the folks at the federal government go back to work. They're signed, they're done. They just have to sign them. We have these heads of agreement so all of this is coming together pretty quick," Cruz said. "ASAP is very expandable. People say it's a little pipeline. No, it's not it's very expandable. We're ahead of the timeline to provide gas for Alaskans and that allows us to grow an export market out of a pipeline that we can expand."
When we spoke prior to changing of the guard I was under the impression that the ASAP line could only provide service to Alaskans and the AKLNG machine was for export but Cruz says the ASAP line can do it all.
"The 36-inch pipeline and that comes down to Point MacKenzie and ties in there through existing pipelines across Cook Inlet. We can move 750 million cubic feet of gas a day down to that existing LNG plant in Nikiski. That's without doing anything to this pipeline. If we add compression to the ANSI 600 pipe we could move 1.4 billion cubic feet of gas a day. That takes care of Alaska's needs and a pretty sizeable export market. For a long time, we've had the ability to have these compressor stations to come online. If we change the pipe wall thickness which does not require any environmental impact statements or supplementals. It's just a change in wall thickness not bigger pipe. This would be ANSI 900 as oppose to ANSI 600 that same pipeline with compression you could move 2.4 billion cubic feet of gas per day. We will have tremendous expansion capabilities as the market grows. I think the Board would go with the thicker pipeline. Then your covered and you have better long-term wear. Then all your compression stations are engineered in, they're just a flange. It's already pre-engineered, you unbolt the pipe and you pull that section out and you plug in the compressor station and up goes your volume," Cruz said.
Back to the new leadership and what it looks like now.
"Well we have an interim president named Joe Dubler and Joe was with AGDC when it was first formed with Dan Fauske. Fauske was the president; Meyer replaced Fauske. The board will search for a permanent president," Cruz said.
Will the market force the same salary as Meyer?
"I don't know if there will be a savings now that we are way past the point of a start-up. I can't say what the next person will be paid. Dubler is getting paid $350,000. That's the deal he worked out. I'm not a part of that. I am now a standard board member and not an executive. I still play a role. I'm chair of the technical committee. I've done that since the conception and that's what they asked me to do," Cruz said.
Cruz's position changed after Dunleavy selected the four new board members. The structure is determined by the board members. The new structure was a unanimous decision.
"To be honest with you I've been doing this for about six years with four as chair and two as vice chair. I could use a little bit of break. This is a volunteer position. I get no money to do this," Cruz said.
Although this is a stressful time it is not the first time there have been changes. AGDC went through changes with the Walker administration.
"What I tell people is…look people get very frustrated on how much money the state has spent on doing this venture and this was legislative action. They saw fit to do this and they are the board of directors for the State. They said get it done. The only way you get that investment back is you actually have to build something and do something. That was always the vision of the legislator and the preceding governors and I don't think Gov. Dunleavy is any different. He just doesn't want a bad deal that costs the state money if it doesn't work out. I just want to make sure that we are moving forward and we are hitting on all eight cylinders and we are doing things right," Cruz said.
Dennis Anderson is group publisher for Wick Communications Alaska and Colorado.