Cracking the Code
Demystifying the Alaska LNG Project
While the Alaska LNG project has been a looming, massive topic of discussion for the last few years, planning for a number of North Slope-to-market state-spanning natural gas lines has been in process for more than decade. The Alaska Gasline Inducement Act (AIGA) was enacted in 2007 and there have been years of subsequent discussion and planning.
Building the Code
In 2007 Cindy Roberts, then-recently-retired from a position at the Denali Commission, volunteered as a staff photographer for a class at UAA presented by Jim LaBelle; the purpose of the class was to present information on how AIGA might impact Alaska Native corporations. Over the course of the class, speakers such as Harold Heinze, Wally Hickel, Vic Fischer, Judy Brady, and Michelle Anderson were invited to explain what the natural gasline was and the affect it would have.
Roberts, like many others, found herself awash in unintuitive pipeline, natural gas, and industry issues and terminology outside the frame of reference of the average citizen. In an effort to help the public better understand the terminology—and therefore the project—Roberts volunteered to compile a guide, or glossary, of more than one hundred terms and thirty background explanations called Cracking the Code—A Citizens Guide to the Alaska Natural Gas Pipeline Discussion and the Alaska Gasline Inducement Act. The tear-out glossary, which had already sold 700 copies, was included in the January 2008 edition of Alaska Business Monthly—every issue sold.
Roberts was prompted to publish a second edition in 2012, as various gas pipeline projects were in motion. The revised and expanded edition, Cracking the Code—A Citizens Guide to the Alaska Natural Gas Pipeline Discussion, in addition to more terms and background also included special maps with clearly defined route options, coastal areas, and distribution strategies, as well as intelligible information on the geology and chemistry of the project. Roberts says presales financed the 2012 edition, and 1,500 copies of the guide were placed in the hands of media, legislatures, unions, educators, and individual supporters at publication.
Oil and gas is a commodity, and unfortunately for the Alaska LNG project, in 2012 a shift in industry tech and the wide use of hydraulic fracturing impacted the natural gas market. Commercially viable shale gas plays across the Lower 48 changed the supply and demand picture, and Alaska’s stranded gas once again seemed to some too far away, and too expensive, to try to produce.
In 2014 the Alaska Gasline Development Corporation (AGDC) and the State of Alaska established a framework for an integrated LNG export project, and the Legislature authorized AGDC to investigate the export option in addition to an in-state pipeline to increase Alaska gas supplies—the project was injected with a new, state-driven energy.
When the State of Alaska signed on with partners China Petrochemical Corp. (aka Sinopec), China Investment Corp., and the Bank of China, Roberts was prompted to publish a third edition of Cracking the Code. The 2018 edition includes additional terms and definitions with a focus on the current LNG project joint development agreement with China and the Asian LNG market.
“When we received the state’s insert report on the Joint Development Agreement signed in November by the governor, AGDC President Keith Meyer, and the three major financial forces of China, we knew this was a new strategy to commercialize Alaska’s North Slope gas,” says Roberts.
“Something many people may not have heard before is the idea of G2G, or Government-to-Government. Alaska, through AGDC, can restructure the economics of the project with a lower return on investment [than corporate organizations can] and tax-free status. The government of China, through China Petrochemical Corporation, China Investment Corporation—similar to our Permanent Fund—and Bank of China, can use a low interest, long-term loan to obtain the gas supply it wants. That is G2G,” explains Roberts.
She goes on to say that the biggest difference between what’s happening now and past gasline plans that have not been successful is the “Debt for Capacity” provision included in the China transaction. “Many Alaskans are just learning that China is currently Alaska’s largest trading partner. China is negotiating 75 percent of the capacity of the system with its investment, not the ownership of the infrastructure. Seventy-five percent of the costs will be loaned to Alaska and the loan will be paid off by the delivery of LNG,” she says. “A single-buyer will buy the gas in China; 25 percent of the capacity will be sold to other nations including Japan, Korea, and Vietnam and will be available for propane ‘off-take’ for use in Alaska.”
Additionally, prior gasline projects quoted “astronomical” price tags, say Roberts, as high as $65 billion to take the resource to market. After the cost-plus reality of building the Trans Alaska Pipeline System in the ‘70s, the Alaska LNG project is being crafted as a turn-key operation at a total price of $43 billion, with a 30 percent contingency element built into the budget.
