AGDC audit recommends minor changes, additional report forthcoming

Alaska Gasline Development Corp. officials by and large have spent $433.3 million in line with the requirements tied to that money but missed the mark on other, smaller legislative mandates and in-house rules, according to a special Legislative Audit Division review of the state-owned corporation.

Released Jan. 14, the audit determined that AGDC had spent all but $150,000 of the $433.3 million in accordance with legislative intent for the appropriations. The misstep occurred when seven invoices from the Bureau of Land Management were charged to the corporation’s Alaska LNG Project fund instead of its Alaska Standalone Pipeline, or ASAP, project fund as they should have been.

The charges were made after a new working agreement was signed with BLM and “were coded incorrectly to the AK LNG fund,” according to the audit report.

AGDC staff subsequently corrected the errors when they were flagged by the auditor, the report states.

Accounting for a $157 million re-appropriation of gasline funds to an education account in 2015, AGDC has received $479.8 million from the Legislature since 2010; $225 million of which was meant for the smaller, in-state ASAP project and another $254.8 million to further the $43 billion Alaska LNG Project.

AGDC has exhausted its ASAP money and had $39.7 million left in Alaska LNG funds remaining at the end of November, according to figures presented at the corporation’s Jan. 10 board of directors meeting.

A joint permitting record of decision for the ASAP project is expected from the U.S. Army Corps of Engineers and BLM as soon as the federal government shutdown is over. ASAP is a gasline project for in-state use estimated to cost approximately $10 billion.

The finance review covered the period from July 1, 2014, to March 31, 2018. AGDC’s administrative support was handled by the Alaska Housing Finance Corp. prior to July 2014. AGDC started as an arm of AHFC and the Legislature separated the two in 2013.

Some legislators have questioned whether AGDC had kept its project spending segregated during a time of severe overall state budget challenges given development of the long-sought Alaska LNG Project could benefit from additional money.

The audit additionally concluded that AGDC had not complied with statutory language requiring its hiring procedures to include an Alaska veterans’ preference and recent corporate budgets and large contracts had not been approved by the board of directors as called for in the corporation’s bylaws.

AGDC’s annual operating budget has been static at $10.3 million for several years.

Then-AGDC board chair Dave Cruz wrote in a Jan. 2 formal response to the audit that the board approved a veterans’ preference policy in August and that staff would notify the board of future contracts of more than $1 million and seek board approval for contracts in excess of $5 million. Management will also seek full board approval for future operating budgets, according to Cruz.

“AGDC is a dynamic organization that has successfully navigated through considerable organizational change,” he wrote. “AGDC is committed to continuously monitoring operations to ensure current processes are in alignment with established policy and good corporate governance. AGDC is committed to continuous improvement.”

AK LNG report, financing

Legislative Budget and Audit Committee chair Sen. Bert Stedman announced during a Jan. 14 meeting that the committee is working on a report with consultants hired to evaluate the overall potential fiscal impacts of Alaska LNG development on the state’s finances.

Stedman said he originally wanted the Alaska LNG fiscal report — spanning everything from broad construction costs to the implications of specific lease expenditures by the North Slope producers — to be available by the Jan. 14 meeting as to apprise the incoming committee chair from the House of the work the committee has been doing to evaluate the gasline project.

As of this writing a majority caucus had not been formed in the House and it was unclear who would chair the LBA Committee.

However, the committee was told in mid-December that the flow information from AGDC and other relevant state agencies had been “highly restricted,” which delayed completion of the document, according to Stedman.

He noted the Legislature didn’t approve AGDC’s request last year for unlimited authority to accept outside funding in large part because legislators weren’t comfortable with the amount of information the corporation was providing them.

“We’re hopeful that we’ll have a smooth transition (to House leadership) and this document will help sitting members in the Legislature and staff and the public better understand the scope and realm (of fiscal issues) that we’re dealing with,” he said.

Randy Ruaro, a member of Stedman’s staff said the report could be done in late January.

Outgoing Rep. Paul Seaton of Homer also voiced concerns he has regarding the financing structure for Alaska LNG that AGDC is contemplating during the meeting.

According to Seaton, AGDC Commercial Vice President Lieza Wilcox said negotiations with the Bank of China and Sinopec — two of the three state-owned Chinese companies AGDC has been negotiating with as a possible anchor customer and financier for the project — include the possibility of Sinopec receiving cheaper gas than other customers for 1 percent to 2 percent debt financing in return.

Wilcox was part of mid-December meetings in Houston with LBA consultants, committee members and administration officials. Seaton participated via teleconference.

The November 2017 joint development agreement AGDC signed with the Bank of China, Sinopec and China Investment Corp. contemplates Sinopec buying up to 75 percent of the project’s LNG capacity in exchange for the Bank of China funding up to 75 percent of the estimated $43 billion Alaska LNG Project. The remaining project funding would be raised through equity investments, according to AGDC officials.

“What disturbed me was they said the Chinese are interested in this project because they could get cheap gas. They mentioned $5 (per million British thermal units) if things worked out,” Seaton said in an interview.

“When you have a national bank and a national oil company working together on a project — heck, they could have 0 (percent) or 1 percent money and they’re going to make those payments and all of a sudden that’s where it could be really cheap.”

Those comments caught his attention because corporation leaders have previously estimated building and operating Alaska LNG infrastructure would cost more than $6 per mmBtu, which does not account for feedstock gas and shipping costs, Seaton said further. He’s worried it could leave the state with LNG priced on equity financing with 8 percent to 9 percent returns that would be too costly to sell on world markets.

“The whole plan has been 75 percent Chinese but this financing model means that it’s no longer one project; it’s two separate projects because the financing for the projects are totally separate and therefore one can be economic and one can be noneconomic,” Seaton described.

AGDC officials disputed the $5 gas price reference but noted volume discounts are common in markets for many products.

AGDC communications Vice President Tim Fitzpatrick said “pricing for gas from the project is still in the negotiation process” and also pointed out that in-state gas from the project would not have liquefaction and shipping costs added to it.

Elwood Brehmer can be reached at [email protected].

01/15/2019 - 5:56pm