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The LNG Saga

by | Mar 16, 2019 | Magazine, Oil & Gas

AGDC reorganizes, returns to stage-gate approach

AGDC Vice President of Commercial and Economics Lieza Wilcox (left) and ExxonMobil Alaska President Darlene Gates sign a gas sales precedent agreement on September 10, 2018.

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Governor Mike Dunleavy’s shakeup of the Alaska Gasline Development Corporation (AGDC) board in January put four new people on the seven member team in charge of pushing forward the Last Frontier’s long-anticipated North Slope pipeline project.

The board quickly moved to name Joe Dubler as the interim president.

“I’m going to start by restoring the stage-gate approach to advancing this project. I’ve already asked the AGDC team to insert a stage-gate in order to fully evaluate and understand the project’s current status and potential. We will have stage-gates at every major decision point in order to determine whether to continue on to the next phase of the project,” Dubler says. “I am going to re-engage Alaska’s Legislature, which plays an important role in evaluating this project on behalf of the state.”

The new members to the AGDC board are Chair Doug Smith, who previously served as the president and CEO of ASRC Energy Services and on the boards of the Resource Development Council and Alaska Support Industry Alliance; Vice Chair Dan Coffey, previously chairman of the Alaska Board of Fisheries, chairman of the Anchorage Energy Commission, and member of the AGDC Community Advisory Council; Tamika Ledbetter, commissioner of the Department of Labor and Workforce Development; and Jason Brune, who serves as the commissioner of the Department of Environmental Conservation.

“I’m optimistic about the Alaska LNG project. Prior to being hired as interim president, I spent six years working with AGDC and could not be more thrilled to play a new role here, working with our new administration and new board composition to make sure we have the right resources and participants to make this work,” Dubler says. “We have a real opportunity to unlock the benefits of our North Slope gas to enhance the lives of all Alaskans.”

Viable Financing

The most daunting task ahead of AGDC is bringing investors on board and proving to the legislature that the pipeline is economically viable.

“It has to be economic. The state can’t make a $45 billion outlay and then expect to spend decades redeeming that investment,” says State Senate President Cathy Giessel. “The state of Alaska cannot afford to do this on our own. [The] legislature is very aware of that. It’s the largest, private-sector project in the world, and for a state government to fund the whole thing is just not logical.”

The current plan for the project will see a 42-inch pipeline run 807 miles from a gas treatment plant in Prudhoe Bay to a liquefaction facility in Nikiski.

“The Alaska North Slope super basin is the largest proven, but currently stranded, natural gas resource in North America,” AGDC Communications Manager Jesse Carlstrom says. “The pipeline route follows existing infrastructure: it parallels the Trans Alaska Pipeline System and haul road for the first (approximately) 400 miles and the Parks Highway for the second (approximately) 400 miles.”

For nearly fifty years, Alaska has exported LNG from Nikiski—about 6 percent of the output capacity of the state’s proposed development. In 2015, the 1969 plant went into a “warm shutdown,” meaning it is now capable of liquefying 0.2 billion cubic feet of gas per day, or 1.5 million tonnes of LNG per year. “The proposed Alaska LNG liquefaction facility is slated to be near the existing LNG infrastructure and its qualified workforce,” Carlstrom says.

The 600-plus acres for the new plant in Nikiski are owned by the Alaska LNG producer partners.

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“AGDC is actively meeting with these producers to engage them in a variety of possible ways to progress the project,” Carlstrom says.

But even if AGDC acquires the rights to the about 900 acres of total land it needs in Nikiski, there remains the issue of financing the project.

“The project faced a setback in 2016 when three of the project’s four partners—BP, ConocoPhillips, and ExxonMobil—pulled out. The sole remaining partner in the project was state-owned AGDC,” Carlstrom says.

“I just think we are at a competitive disadvantage due to economics and due to the fact that the state is going it alone,” says Larry Persily, former head of the federal office for Alaska North Slope natural gas pipeline projects. “We have no partners and the state doesn’t have the financial wherewithal to do anything. So, I think this project is far from being ripe for success, despite all the good intentions.”

However, AGDC is actively meeting with third parties to discuss the requisite private sector involvement in the project, Carlstrom confirms.

“Bringing Alaska’s North Slope natural gas to market is an incredible opportunity with daunting challenges. Our opportunity is well understood and is defined by the size of our reservoir and our proximity to a large and rapidly growing market,” Dubler says. “However, the size and complexity of the logistics involved in bringing our gas to market require that the state has partners with the technical and commercial expertise.”

Last year, AGDC signed a contract with Goldman Sachs and the Bank of China to assist in raising multiple rounds of debt and equity investment.

Equity offerings are slated to be made to Alaska municipalities, Native corporations, and all Alaska residents in addition to more traditional private equity investors, as required by state Senate Bill 138, which set up the initial commercial framework for the project in 2014.

“Bank of China and Goldman Sachs are well positioned to provide AGDC with world-class institutional knowledge and resources required to arrange the equity and debt financing to build Alaska’s natural gas infrastructure and LNG export project,” former-AGDC President Keith Meyer said in a news release last year.

However, given the shift from a schedule driven process to the industry standard stage-gate process, plans for an equity roadshow are on hold at this time.

“AGDC plans to seek strategic investors as part of the project viability review in 2019 in order to advance Alaska LNG and share in the risk. We will keep the Dunleavy administration and Alaska’s Legislature apprised of any potential strategic investors prior to entering into agreements,” Carlstrom says.

Before AGDC can accept any money from outside investors, it must get approval from the legislature.

