Giessel, MacKinnon skeptical of new direction on AK LNG

A briefing planned for next Wednesday on the Alaska LNG Project promises to be interesting, and possibly heated.

The state House and Senate Resources committees are due to meet June 29 for a scheduled update from industry and state officials on the big pipeline and liquefied natural gas project.

Alaska is a partner in Alaska LNG with the three major North Slope producers, BP, ConocoPhillips and ExxonMobil.

The hot topic will be Gov. Bill Walker’s desire for the state to move into the lead role on the giant project, which became public this week in remarks to the press by Keith Meyer, newly-appointed president of the Alaska Gasline Development Corp., the state gas corporation that is the entity representing Alaska’s interest.

“We’ve heard the governor imply that he wants to go it alone but this was the first time that we had seen it said explicitly,” by someone in the administration, state Sen. Cathy Giessel, R-Anchorage, said at a Commonwealth North task force meeting Friday, June 24.

“We were not informed about this,” she added.

As chair of the Senate Resources Committee Giessel will co-chair the June 29 meeting along with Rep. Ben Nageak, D-Barrow, co-chair of the House Resources Committee.

Sen. Anna MacKinnon, R-Eagle River, was also at the Commonwealth North meeting, and said, “We’ve been asking about this for quite a while,” and have not been getting answers.

As co-chair of the Senate Finance Committee, MacKinnon’s focus is on the budget.

“We’ve been asking why we need to be spending $1 million a month on attorneys, including some brought in from London, and we were told that all of this was on work that was ‘inside the lanes,’ to support the present partnership structure,” and not on a new go-it-alone strategy, MacKinnon told Commonwealth North.

Giessel said she has been told that Meyer will be speaking for the administration at the meeting. Typically, senior managers from the producing companies also attend and participate in joint presentations.

Separately, ExxonMobil, operator of the technical work now underway on Alaska LNG, makes a separate presentation on the status of engineering and regulatory work. The project is now in the preliminary engineering phase, which is due to be complete late this year.

The legislators’ focus will be on Meyer and the intentions of the administration, however. Recently announced changes in the administration have further confused things.

Walker announced June 23 that state Attorney General Craig Richards has resigned, for personal reasons, and that Andy Mack, former government affairs manager for the North Slope Borough, has been appointed as Commissioner of Natural Resources, replacing Marty Rutherford, who is acting commissioner.

The unexpected transitions aren’t sitting well with Giessel.

“Marty Rutherford is someone the Legislature trusts. She is extremely knowledgeable about the natural gas project and has taken a very pragmatic approach in managing the state’s involvement,” Giessel said.

In a recent interview, Rutherford said the state is still negotiating on fiscal terms with the three industry partners and that the talks could involve a “larger role” for the state in the project, but she did not mention that it might be a lead role or the state taking on building of the project by itself.

MacKinnon said Meyer may have “gotten out ahead of the administration” on Walker’s new direction in his press comments.

“I’m certain that Mr. Meyer exceeded what was supposed to be out in the public right now on this,” she said.

The issue is also likely to further complicate the Legislature’s consideration of a new fiscal structure for the state, MacKinnon said.

The Legislature will go into a new special session July 11 to consider once again the governor’s proposal for use of Permanent Fund earnings to reduce the state’s budget deficit, a plan that also involves reducing the annual Permanent Fund Dividend paid to citizens.

“People are going to ask why the state is cutting the dividend when the governor is also asking to take on a hugely expensive gas pipeline and LNG project,” MacKinnon said.

The gas project is now forecast to cost between $45 billion and $65 billion, but a revised cost estimate is being doing as part of preliminary engineering work now underway.

Under the current structure of AK LNG the state would be responsible for about one fourth of the project costs with the industry partners shouldering the other three-fourths. If the state builds the project it will be responsible for all costs.

Walker has always wanted the state in a lead role or even as sole developer of the giant gas project. Last year he pushed a plan for the state gas corporation, AGDC, to expand a smaller back-up pipeline plan, developed as a backstop to get gas to Alaska communities, into a larger project that could feed an LNG export plant and be in competition with the Alaska LNG Project.

The Legislature stopped that by diverting funds from the AGDC budget, but the political heat generated by the controversy dominated the 2015 legislative session and diverted attention from other issues.

With the demise of Walker’s plan to up-size the smaller AGDC gas project, the governor switched to support the industry-state joint-venture project proposed earlier, and approved by the Legislature.

However, the sharp drop in crude oil prices and LNG prices on world markets has created problems for industry members of the current consortium. The governor held a press conference with BP, ConocoPhillips and ExxonMobil officials in February to announce a possible new “commercial structure” for the project, and said a new agreement could be in place by late March.

That didn’t happen.

In the recent interview Rutherford said she has been negotiating individually with BP, ConocoPhillips and ExxonMobil on a new commercial structure and that the talks have included terms under which the companies might be willing to sell gas reserves to the state, under a go-it-alone strategy, or to possible new partners.

Walker has talked of bringing in potential purchasers of LNG, such as large Japanese companies, as investors and partners.

The sensitivity over current cost, for the industry partners, is mainly on a decision planned in 2017 to begin front-end engineering and design, or FEED, for the giant project.

The FEED is expected to cost between $1.5 billion and $2 billion and would be the first major investment in the project by the partners. Under the current structure the state would pay about a quarter of that, or between $400 million and $600 million.

About $600 million is being spent in the preliminary engineering work that is now under way.

A decision on the FEED in 2017 would allow the project to stay on its current schedule, which requires a final investment decision, or FID, in 2019, construction beginning in 2020 and operations starting in 2024 or 2025.

In the recent interview Rutherford said there are ways the project can remain on schedule for completion in 2024 or 2015, however, even with delays in the FEED and FID.

Just what the governor intends in a new plan is unclear. In the near-term it would likely involve the state funding all of, or most of, the $1.5 billion to $2 billion FEED cost. With that done, the state could solicit new partners.

There are problems of where the money would come from for the state’s larger investment, however. The state’s financial resources are already stressed by large multi-billion-dollar deficits and the new plan to use Permanent Fund earnings would only cover part of the expected deficits.

There are ways the state can finance the gas project costs, and state officials have been researching these to fund the state’s one-fourth costs.

One idea is for the state to attempt to fund the cost solely with debt, an approach that Walker advocated before he was governor, and was head of the Alaska Gasline Port Authority, a municipal group attempting to develop a North Slope-to-Valdez project.

However, approval by the Legislature will be needed on any of this and if reactions Friday by Giessel and MacKinnon are any indication, that will be a tough sell.

“We are the ones with the appropriation powers,” MacKinnon said at the Commonwealth North meeting.

Tim Bradner is a correspondent for the Journal. He can be reached at timbradner@pobox.alaska.net.

Updated: 
06/24/2016 - 11:48am

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