Dunleavy administration pumping brakes on gasline
Gov. Micheal J. Dunleavy’s administration plans to go back to the future for a successful Alaska LNG Project.
Revenue Commissioner Bruce Tangeman stressed the administration’s belief that the state-owned Alaska Gasline Development Corp. needs to shift its focus away from intense efforts to get the $43 billion gasline project approved quickly in favor of resurrecting the “stage-gate” approach favored by the state’s former producer partners during a Jan. 18 speech at the Meet Alaska oil and mining contractor trade show in Anchorage.
“The (administration) transition is a great opportunity to pause and see exactly where we’re at in the process with the Alaska LNG Project specifically. It’s a good chance to reach out to our partners that we used to be involved with on a different level and see what their views are of the gasline and the LNG market — get their expertise,” Tangeman said.
He added that Dunleavy is very familiar with the project from his time in the state Senate. Dunleavy and other legislators were comfortable with the stage-gate megaproject development process employed until the state took over leadership of the project in late 2016, according to Tangeman.
The deliberate stage-gate process breaks overall project development into numerous stages and after each is finished a decision is made whether or not to advance to the next stage. For Alaska LNG, the decision points, or gates, were times when BP, ConocoPhillips, ExxonMobil and the State of Alaska could evaluate their desire to continue or allow the other partners go ahead without them.
The companies approach former Gov. Sean Parnell about the prospect of the state being a 25 percent partner in Alaska LNG, which was appealing to the state because it was a way to participate without undue risk, said Tangeman, who was a deputy Revenue commissioner when the public-private Alaska LNG Project ownership structure was devised during Parnell’s tenure in the governor’s office. Parnell has since consulted with Dunleavy on the current status of the project since the election.
“We had partners who had done this kind of work and we were going to jump on their backs and ride across the finish line to a successful, profitable project,” he recalled.
ExxonMobil was leading the project at that time and the company’s Alaska LNG manager Steve Butt emphasized a need to continually focus on lowering the project’s final cost of LNG supply through optimized project design and infrastructure engineering, in turn leading to improved project economics overall.
However, when oil markets bottomed out at sub-$30 per barrel prices in early 2016 — and oil-linked global LNG prices followed suit — the companies suggested to then-Gov. Bill Walker that the project could either be slowed or the state, through AGDC, could take it over.
Walker, a longtime advocate for a publicly-led gasline project, quickly chose the state-led option.
The Alaska LNG team at the time was wrapping up the roughly $600 million preliminary front-end engineering and design, or pre-FEED, stage of the project, which resulted in reams of environmental and engineering data and the current cost estimate of $43 billion, below the conceptual range of $45 billion to $65 billion.
Under Walker, AGDC focused on marketing the project to potential customers in the Asia-Pacific region, an aspect of development Walker repeatedly said had been incorrectly ignored under the prior producer-led Alaska LNG structure.
AGDC also began the multi-year process of securing federal permits for the project in April 2017 primarily using the information gathered during pre-FEED.
Tangeman said interim AGDC President Joe Dubler and new board members appointed by Dunleavy are also taking time to better understand where the quasi-state agency is in negotiations with potential customers as well as the status of permitting with the Federal Energy Regulatory Commission.
FERC is scheduled to release a draft environmental impact statement for the project sometime in February.
Dubler, a former finance executive with AGDC, officially takes over as president of the corporation Feb. 1. The board hired him Jan. 10 immediately after firing Keith Meyer, who was hired in 2016 under Walker’s guidance for his significant experience in Lower 48 LNG and pipeline companies.
AGDC secured 15 letters of interest from potential customers under Meyer’s leadership and was actively negotiating with six of them when he was let go, according to corporate management.
The most notable interest has come from a consortium of state-owned Chinese corporations, which signed a joint development agreement, or JDA, with AGDC in November 2017 in front of President Donald Trump and China President Xi Jinping.
The JDA outlines the prospect of the Bank of China and oil giant Sinopec Corp. becoming anchor customers and financiers of the project, with the bank debt funding up to 75 percent of the $43 billion project cost in exchange for Sinopec purchasing 75 percent of its LNG production capacity.
Final JDA negotiations have been extended for six months after a Dec. 31 deadline was not met.
While the administration is championing a slower approach, board chair Doug Smith also said he doesn’t want to slow any of the progress the corporation has made.
Tangeman made it clear that AGDC would not be making a final investment decision on Alaska LNG in 2020 as Meyer had been pushing for, but getting a record of decision from FERC would be valuable and it’s unclear exactly how much that will cost.
The state will not be leading a project into construction with as much risk as it carries now, he said.
AGDC was also preparing for what executives called an “equity road show” to market the project to investors this year. They often noted the producers would be welcome investors to the project.
Tangeman said Dunleavy doesn’t expect to return to the prior structure, but he would be happy with it.
“We understand what took place with the price of oil, the price of gas over the last several years but we’ll be talking with (the producers) to see what the climate is now, where we are with oil at $60; what is the gas market; is there an appetite to reengage and see if we can move forward as a partnership again?” he said. “We look forward to having those discussions again. And ultimately a stage gate approach will be put in place so we know and Alaskans know exactly how we’re going to build this project.”
The Legislature will also have its say, Tangeman noted.
AGDC had previously stressed the need to move quickly on the project to meet a mid-2020s market demand window.
BP Alaska President Janet Weiss said in an interview that a state-led project has tax advantages the IRS has recognized that could lower the cost of supply and government-to-government relationships with customers are valuable as well.
The state is wrestling with the challenge of assuring it can find a competent builder for the project, something BP, which has assisted AGDC since the state took over, would need to be comfortable with before it would invest. The London oil major also agreed to key terms, including pricing, in May with AGDC to sell its share of North Slope gas into the project.
Weiss said BP, which has championed the state’s project “is all about educating and figuring out how to go forward” in discussions with the administration and Legislature.
Tangeman said in an interview that the potential customers AGDC is negotiating with understand some change is going to happen in the project with a change of governors but that it will survive if it is economic.
He said they also understand there is still a lot of work to do. AGDC veered from the formal stage gates between pre-FEED and FEED, which the companies estimated to be up to a $2 billion undertaking of much more detailed work.
“All that hard work has gotten us to a 10-yard line but I think we still have a long way to go to get to the 10-yard line,” Tangeman said, referencing Walker’s campaign metaphor for how close he believes the state is to finally building a gasline. “And I think it’s going to be important that Alaskans understand that.”
Tangeman later added in an interview that, “Gov. Dunleavy doesn’t want to go that 90 yards with 100 percent of the risk on our back.”
Elwood Brehmer can be reached at [email protected].