Hope on the Horizon
To many, including Roberts, the gasline is a vital component of Alaska’s future and could be the basis for a new economy. As the nation’s largest energy project, the Alaska LNG project would bring thousands of jobs to the state and make use of the 8.4 billion cubic feet of gas brought to the surface as oil is produced on the North Slope. As is stands, most of that gas is reinjected to pressurize the oil strata, though approximately 1 billion cubic feet per day is used to power North Slope operations.
As of late March, the Federal Energy Regulatory Commission (FERC) issued a Notice of Schedule for the Alaska LNG project. In its notice, FERC said it plans to issue a draft environmental impact statement (EIS) in March 2019, followed by a Notice of Availability of the final EIS in December 2019.
“Achieving clarity on the permitting timeline is another critical step forward for the project; AGDC is appreciative to FERC and to the administration for their continued commitment to keeping this project on the fast track,” said AGDC’s Meyer in the March press release. “A draft EIS in March 2019 with availability of a final EIS in December 2019 will allow us to keep Alaska’s gas export project on track for a 2024/2025 in-service date. FERC’s expeditious and comprehensive analysis of our application is a testament to the hard work and dedication of commission staff.”
AGDC first filed an application to obtain a Natural Gas Act Section 3 permit with FERC for its Alaska LNG project in April 2017. Over the next several months FERC requested a series of environmental data and “since first filing our application with FERC, commission staff have diligently addressed all of the requirements of the National Environmental Policy Act as they write the draft EIS,” said Frank Richards, senior vice president of AGDC, in the same press release.
And the potential for employment for Alaskans statewide has LNG pipeline supporters particularly excited. “Economic impact studies indicate the project will benefit Alaskans through royalties and jobs and provide low-cost, clean energy to help stimulate economic activity throughout the state. The project will create up to 12,000 jobs during construction and approximately 1,000 jobs during operation. Numerous opportunities for Alaska businesses and contractors will also be created,” according to AGDC.
Another significant step for Alaska LNG was announced in late March. “The Alaska Gasline Development Corporation engaged Bank of China and Goldman Sachs to serve as global capital coordinators to AGDC’s Alaska LNG project,” the corporation announced. Bank of China and Goldman Sachs will help AGDC raise equity and debt financing for the continued development of the project. The March AGDC release said: “The investment banks and AGDC anticipate raising the funds in multiple rounds, which will include offerings to Alaska residents, Alaska municipalities, Alaska Native Corporations, and private equity sources. Initial equity will be raised to meet AGDC’s working capital requirements and subsequent funding rounds will be used to fund full-scale development of Alaska LNG, once the project has received all necessary approvals.”
The New Edition
This relationship with China, G2G strategies, and other information are explored in depth in the 2018 edition of Cracking the Code. As an example:
- Debt for Capacity: 75 percent of the LNG production will go to a single buyer in China.
- FEED: Front End Engineering and Design
- Fungible: Our gas is payment for the loan to build the infrastructure and for related operations.
- Supply Gap: In 2024, China calculates its LNG supplies will be less than the desired level to enable transition from coal to natural gas as its major energy source. This project fits their target.
- Aggregation: Under this system, a single buyer can arrange contracts for multiple quantity contracts. Alaska has initiated this idea for communities along the pipeline route. China will use the same idea for twenty to thirty year contracts.
Roberts says, “2018 is a critical time for Alaskans to once again understand the discussion. The tremendous work by AGDC and the Walker Administration is pushing our resource to market. Delivery of LNG to Asia and natural gas to our communities and in-state resource developments will substantially strengthen our economy for future generations.”
Roberts continues in her enthusiasm about seeing this natural resource put to good use. “Alaska will be the exciting place it was for those of us who watched it grow through early statehood and the beginning of the oil boom of the 1970s,” says Roberts. “The government will be able to fund schools, roads, and public services. Younger generations will be able to train for these jobs and participate in building the state.”
Cracking the Code 2018 will be available for purchase July 1.
Kathryn Mackenzie is Managing Editor for Alaska Business.