“The legislature is going to continue to ask the administration, ‘What have you done to model the economics of this?’ We’re going to be asking AGDC this, too,” Giessel says. “The Department of Revenue is supposed to be working with AGDC looking at the economic modeling of the project so that legislators know what we can expect in revenue from this project.”

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Is AK LNG Competitive?

AGDC’s partners pulled out of the pipeline project following a report by Wood Mackenzie—commissioned by BP, ExxonMobil, and the state—which said that the Alaska project was “one of the least competitive” LNG projects in the world.

“There is no shortage of natural gas in the world and there is no shortage of projects that are more economical or viable and more ready than ours,” Persily says, before naming a number of projects as examples, including the Shell-lead LNG Canada venture and projects in the Gulf of Mexico, Mozambique, and the Russian Arctic.

Carlstrom makes a different argument.

“The costs of Alaska LNG project components are comparable to other projects around the world. The LNG Canada project, estimated to cost approximately US $30 billion, is comparable to Alaska LNG,” Carlstrom says, noting the Canadian project will produce 13 tonnes of LNG per annum, compared to Alaska LNG’s 20 tonnes of LNG per year.

“Our LNG can be shipped with competitive seven-to-nine-day routes directly to major markets without transit through any canals or third-party ‘transit’ countries. For comparison, shipments from US Gulf Coast projects take approximately thirty days and must transit the Panama Canal to reach Asia. Alaska and the US offer a very stable political climate.”

Lower shipping costs would allow Alaska LNG to be competitive in the Asian market despite the higher initial infrastructure costs, Carlstrom says.

Access to the Asia market is significant, since Japan accounts for 28.8 percent of LNG imports and market shares by country, followed by China at 13.5 percent and South Korea at 13.2 percent.

“Asia, and specifically northeast Asia, is the world’s largest and fastest growing LNG market. Global energy research firm Wood Mackenzie reported in December 2018 that demand in Northeast Asia is on track to potentially quadruple to 80 million tonnes per annum by 2030,” Carlstrom says.

AGDC has confidential and non-binding cooperative agreements with China’s state-owned Sinopec Group, the Bank of China, and CIC Capital, a subsidiary of China Investment Corp.

All parties agreed in January to a six-month extension to negotiate and to conclude definitive agreements for the LNG project. However, such non-binding agreements, including one signed by BP in May, fall short of real progress, says Persily.

“These are far from commitments to write checks and sign binding contracts,” Persily says. “China is interested if they can get a good deal. And a good deal for China—a good deal for the buyer isn’t necessarily a good deal for the seller and that applies to everything from used cars and trailer homes to condos. Their interests are just not the same as ours.”

However, there are several bright spots on the horizon for the project, including the return of the stage-gate approach and the final environmental impact statement (EIS) due out in November.

A stage-gate approach, which was in place until 2016, allows the state to review where the project stands, what partners the state can rely on to provide the necessary expertise to complete the project, and what the commercial situation is in order to make an informed go or no-go decision based on the project’s commercial viability, explains Carlstrom.

“Each step in a stage-gate review provides leadership with the opportunity to advance the project to the next stage, pause the project if changes are needed, or to halt the project if economic circumstances warrant,” Carlstrom says.

EIS Milestone

One milestone for the project that nearly everyone sees as a positive move in the development of the pipeline is the draft EIS, slated for completion this month, with a final EIS in November. If that timeline holds, the Federal Energy Regulatory Commission (FERC) would be able to take action on AGDC’s project application in March 2020.

“Aside from the fact that I don’t think it’s going to get built in the near future, getting a draft environmental impact statement is an accomplishment,” Persily says. “It has value. It’s essentially a building permit. They don’t have to use it the next day. The state and producers put hundreds of millions of dollars into it. It would be good to finish that off, have it, even if you put it on the shelf.”

With the EIS, AGDC would be able to legally break ground in 2020, which was the stated plan prior to bringing back the stage-gate process.

“AGDC will insert a stage-gate at this point in the project to review where it currently stands and take that review time to simultaneously solicit partners the state can rely upon to provide the necessary expertise to complete the project,” Carlstrom says. “AGDC will continue to pursue the FERC license for the Alaska LNG project.”

When the time is right—meaning the economics are right—the Alaska LNG project stands to greatly benefit the Last Frontier, say its proponents.

“Alaska LNG will provide Alaska North Slope natural gas to Alaskans. Because North Slope natural gas discoveries are currently stranded, no natural gas exploration has occurred. Infrastructure to treat and transport North Slope natural gas will spur both oil and gas exploration on Alaska’s North Slope,” Carlstrom says. “This should provide an incentive to explorers currently working on the Slope, as well as attract new companies to the state.”

Carlstrom’s list of additional benefits include affordable energy for domestic and industrial use; broad international environmental benefits stemming from decreased reliance on coal in Asia; 12,000 direct jobs during construction and 1,000 direct jobs during operation; revenue to the state, municipalities, and North Slope lease holders; and up to 20 percent of revenue from the state’s royalty gas that can be invested in the Alaska Affordable Energy Fund to offset the high cost of energy in rural Alaska.

“There’s still a lot of questions about all aspects of the project. But I think this new board will give a fresh look to that,” Giessel says. “I’m a lifelong Alaskan, and right after oil started being tapped the expectation was that gas would be flowing, as well. We’re forty years later, and we’re still working on this gas project. I hear from constituents that this will never happen, but the encouragement for them is that we are now further on commercializing our gas and distributing it to Alaskans than we’ve ever been.”

Alaska Business Magazine June 2019

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