Port Mac not part of $43 million LNG Project

The state-owned Alaska Gasline Development Corp. will begin soliciting equity investments by mid-year in the proposed $43 billion Alaska LNG Project, officials of the corporation told state legislators in briefings last week.

An initial offering will be aimed at raising about $1 billion to be used for final engineering needed to prepare the project for final investment decision by the state and potential Chinese customers in mid-2019, Keith Meyer, AGDC’s president, told the resources and finance committees in the House and Senate.

A recent accomplishment is the completion of answers to over 100 technical questions asked by the U.S. Federal Energy Regulatory Commission on the Alaska LNG Project’s application to the agency for a certificate for the giant project, Meyer said. Alaska LNG is now waiting for the FERC to set a schedule for the federal Environmental Impact Project that is needed.

Meyer also explained why the Matanuska-Susitna Borough’s Port MacKenzie was eliminated early on as a site for the terminus of the Alaska LNG Project’s 800-mile, 42-inch pipeline and large liquefied natural gas plant. “Port MacKenzie is a little too close to Anchorage and ship traffic going there. Also, Port MacKenzie is a multi-use cargo port and federal law requires an LNG terminal to be single-use,” Meyer said.

“The Alaska coast has many locations that would make wonderful port, but we would up choosing Nikiski and we’re sticking with that,” he said.

Meyer didn’t explain how the Mat-Su site was given an erroneous evaluation of physical and environment conditions, however. The Mat-Su Borough pointed out that the Alaska LNG Project analyzed Point MacKenzie, a site five miles distant that is less favorable than Port MacKenzie, where the borough has built a commodity port.

Meyer said Port MacKenzie is an excellent cargo port, however, and would play a big part in shipping materials and equipment during construction of the big gas project. He welcomed the Mat-Su Borough’s filing to become an intervenor in the U.S. Federal Energy Regulatory Commission’s proceedings on the Alaska LNG application.

“Mat-Su should be at table during the FERC proceedings. There are 170 miles of the pipeline that will go through the borough,” Meyer said.

On the raising of investments Alaskans will be given the first crack at the opportunity, Meyer told legislators. “Senate Bill 138 (the legislation providing the framework for Alaska LNG Project in state law) requires us to make a specific offer to Alaska municipalities, regional Alaska Native corporations and others, and we will do this in the first rounds,” of fund-raising, he said.

As for state appropriations, the corporation isn’t asking the Legislature for an operations appropriation this year for the Alaska LNG Project because $72 million in unspent funds is still on hand from a prior appropriation, which is enough to fund operations of AGDC through Fiscal Year 2019 (the budget year beginning next July).

However, AGDC is asking lawmakers to approve a transfer of $12 million in unspent money in an account for an in-state gas pipeline, Meyer said. The in-state gas pipeline was pursued as a kind of fall-back, parallel project in case the large gas project experiences delays.

Design work on the in-state pipeline, called the Alaska Stand-Alone Pipeline, or ASAP, is complete and final regulatory approvals are expected this summer.

While it doesn’t involve state money the state corporation is also asking lawmakers to approve “receipt authority” that would allow AGDC to accept third-party investments to finance final engineering. Under state law the Legislature must approve the receipt of money by state agencies or corporations from non-state sources.

Lawmakers were cautiously supportive of work so far on the gas project work, which is a prime goal for Gov. Bill Walker, but several legislators raised questions over whether Walker will seek to invest state pension funds in the project, or money from the state’s $63 billion Permanent Fund.

Rep Chris Birch, R-Anch., said he had heard a comment from Walker about investing pension funds. “That gives me a great deal of concern. I also heard that the Permanent Fund is being talked about as a potential investor,” Birch said.

Meyer said AGDC is not yet targeting any specific investors, “We’re actively seeking third party investors but we’re not intending that the Permanent Fund be an investor, but we don’t want to exclude them either,” he said.

In general, large institutional investors like pension funds and sovereign wealth funds will find the Alaska LNG Project a sound investment because it is infrastructure that, once built, will last for decades and generate steady returns, Meyer told the legislators. However, the project could be less attractive for major oil and gas companies, like the North Slope producers, who generally want higher returns on their investments than long-term institutional investors, he said.

However, Sen. Natasha von Imhof, R-Anchorage, who is a member of the Senate Finance Committee, raised questions as to just who potential investors in the project might be.

“I learned (in the briefing) that the project will need a significant amount of cash in the next couple of years to pay for the permitting, construction and investment financing of this mega-project. I noticed a lack of investment analysis in AGDC’s presentation on who potential funders of this significant amount of cash may be,” von Imhof said.

She also questioned how prepared the state corporation is to engage in financing of this magnitude: “At this late stage of the game, AGDC has still not hired a Vice President of Finance, yet they still hope to start raising much needed investment dollars as soon as 2019,” von Imhof said.

Former House Speaker Mike Chenault, R-Nikiski, who attended AGDC’s briefings of the House Resources committee, said legislators will need a lot more answers before they will allow AGDC to tap the $12 million set aside for the in-state gas project or for the “receipt authority” to receive third party investment funds for the final engineering. “There will be a lot of conversations about this,” Chenault said.

Rep. Dave Talerico, R-Healy, said “I’m optimistic but there are still a lot of questions out there. We’re on a learning curve and the more information we get the better. I am pleased that the FERC application is almost complete. This will have a seven-year ‘shelf’ life, so will be good to get it done.”

However, Talerico also said he is concerned about differences in the abilities of the state and its potential Chinese partners to tolerate risk. “China is investing in energy projects all over the globe and even those this is large it’s not that big as a part of their portfolio. It would easier for them to walk away than it would be for the state if things went sour,” he said.

Rep. Chris Birch, R-Anchorage, said he’s supportive of the gas project but would feel a lot more comfortable if potential Chinese partners would put up a little money to demonstrate commitment to the idea. “It’s typical to get a little earnest money up front in things like this. This is a good start but I’m a ‘show me the money’ kind of guy,” Birch said.

He also said he would like to see the North Slope producers involved. “I’m very concerned about that. Overall, I’m a little skeptical,” he said.

On the overall project planning, Meyer told the legislators that AGDC has contracted with Fluor, a major engineering company, to identify potential ways to reduce construction costs and that so far the company has suggested that $2 billion in reductions off the $43 billion overall cost might be possible. Fluor is still engaged in the analysis, Meyer said.

AGDC has also received an informal proposal, still confidential, from a major U.S. engineering and construction management company with an offer to manage construction that could be substantially less expensive than the $3.4 billion AGDC is now using as an estimate for project management.

The $43 billion total cost includes large amounts of contingencies for problems like $9.3 billion for cost overruns and $6.2 billion of “owners’ costs,”which would include project management, Meyer said. The cost of actually building the pipeline, gas treatment plant on the North Slope and LNG plant at Nikiski is estimated at $27.9 billion, he said.

The estimates, including contingencies and estimated owners’ costs, were put together by the industry consortium including AGDC and managed by ExxonMobil that led Alaska LNG until it was taken over by the state.

The consortium spent $600 million doing preliminary engineering, regulatory work and cost studies before handing the reins to AGDC, Meyer said.