State still seeking major LNG customer by year-end

The Alaska Gasline Development Corp. won’t be asking for additional funding before the agency knows if it will build the roughly $40 billion Alaska LNG Project, corporation leaders told legislators Oct. 16.

AGDC Board of Directors Chairman Dave Cruz said in response to questions from several legislators that the state-owned corporation won’t be requesting additional funding in the 2019 fiscal year state budget, which will be sorted out in the next regular legislative session starting in January. He testified before a joint Alaska LNG Project update hearing of the House and Senate Resource committees in Anchorage.

Last February the AGDC board approved a $102 million budget plan to carry the agency through the next 18 months, or roughly until midsummer 2018 when the 2019 fiscal year begins.

The AGDC spending plan was meant to complete the needed work within the available funds instead of matching funding to meet the expected workload as the Legislature and Gov. Bill Walker spend another year trying to pull the state out of annual deficits averaging nearly $3 billion.

At the time, the corporation had $102 million left from legislative appropriations dating back to 2013 to pursue the Alaska LNG Project and the smaller Alaska Standalone Pipeline, known as the ASAP project.

However, AGDC Senior Vice President Frank Richards said the agency had spent only about $22 million this year through August; its expenses have averaged about $3 million per month despite board authorization to spend about twice that.

As a result, AGDC should get to a final investment decision on whether to build the megaproject much of the state has waited decades for without asking for more money. The major final investment decision is currently pegged for early in 2019 based on AGDC’s current schedule.

Democrat Sen. Donny Olson said he was concerned that the nearly $700 million the state has spent on the project over the past five years has led to a mantra that the Alaska LNG Project is “too big to fail” and AGDC and the Walker administration might not be willing pull the plug on it even if it becomes clear the project doesn’t fit in the ultra-competitive global LNG market right now.

Cruz acknowledged that AGDC leadership doesn’t yet know if the project will ultimately be successful, but added, “There’s only one way you get that (money) back: it’s to follow through and build something.”

Founder and owner of the heavy construction firm Cruz Construction Inc., Cruz has served on the AGDC board since its inception in 2013 and has been one of the biggest proponents of the state’s effort to utilize the long-stranded North Slope natural reserves, through either the state-focused ASAP project or the larger Alaska LNG export plan.

“I would say the sun and the moon and the stars have aligned to bring closure to this project,” he said.

Alaskans should have a much better idea as to whether the celestial objects will stay in sync at the end of the year when AGDC officials hope to have a prospective Asian LNG customer in the fold.

President Keith Meyer, who usually leads AGDC’s legislative presentations, is currently in Asia marketing Alaska LNG to potential buyers. Cruz said Meyer was hired in 2016 with the lone task to “get us a gas customer.”

“Are we going to be able to deliver a gas customer? That’s what it really boils down to,” Cruz said.

Securing even one large customer would allow AGDC to then start soliciting investors and other forms of project financing, which would be underwritten by the take-or-pay customer LNG contracts.

AGDC is shooting to have a letter of intent from an Asian utility or industrial gas buyer by the end of this year.

Cruz conceded AGDC probably won’t have a firm contract with a customer by the end of the year, but receiving a letter would be the next best thing.

“They don’t break those letters of intent,” he said of LNG buyers.

Getting a letter of intent by Dec. 31 would consummate a year of incremental progress for the corporation, which took a big step in April when it filed with the Federal Energy Regulatory Commission to start the daunting environmental impact statement, or EIS, process for the Alaska LNG Project that would span from the North Slope wells to a 20 million tons per year LNG plant in Nikiski on the Kenai Peninsula.

An 800-mile buried gas pipeline would connect the infrastructure at each end of the state’s mainland.

In June, AGDC announced it had signed a memorandum of understanding, or MOU, with Korea Gas Corp. to work on a partnership to advance Alaska LNG. Kogas, as it is commonly known, is a government-owned corporation and one of the largest LNG buyers in the world.

While it was reported that Kogas has MOUs with other hopeful LNG sellers, Cruz said Alaska’s project, while very large, would be a page in the supply portfolio for many Asian utilities that buy immense amounts of LNG each year. AGDC officials are currently in talks with a Chinese state-owned utility that serves 300 million customers, he noted.

“Our project is a drop in the bucket for them to contract with us for a long-term supply,” Cruz said.

AGDC then received a favorable tax-exempt opinion from the Internal Revenue Service in July, meaning profits the corporation would net for the state from the project would be free of federal income taxes, as AGDC is an arm of the State of Alaska. Profits earned by private investors in the project are still subject to federal taxes.

Then, at the end of August, the corporation got interest from one of the large North Slope producers — and former partners with the state in the Alaska LNG Project — in its capacity solicitation, according to AGDC officials.

Which of the “big three” has interest in signing up for capacity in the gas pipeline and LNG tolling system is confidential, but Cruz reiterated at the meeting that ConocoPhillips Alaska leaders have repeatedly said the company prefers to sell its gas at the wellhead.

In January, BP and AGDC announced a deal in which the producer — which operates the Prudhoe Bay field expected to supply three-quarters of the natural gas for the project — would assist AGDC in advancing Alaska LNG through the end of the year.

Regulatory progress

AGDC’s Richards said one of the ways the corporation has saved money is by maximizing in-house resources on EIS work to avoid paying outside contractors whenever possible.

The corporation has spent the last five months answering FERC questions on the roughly 60,000 pages of environmental, engineering and socio-economic information it filed with the commission to start the EIS in April. In total, AGDC has already responded to more than 800 data requests from federal regulators, according to Richards.

He said he hopes the numerous prior examinations of a gasline project will help FERC get the EIS done in the 18-month window AGDC is shooting for.

“Many of the questions they’re asking have been asked and answered before,” Richards said.

The Alaska LNG Project also qualifies for measures in the 2015 surface transportation reauthorization known as the FAST Act that set a comprehensive schedule for all federal permits for large transportation projects and are intended to expedite project reviews when possible.

To that, Richards said he expects FERC to publish the project’s EIS schedule “any day now.”

Additionally, the Establishing Discipline and Accountability in the Environmental Review and Permitting Process for Infrastructure executive order President Donald Trump signed Aug. 15 directs agencies to issue determinations on infrastructure projects within two years of permit applications and requires federal agencies to follow a prescriptive permitting timetable for infrastructure projects. Richards said the Alaska LNG Project meets the guidelines of the executive order.

The permitting timeline is critical because AGDC is trying to align its efforts to secure a customer and project financing with the countless federal authorizations it needs to hit the 2019 investment decision and start construction to have the Alaska LNG Project in service by 2025.

Elwood Brehmer can be reached at [email protected].

10/18/2017 - 12:53pm