Proponents of Alaska LNG Project remain hopeful

There are still hopes that the $43 billion Alaska LNG Project can slide in under the radar despite a stormy trade battle underway between Washington, D.C. and Beijing.

Meanwhile, the departure in December of Gov. Bill Walker, the project’s champion and chief cheerleader, raises new uncertainties.

Walker has withdrawn his bid for reelection.

The November, 2017 deal between China-owned Sinopec, Bank of China and China Investment Corp. to negotiate a purchase of 15 million tons per year of LNG from Alaska’s state-owned Alaska Gasline Development Corp. is due to be finalized by Dec. 30.

So far state’s Alaska Gasline Development Corp., which is managing the project, is getting no signals of anything is amiss in meeting the target, Keith Meyer, AGDC’s CEO, said last week in an interview.

Negotiations are ongoing, he said, and one encouraging sign is that a 12-member Sinopec team was in Alaska the previous week to meet with North Slope gas owners BP and ExxonMobil to verify gas reserve data.

“We’ve asked them about the trade dispute and they’ve asked questions of us, but our thinking is that this will all be settled before we have to make a Final Investment Decision,” which would come in 2020 in the current plan.

“We see no reason why the schedule can’t be met,” Meyer said.

AGDC also met in Beijing last month with Sinopec and the other Chinese partners and signed a memorandum basically reaffirming the deal is still on track despite the trade fight.

“We intended this mainly as sign to other potential customers in Asia that we’re still in the game,” he said.

There are people who think Meyer is too optimistic. natural gas project coordinator in the Obama administration, thinks.

“I find it extremely difficult to believe any entity in China will sign any kind of a long-term binding commitment to take tens of billions of dollars of Alaska LNG – or any U.S. LNG - until the trade war is resolved,” said Larry Persily, an independent Alaska energy analyst and federal Alaska gas project coordinator.

“But I would not be surprised if China signs another memorandum or similar agreement to keep talking and exchanging information. It seems a low-risk option for China to keep its name in the game,” he said.

Persily also said that before LNG buyers, Chinese or others, sign long-term binding purchase contracts AGDC will likely have to complete the federal licensing requirements and to secure its major federal permits.

Those are another year away.

“I cannot imagine firm sales contracts or firm financing (by the end of December) for a project that lacks a final environmental impact statement, FERC authorization, completion of land acquisition at the LNG plant site in Nikiski and all the other unsettled pieces of this puzzle,” he said.

However, AGDC is moving steadily to complete FERC’s regulatory requirements and a target date of February 2019 has been set for the Commission to issue a Draft Environmental Impact Statement for the project. The final EIS is expected later in the year. This would set the stage for the FERC certificate and other authorizations.

Meyer said the decision by a Shell-led consortium to approve a large LNG export project in British Columbia is a net positive although Shell would seem to have a timing advantage over Alaska’s project.

“This will put a large LNG project on North America’s west coast,” which would focus attention on the shorter shipping distance to Asian markets.

“Shell is a major player in the world LNG business and it has 40 percent stake in this,” so it basically validates the advantages of the location relative to competing LNG supply sources, he said.

“It will help bring other major LNG players to the U.S. west coast,” Meyer said. North Slope producers BP, ConocoPhillip and ExxonMobil are meanwhile on board backing the Alaska project.

BP and ExxonMobil have signed agreements to supply gas to the Alaska LNG Project and an agreement with ConocoPhillips is pending along with, eventually, a deal to buy state-owned North Slope royalty gas, essentially the state committing its own gas to the state LNG project.

Including the state-owned gas along with BP’s and ExxonMobil reserves, AGDC now has 25.5 trillion cubic feet (tcf) of the 32 tcf of total confirmed North Slope gas committed to Alaska LNG, according to information provided to the corporation’s board in October. Negotiations are still underway with ConocoPhillips, the third and final private major North Slope gas owner.

The state itself owns about 25 percent of the North Slope gas through its royalty share of production and its tax share, assuming the state production tax is taken as gas, which state law allows.

The state Department of Natural Resources took the first step in taking its royalty gas in kind last month with a Request for Proposals for potential buyers of the state gas. The only response came from AGDC, which would essentially be a state corporation purchasing the royalty gas from the state itself.

State statutes set out a procedure for the royalty-in-kind sale with the first step being an indication of interest from a buyer, which has happened. This doesn’t preclude other buyers from making competitive offers as the process unfolds, said T.J. Presley, spokesman for the state Division of Oil and Gas.

AGDC spokesman Tim Fitzgerald said even if another entity bids for the royalty gas it would still be shipped through the state-owned Alaska LNG Project. “They would be another customer for us,” Fitzgerald said.

Meyer also said AGDC has reviewed the $43 billion cost estimate for the project that was done in 2016 when Alaska LNG was being led by an industry consortium that included AGDC.

The review basically validated the 2016 estimates with adjustments for inflation, Meyer said. ExxonMobil led the industry consortium at the time, leading the project through its preliminary engineering.

“They did a pretty good job, which would be expected having spent $600 million on preliminary engineering,” Meyer said.

Of the $43 billion total cost Meyer said the actual construction expense is $28 billion with $6.2 billion estimated as the “owner’s cost,” or expenses the state as project developer would bear, and another $9.3 billion is set aside as a contingency for unexpected problems, Meyer said.

The ”owner’s cost” gives AGDC some flexibility because these expenses might be handled in other ways.

The industry consortium, of which AGDC was a one-fourth partner, turned the project leadership over to AGDC when it appeared conventional commercial-type financing and ownership models for the project wouldn’t work with LNG prices where they were.

The state has pursued a different strategy to attract long-term investors and customers like Sinopec and other Chinese companies. Its underlying premise is that a state-owned Chinese companies be willing to accept lower long-term returns on investments than private companies would require.

Under terms of the 2015 deal Sinopec would purchase three-fourths of AGDC’s planned production of 20 million tons of LNG yearly. The remaining five million tons per year of production would be sold to other buyers, most likely also Asian.

Besides the Chinese companies AGDC has negotiations underway with Tokyo Gas and Petro-Vietnam.