AGDC gets interest from Tokyo, questions from lawmakers
Legislators got their first chance to publicly question Alaska Gasline Development Corp. officials about a recent agreement with Chinese companies to advance an LNG export project during a Dec. 4 hearing.
Meanwhile, AGDC executives in Japan were busy putting the finishing touches on the state-owned corporation’s latest pact to cooperate on developing the $43 billion Alaska LNG Project with potential customers.
Shortly after AGDC President Keith Meyer told the House Resources Committee and other legislators in attendance that his team was close to signing a letter of intent with Tokyo Gas Co., the corporation issued a release announcing just that.
“Tokyo Gas and Alaska have a special relationship in LNG and I was pleased to host (company President Michiaki) Hirose for meetings and a project update in Juneau this past August to help continue that kinship,” Gov. Bill Walker said in an official statement.
The Japanese utility, with more than 11 million customers, was itself a customer to ConocoPhillips’ Kenai LNG plant, which first exported to Japan in 1969. The plant has seen little use in recent years as down prices globally have challenged the competitiveness of Cook Inlet-sourced LNG.
“Alaska is a trusted source of LNG. For more than 40 years Tokyo Gas Co. Ltd. received shipments of LNG from Alaska. As the closest source of North American LNG to Japan, with a shipping time of as little as seven days point to point, Alaska LNG is naturally an economic and reliable source of LNG for Tokyo Gas Co. Ltd.,” Hirose said, reiterating AGDC talking points, in the release.
The letter of intent is for the sale and purchase of LNG but it also includes a commitment by Tokyo Gas to look at other ways to support the Alaska LNG Project, according to AGDC.
Corporation leaders have stressed the distinctions between how its different agreements with potential gas customers and project investors are characterized, highlighting the fact that the Asian utilities and companies AGDC has targeted follow a prescribed schedule in the courtship and very rarely back out from a letter of intent.
Spokeswoman Rosetta Alcantra wrote in an email that the Tokyo letter sets the basic principles for the two to “collaborate on exploration of potential purchase of LNG from AGDC; and to evaluate other opportunities to advance Alaska LNG.”
That includes potential upstream investment. It is a nonbinding agreement.
How the letter differs from the joint development agreement signed Nov. 9 with three giant nationalized Chinese companies or memorandums of understanding with PetroVietnam Gas Corp. and Korea Gas Corp. is unclear.
Walker and Meyer said in a press call after announcing the China development agreement that it went beyond the significance of a letter of intent because it involves all parties needed to put the project together — Sinopec, the gas buyer; the Bank of China, a project lender; and the China Investment Corp., an equity investor.
The joint development agreement, released by Walker’s office, is a nonbinding document that expires Dec. 31, 2018.
AGDC has kept the other letters of intent and memorandums of understanding confidential, citing business considerations in the highly competitive LNG industry.
The Legislature afforded AGDC the right to keep its deals private in the 2013 legislation that made it a standalone entity. AGDC was originally a branch of the Alaska Housing Finance Corp.
Questions on price, dealing with China
Legislators’ questions in the Dec. 4 hearing largely focused on Chinese involvement in the Alaska LNG Project should the joint development agreement come to fruition and whether the North Slope producers are on board with the state’s expectations for the project.
AGDC’s Meyer has long said Gulf Coast LNG projects are Alaska’s primary competitors in Asian import markets because of the continued low cost of Lower 48 Henry Hub indexed feedstock natural gas and political pressures that have killed LNG export plans in Canada and Oregon.
LNG can be produced and delivered to Asia from Texas and Louisiana for about $8 per million British thermal units, or mmBtu, the standard unit measurement in the industry, according to AGDC. That is assuming a generally static Henry Hub price of roughly $3 per thousand cubic feet, or mcf, of raw gas.
One mmBtu of LNG is roughly equivalent to 1 mcf of unprocessed natural gas.
Meyer said liquefaction, shipping and other costs total about $5 per mmBtu to deliver Gulf LNG for a minimum customer cost of $8 per unit.
