Skin in the game: Alaska Department of Revenue soon to complete LNG Project analysis

Alaskans will get their first look at a possible state investment in the large Alaska LNG Project early next year when the state Department of Revenue completes its analysis of financing options for the $43 billion project.

There won’t be a recommendation but there will be estimates of how a state equity contribution might help the project along with what risks there might be, state officials told legislators in hearings last Wednesday.

Alaska LNG includes an 800-mile, 42-inch pipeline built from the North Slope to a large LNG plant on the Kenai Peninsula in Southcentral Alaska.

Any state money from, for example, the Permanent Fund would be part of a package that would include other investors, Marie Tsu, a consultant to the revenue department, told a joint hearing of the House and Senate Resources Committees.

A state investment, whether for the Permanent Fund or other state money, could be guided by the “Prudent Investor Rule,” a standard of decision requiring a high level of judgement.

“This decision would have to weigh the risks (to the Permanent Fund) in context of the overall portfolio and its diversity of investments,” Tsu said.

Meanwhile, the Alaska Gasline Development Corp., the state gas corporation, will begin hustling other equity investors in a “road show” to begin in a few weeks, Leiza Wilcox, AGDC’s commercial vice president, told legislators.

Feedback will give AGDC, for the first time, a sense of what appetite there might be for putting money into Alaska LNG.

The investor presentations are being coordinated by Goldman Sachs and Bank of China, now retained as capital investment advisors to the project.

“These early contacts are to get people familiar with the project and get initial determinations of interest,” Wilcox said. “We plan formal solicitations for investment in the first quarter of 2019.”

A tentative financing plan calls for 75 percent debt and 25 percent equity, which would require about $10.7 billion in equity capital.

AGDC’s CEO, Keith Meyer, said previously other investors may want the state to put some of its own money at risk as capital. Whatever the state contribution is, AGDC intends to remain a 51 percent owner of the project, Meyer said.

Alaska has substantial assets including its $64 billion Permanent Fund, Deputy Revenue Commissioner Mike Barnhill said, but will consider other ways of providing equity as well as whether state investment is even advisable.

Negotiations are underway now with a Chinese group led by Sinopec, which would buy LNG and China Investment Corp., the nation’s sovereign wealth fund, as a source of major equity investment. Sinopec itself may be an investor, possibly for as much as up 25 percent, Meyer said.

As currently planned, the project would be financed 75 percent with debt, or $32.6 billion, and 25 percent with equity, or $10.8 billon.

The assumption is that interest on the debt portion would be 5 percent and that equity investors would accept a long-term return of 8 percent to 9 percent on their money.

That’s comparable to long-term returns for Alaska’s Permanent Fund.

AGDC’s planning assumes a price for gas paid to the North Slope producers, and the state for its royalty gas, between $1 and $2 per thousand cubic feet.

It is not known whether the North Slope producers will accept that price.

Since the state would own most of the gas project, and the state’s portion is exempt from taxes, a “payment in lieu of tax” will be worked out with municipalities along the pipeline route. In AGDC’s planning $450 million a year is assumed for that.

Wilcox said the commercial structure of the deal, as envisioned, is for AGDC to buy gas from North Slope producers as well as the state and then market it as LNG.

In terms of materials procurement, AGDC told the legislators it has now located domestic sources for at least some of the massive amounts of steel pipe needed.

Frank Richards, AGDC’s vice president for engineering, said the state corporation has found plants in Arkansas and Illinois that will be able to provide some of the 42-inch high-strength steel pipe and pipe spools needed.

Previously it was thought that all the steel needed would come from overseas, much of it from China, under the belief that U.S. mills did not have capability of making 42-inch pipe with proper specifications.

This could help mitigate effects from the escalating U.S.-China feud over trade. Richards said new tariffs ordered by the Trump administration affect imports of pipe from China but not, so far, large process modules needed for the LNG plant and a large gas treatment plant.

Alaska’s project could pick up splatter from the U.S.-China trade fight but it achieved such high profile last November when the deal was signed in Beijing with U.S. President Donald Trump and China’s president, Xi Jinping, looking on, that it may survive. “Clearly, China needs clean energy and LNG and Alaska would be the closest source,” Meyer said.

U.S. Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross mentioned the Alaska gas project in recent remarks as an example of a project beneficial to both China and the U.S. despite disagreements over other trade, he said.

AGDC also met with Sinopec and the other potential China partners during the World Gas Conference in Washington, D.C. in late June and all indications were the deal was still a go, Meyer said.