What Chinese LNG deal means for Alaska

An agreement signed between three major Chinese entities and Alaska’s state-owned natural gas corporation has added new momentum for the $43 billion-plus Alaska LNG Project and could help speed federal regulatory approvals needed for a Final Investment Decision in 2019, a key target.

The agreement is still a framework for further talks but it could link Alaska will a large potential customer for North Slope gas.

“This is the first time we’ve had these levels of commitments from customers,” Dave Cruz, AGDC’s board chair, told the Alaska Support Industry Alliance in a briefing last Friday. “We know we can offer a competitive price and we know we are not technically challenged. We just needed a customer,” Cruz said.

But Sinopec, the lead Chinese company in the deal, expressed caution. “This is a letter of intent for mutual cooperation, not a contract,” Lu Dapeng, a spokesman for Sinopec, told the New York Times. “We are really positive about this, but it will take time,” he said in remarks to the Times.

The agreement is between Alaska Gasline Development Corp., the state-owned gas corporation, and China’s Sinopec, the Bank of China and China Investment Corp, a large sovereign wealth fund with $813 billion in assets.

Signatures by the parties were done Thursday in Beijing with U.S. President Donald Trump and China’s president, Xi Jinping, looking on. The presence of the two leaders at the signing Thursday sends a message of their personal support, an important factor in getting the ultimate approvals by U.S. and Chinese government agencies.

AGDC took over as lead and is now sole owner of Alaska LNG after North Slope producers BP, ConocoPhillips and ExxonMobil, citing soft LNG markets, pulled out of a four-party consortium that included AGDC last year. AGDC took over management of the project, which the agreement with the three slope producers allowed, to continue working on regulatory permits and marketing.

LNG prices in Asia are still low but AGDC is aiming for a projected increase in Asian LNG demand, and prices after 2022 and hopes to have its project in operation in 2025.

Gov. Bill Walker,, told reporters in a teleconference from Beijing that the “Joint Development Agreement” signed Thursday goes beyond “Letters of Intent” signed previously by AGDC with several LNG buyers including Kogas, or Korea Gas Corp.

“This agreement includes deadlines for decisions, a scope for gas and LNG supply,” as well as a conceptual commercial structure, Walker said in the teleconference.

Walker said the target for a final agreement is the end of 2018, which would allow an investment decision in first quarter 2019. That would allow Alaska LNG to be delivering up to 20 million tons per year of LNG to Asia by 2025, the governor said.

Keith Meyer, AGDC’s president, said discussions so far with Sinopec involve the Chinese company owning 75 percent of the project’s gas transmission and LNG capacity, or about 15 million tons per year of LNG. This would leave 5 million tons per year of LNG available for other LNG buyers in Asia.

The Chinese partners would also finance that amount of the construction cost, Meyer said. Discussions to date would also have the Bank of China handling much of the financing and China Investment Corp. as an equity investor

Meyer said AGDC expects to buy gas for about $1 to $2 per million British Thermal Units, or mmbtu (roughly equivalent to a thousand cubic feet, of mcf) from North Slope producers as well as the state of Alaska for royalty and tax-share gas.The state-owned gas constitutes about 25 percent of the gas supply.

“This works out to about $1 billion a year paid for the gas,” Meyer said, with about one-fourth, or $250 million a year, paid to the state for its gas.

AGDC’s plan is to finance construction with 75 percent debt and 25 percent equity, and Meyer said this would result in $3.5 billion in annual debt payments for 20 years. About $1.1 billion paid to the project owners who would hold the 25 percent equity. The state, through AGDC, would likely be an equity investor, Meyer said.

After the 75 percent debt is paid the project should earn $5 billion to $6 billion a year, with operating costs estimated at about $1 billion a year, Meyer said.

AGDC’s intent is that it will be the majority equity owner, which could put the state’s annual profit at $2.5 billion to $3 billion a year in addition to $250 million a year in gas sales revenues. “China will not be a majority owner of this,” Meyer said.

Frank Richards, AGDC’s vice president of engineering, said the China companies are also interested in Chinese content in supplies and equipment for the project. Fabrication of large process modules, which will be needed for the Gas Treatment Plant on the North Slope and the large LNG plant in south Alaska, is a capability the Chinese now have, Richards said.

What North Slope producers BP, ConocoPhillips and ExxonMobil think of the China agreement is unclear, particularly on whether they would be willing to sell their gas for $1 to $2 per million British Thermal Units to an Alaska and Chinese-owned gas project.

There are 35 trillion cubic feet, or tcf, of gas reserves now known on the North Slope, and while the state owns five tcf of this as royalty and tax-share gas the remaining 30 tcf of gas is owned mostly by the three major gas producers.

All three have told the state, in writing, that they would be willing to sell gas to an independent gas project but at “commercially-reasonable terms.” BP, for its part, complimented the state in reaching the deal: “BP congratulates AGDC and the State of Alaska on reaching this important milestone on Alaska LNG,” BP spokeswoman Dawn Patience said Friday in a statement.

“We look forward to better understand the terms of the agreement and the role envisioned for gas resource owners, like BP,” the statement said. ConocoPhillips was also positive in its assessment. “ConocoPhillips intends to make its gas available through a wellhead sale and supports the State’s plans to try and progress a state-led project,” spokeswoman Natalie Lowman said.

A key question, however, is whether the producers believe that AGDC and Sinopec can build the project for $43 billion, the cost target AGDC has set. If there are construction cost overruns, like those that happened with the trans-Alaska oil pipeline in the 1970s, the economics of the project will be undermined.

In the past the companies have also said they want to be majority owners of that gas project so that they can manage construction. In the previous joint-venture consortium with industry the three producers held 75 percent and the state 25 percent, with ExxonMobil as project operator.

If the companies are unwilling to accept the gas price offered by the state and China the state may press a legal obligation of the companies to pruduce. In briefings last summer to Commonwealth North, a business group, AGDC’s president Meyer said the state would press the producers to sell gas a “duty to produce” clause in the state’s oil and gas leases on the North Slope.

Walker has also said previously the companies have a legal obligation to sell gas if presented with a reasonable commercial offer. Whether $1 to $2 per million British Thermal Units meets that test is unknown.

Once a gas pipeline in built, state officials have said, industry will begin exploring for other gas. The North Slope considered to be gas-prone in many areas by geologists.

The region has seen oil production since the Trans Alaska Pipeline System was completed in 1977 but development of the large gas reserves, which have been known since that time, has been delayed because no gas pipeline is available.

Tim Bradner is copublisher of the Alaska Legislative Digest.