Trump tariffs not anticipated to affect LNG project

Tariffs on imported steel ordered by President Donald Trump are not expected to affect the proposed $43 billion Alaska LNG Project substantially, the president of the state-owned Alaska Gasline Development Corp. says.

Keith Meyer, CEO of the state gas corporation, said AGDC estimates that the president’s 25 percent tariff on imported steel would apply only to part of the steel used in the project and would add $250 million to $500 million to its cost.

“We have a $9.3 billion contingency in our budget plan so we believe we can handle this,” Meyer said.

Meyer briefed AGDC’s board on the project last Thursday, April 12.

Frank Richards, AGDC’s vice president for engineering, said the new federal tariff is applied to only certain types of steel that would be used, mainly pipe and pipe racks. AGDC’s will need 800 miles of 42-inch pipe for a pipeline from the Noryj Slope to a planned natural gas liquefaction plant in south Alaska.

Structural steel such as that used in gas process modules or the LNG plant should not be affected by the tariffs, Richards said. Most of the needed plant facilities will be built outside Alaska, most likely in China or Korea and moved to Alaska by sea, he said.

AGDC is a state-owned corporation that took over the development of the Alaska LNG Project when North Slope producers ExxonMobil, ConocoPhillips and BP withdrew two years ago. The state corporation previously held a 25 percent stake in a previous consortium with the three producing companies, but for now holds 100 percent of the project ownership.

Meyer also discounted any adverse effects of the current trade tensions between the U.S. and China on negotiations underway between AGDC and potential Chinese LNG customers and investors.

“The underlying issue with China is that President Trump wants the Chinese to buy more stuff from the U.S.” Meyer said. “Liquefied natural gas has been identified as one export that can positively affect the trade deficit.”

If it is built, Alaska LNG would export up to 20 million tons of LNG per year from its liquefaction plant and marine terminal at Nikiski, on the Kenai Peninsula south of Anchorage. Nikiski would also be the terminus of the 800-mile pipeline built from northern Alaska.

In a Thursday briefing to AGDC’s board, Meyer said negotiations with three potential Chinese partners: Sinopec, Bank of China and China Investment Corp. are underway, and a preliminary agreement on roles the respective parties could play is expected in May.

Thirty eight people from the three Chinese entities visited Alaska in late March for a week-long tour and briefings at oil and gas production facilities on the North Slope, the Trans Alaska Pipeline System route and the site of the LNG plant at Nikiski.

Under a Joint Development Agreement signed last November, Sinopec would be the major LNG customer for up to 75 percent of the Alaska LNG output, or 15 million tons of LNG per year, while Bank of China would finance the LNG purchases and construction. China Investment Corp., the nation’s sovereign wealth fund, would be an equity investor.

Twenty five percent of the projected LNG output is expected to be sold to other customers in Japan, South Korea and Vietnam.

Once parties commit to their respective roles in May, the final agreements are expected to be completed by December, Meyer said.

On the regulatory front, the U.S. Federal Energy and Regulatory Commission has issued a schedule for Alaska LNG’s federal Environmental Impact Statement that would have the document complete by December 2019 and a final Record of Decision by March 2020, Meyer told the board.

While that is later than AGDC had originally hoped for, it should not materially affect the planned completion date in 2024 and first LNG shipments in late 2024 or early 2025, Meyer told the board.

“As long as we can be in construction in 2020 we can make that date,” he said.

Meyer said Sinopec would be expected to play a major role in construction of the pipeline and plant facilities, but other major contractors will be involved along with Alaskan companies that have Arctic and cold weather expertise.

“Sinopec is quite comfortable that they can build what we need. They have built longer pipelines and at higher altitudes than our project,” Meyer said.

“However, they acknowledge that they lack cold weather construction expertise,” he said. “But we have companies here who have a long track record in Arctic construction.”

During the March visit AGDC arranged meetings with major Alaska contractors including three Alaska Native corporations, Doyon, Arctic Slope Regional Corp. and Calista Corp., which own industrial-support companies.

Meyer also said AGDC will begin planning procurement of long lead-time equipment and materials in 2019 and also the final engineering needed before final cost estimates can be done and agreements signed.

AGDC will also be soliciting for its first round of equity investment later this year with a target of raising $600 million to $800 million needed for engineering and other project activities including some long-term equipment procurement.

To fund its work this year which is mainly focused on regulatory work with FERC, the state corporation still has about $40 million on hand remaining from a state of Alaska appropriation made two years ago.

AGDC recently signed agreements with the Bank of China and Goldman Sachs to serve as global capital coordinators for the project.

Meyer said the state’s commercial strategy, with the withdrawal of the three gas producing companies, is to attract a major long-term infrastructure investor like China Investment Corporation that would be willing to accept a return less than that required by major oil companies like ExxonMobil and BP.

“This kind of investment just doesn’t fit them. This is a reason why producing companies are typically not investors in major gas pipeline in the U.S.” he said.

The three companies, who are also major North Slope gas owners, are meanwhile supporting the state’s efforts to develop the project. They have also met with state officials including Gov. Bill Walker, on plans to sell gas to the project. The state itself owns about 25 percent of the known 35 trillion cubic feet of gas on the North Slope through its royalty and tax in-kind share of the resource.

Tim Bradner is co-publisher of the Alaska Economic Report and is 2018 Atwood Visiting Professor of Journalism at the University of Alaska Anchorage