AK LNG transition misses first benchmark in state takeover

  • Alaska Gasline Development Corp. CEO testifies to a joint legislative Resources Committee hearing on June 29 shortly after accepting the job. (Photo by Michael Dinneen/For the Journal)

The Alaska LNG Project handoff to state leadership is progressing, albeit slower than expected.

“Negotiations are continuing,” Alaska Gasline Development Corp. President Keith Meyer told the AGDC board of directors at a Nov. 10 meeting. “We did not meet our intended target of October for a signed agreement as we had talked about a number of months ago when this started. However, I would say that all things are moving well. I don’t detect anything that’s going to stop the process.”

Meyer had said previously that he hoped to have a deal signed with the producers to give the state control of the project by Oct. 31 so the transition could be wrapped up by the end of the year.

Despite missing the first self-imposed deadline, the Dec. 31 target for state control is still in sight, according to Meyer.

The negotiations are parsed into three separate agreements: a transition agreement that allows the state to use the technical information developed and held by Alaska LNG Project LLC; an agreement granting the state control of the acreage purchased for the LNG plant site in Nikiski; and a confidentiality agreement governing what information the state can use and what is restricted from being used to further the project.

Meyer added that the “thousands of documents built up over time” and held by the project corporation are already being transferred to AGDC.

The state and its partners in the $45 billion-plus North Slope natural gas export plan, BP, ConocoPhillips and ExxonMobil, have been building to a state-led model for most of the year.

It became clear late last winter that the equity-share project model, with each company participating in the project financially equal to its share of the 35 trillion cubic feet North Slope natural gas resource and the state responsible for 25 percent, was not going to pan out as hoped. 

Concerns from the producers about fitting the project’s 20 million tons of LNG per year into a currently flooded and depressed global market, as well as cash flow considerations stemming from low oil prices led the oil majors to look at slowing or reworking the project before collectively committing to spend roughly $2 billion to fully design the project in the next step known as full front-end engineering and design, or FEED.

Gov. Bill Walker, however, took the opportunity for the state to lead the project on the premise that potential federal tax exemptions wrought from state ownership and third-party investors could improve its economics.

Meyer, who has significant experience in the LNG industry from work in the Lower 48, insists the mid-2020s Asian market window for the project is narrow but still exists. Missing that chance and allowing other LNG projects to feed East Asia’s demand likely means waiting another decade or more to monetize Alaska’s natural gas, according to Meyer.

Making a smooth change to state leadership yet this year will be important to keep the project on schedule. Meyer said AGDC plans to submit its Alaska LNG license application to the Federal Energy Regulatory Commission — part of the agency’s environmental impact statement process — in the first half of 2017, ideally right away in the first quarter.

History has shown FERC will not approve an LNG project unless the proponent holds the both land rights to the project site and the federal LNG export authorizations. Both are currently held by the Alaska LNG Project LLC formed by the producers.

Industry experts following the project have uniformly said shifting the land rights and export permits to satisfy FERC shouldn’t be an issue, but it’s another step that takes time.

BP and ConocoPhillips indicated in a September letter to Walker that they are willing to transfer their interests in the Alaska LNG Project LLC to AGDC, while ExxonMobil officials said the company would “sell” its stake to the state.

Meyer has said he does not foresee a large payout to the producers, so how the negotiations, which are confidential, play out on this issue remains to be seen.

FERC sent back 296 pages of questions and comments compiled from the federal agencies reviewing the project on Oct. 26.

Meyer said the request is one of several AGDC expects to get from the agency and is “somewhat reflective of the fact that we filed 33,700 pages (of resource reports) with FERC, so now we have lots of questions that they’ve asked.”

The expectation is that AGDC will be able to answer most of the queries internally, but the state also has access to the contractors that helped compile the resource reports if need be, he said.

As AGDC preps to file the license application for the project next year, it will also be ramping up worldwide project marketing and lining up the contracts that will ultimately underpin the project’s financing, Meyer said.

Those contracts would be for shipping, gas liquefaction and the LNG itself, among other things.

Adding to the challenges of leading what would be the largest infrastructure project in the country’s history is the state’s multi billion-dollar budget deficit.

“We’re very cognizant of the austerity measures that the state has on, so we’re going to try to live within some of those guidelines,” Meyer said of AGDC’s fiscal year 2018 budget.

He said previously that AGDC is preparing for several budget scenarios, including one that would see the state corporation operate an extra six months, through the 2017 calendar year, on its $10.3 million 2017 fiscal year operating budget. The 2017 state fiscal year ends July 1.

AGDC was about 25 percent under its operating budget forecast in the first quarter of the fiscal year, Senior Vice President for Program Management Frank Richards said Nov. 10. The reduced operating costs were due in part to staffing vacancies in the corporation and bills not yet seen from contractors, he noted.

Overall, AGDC spent just $12.8 million of $23.6 million allocated for the first quarter when the state’s share of project funding is included, according to Richards.

“(The budget under-run) reflects the work within the AK LNG Project, mainly the reduction in cash calls that have gone out to all the producers and AGDC for their reimbursement of expenditures,” he said. “It represents really that there is significant slowdown in the work on AK LNG as they wind up the pre-(front-end engineering and design) effort.”

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Updated: 
12/03/2016 - 9:40pm