When it comes to Alaska LNG project, the big elephant in the room is cost

The Alaska LNG Project is still moving toward a final filing with the Federal Energy Regulatory Commission, but some details remain murky.

The Alaska Gasline Development Corporation is finishing up its negotiations to take over the leadership role on the gasline megaproject, negotiating the transition of project assets from the three producer partners, ExxonMobil, ConocoPhillips and BP. The state-owned corporation is now examining different options for project structure before filing its final application to FERC and is trying to market North Slope gas to worldwide markets, most aggressively in Asia.

A report from consulting firm Wood MacKenzie in August identified the Alaska LNG Project as one of the least competitive liquefied natural gas projects in the world, and there is already a global oversupply of LNG. The three producer partners announced their intention to pull back from further investment after the Wood MacKenzie report was released, though they still plan to be involved. Still, it means the leadership and financing falls to AGDC as the project moves into the expensive FERC filing and front-end engineering and design, or FEED, stage.

In a presentation to the Kenai and Soldotna Chambers of Commerce on Wednesday in Kenai, Alaska LNG Project Vice President Fritz Krusen said project managers are looking ahead to the time when the global LNG oversupply wanes — currently projected to fall sometime in the early 2020s. To make sure the Alaska LNG Project is online in time to start producing in that window to meet global need, it needs to get going now, he said.

“There are a lot of other projects chasing that gap, so we’ve got to be competitive,” Krusen said. “Second of all ... it takes years and years to get there. We have to make a decision to move, to catch that window, fairly soon.”

To reduce the high production costs and make the project more competitive, the state has suggested looking at other financing models, such as soliciting third-party investment or seeking tax-exempt status for the project’s income and tax-exempt financing for bonds to fund the project. Gov. Bill Walker has said he is “confident” the state can secure the exemption. A period of sustained low oil prices have led to pressure on oil producers, and that contributes to decisions to re-evaluate the project financing, Krusen said in an interview.

“Low oil prices have caused everybody to think differently,” he said.

One consequence of that tax exemption, though, may fall on local governments. Through property taxes or payment in lieu of taxes, known as PILT, local governments like the Kenai Peninsula Borough stand to gain significantly from the presence of the LNG Project. However, if it becomes tax-exempt, that income may be at risk.

Kenai Peninsula Borough Mayor Mike Navarre voiced his concerns to Krusen at the luncheon.

“There’s been no communication at all at this point to the local government about what that means,” he said.

Krusen replied that he wasn’t sure how that would play out yet, but the AGDC hasn’t settled on it — it’s just an option being considered at the moment.

“(The tax exemption) is something we need to investigate,” he said. “It’s just one of these things that it might be a lever. It might not, and how it would play out on the federal, state and local scene, I don’t know.”

The same goes for land purchases. Since the Alaska LNG Project began snapping up acreage in the central part of Nikiski in 2014, there has been much hand-wringing in the community about the future of the project and how and when lands will be acquired. Until the transition of assets from the producer partners to AGDC is complete, that won’t be certain, Krusen said.

“That is a great LNG plant site,” he said. “So if we do get the transition behind us, then yes, at some point … we will get back in the saddle and attempt to resume getting property to build the LNG plant.”

Project managers are still working on the plans for the relocation of the Kenai Spur Highway, the ideas for which were originally presented to the public more than a year ago. At this point, no preferred route has been identified for the highway, though the managers are working on the regulatory path forward for the road, said Josselyn O’Connor, community stakeholder advisor to the project.

Borough administration asked that the project managers identify a preferred route as soon as possible in a set of comments to FERC submitted Oct. 5.

“Though the Alaska LNG has, in the past, done a good job of briefing and updating the Kenai Borough government and area residents of the highway relocation planning effort, those discussions have essentially ceased in recent months, and the silence is building to frustration among area residents,” the borough comments state. “The borough urges whichever entity(ies) emerges as project sponsors to actively resume those discussions with detailed mapping, detailed selection criteria and a commitment to narrowing down the options next year.”

The AGDC and Walker are busy marketing the project overseas to potential customers in Asia. Krusen said the Alaska LNG Project has some advantages for Asian markets over others because of its relative proximity to them and its cold environment, making it easier to transport LNG, which is supercooled and condensed.

The case would be different if this project were being developed by a producer with LNG in its portfolio — because this is the state’s one chance to market the North Slope gas, marketing is necessary, Krusen said.

“We have to go out and make contact with the banks, the investment groups, that sort of thing, and we’re developing a strategy to do that,” he said.

Elizabeth Earl can be reached at elizabeth.earl@peninsulaclarion.com.

Updated: 
12/03/2016 - 9:42pm