While Alaska’s proximity to East Asia makes LNG shipping costs from the state about one-third of that from the Gulf Coast and colder temperatures improve liquefaction efficiency — meaning less gas must be burned to produce the LNG — the cost of the 800-mile pipeline off the Slope is the big cost snag.
AGDC estimates the 42-inch pipeline will cost about $8 billion in the larger $43 billion project.
As a result, the bundled costs to deliver Slope-sourced LNG to any of AGDC’s prospective customers is about $7 per mmBtu, leaving a $1 netback to the producers for their gas if the project is to compete, Meyer described.
He acknowledged the $1 per mcf price is what’s “left over” after accounting for other costs if trying to meet the $8 delivered price threshold, but added the method to arrive at the wholesale gas price is more common in the industry than not. The Lower 48, where gas exported as LNG is priced based on a market index, is the exception, he added.
“All these producers deal with a netback throughout the world,” Meyer said. “It’s the standard.”
Anchorage Republican Rep. Lance Pruitt asked whether BP, ConocoPhillips and ExxonMobil were on board with the $1 per mcf for gas.
Meyer said the producers have not committed to the plan but haven’t rejected it either in preliminary discussions.
The $1 per thousand cubic feet price equates to about $1 billion per year for gas, given the project would process about 1 trillion cubic feet per year at full production.
“I think we’re going to find that $1 billion a year upstream, compared to nothing, looks pretty good,” Meyer commented.
LNG contracts have historically been linked to the price of oil and he said Alaska LNG deals could as well if both sides are comfortable with market volatility.
Pruitt and other legislators also noted the state would get about 25 percent of each $1 through its royalty and presumed taxes on the gas.
ConocoPhillips still supports the Alaska LNG Project and is in negotiations with AGDC but pricing and numerous other terms have yet to be finalized, according spokeswoman Natalie Lowman.
ConocoPhillips Alaska leaders have said the company would prefer to sell its North Slope gas reserves into the Alaska LNG infrastructure and not take a larger role in the state-led project.
Similarly, BP spokeswoman Dawn Patience said via email that the company looks forward to better understanding the role of gas owners, such as BP, in AGDC’s customer agreements.
Also, AGDC and BP have extended an agreement for the producer to assist the state corporation in developing the project, she added. That agreement, signed about a year ago, is set to expire Dec. 31.
Rep. Dan Saddler, R-Eagle River, questioned China’s possible involvement beyond financing and buying LNG, asking if Sinopec would get construction jobs on the project.
Meyer said the oil and gas giant won’t have majority involvement, noting some labor will have to come from outside of Alaska simply because the state does not have the workforce to fill the 10,000-plus jobs that will be available.
A large construction management firm will oversee the 800 miles of work but smaller Alaska subcontractors will certainly get a lot of work, he said.
“I would expect Alaska contractors to have a degree of priority,” he added.
Saddler and Palmer Republican Rep. DeLena Johnson also wanted to know if the administration is comfortable working with a communist regime with a long history of human rights violations.
“On a moral basis, does it bother you to be dealing with China?” Saddler asked.
For his part, Meyer reminded legislators that the country is already the state’s largest export customer; it bought 27 percent of Alaska’s $4.4 billion of exports last year. About half of it was seafood.
“This is an extension of that relationship,” he said.
Meyer has emphasized the LNG would help China move off of coal as well.
He also said the LNG trade could be a tool to improve the country’s geopolitical position because it’s a critical commodity.
Pruitt said he’s not concerned about partnering with China but is worried about “what seems like China coming in and letting them own our state.”
Meyer stressed that there is no scenario under which the Chinese will have majority ownership in the project; AGDC is looking for up to 25 percent equity investment.
“They’ll be a good customer, a good partner, but they’re not going to have a controlling interest,” he said.
Pruitt and Saddler sit on the House Finance Committee but were invited to participate in the Resources meeting.
Elwood Brehmer can be reached at [email protected].