Mixed reaction to AK LNG-China letter

  • Gov. Bill Walker visits with China President Xi Jinping on April 7 at the Hotel Captain Cook in Anchorage. Xi stopped to refuel en route back to China after a visit to Washington, D.C. On Nov. 8 in front of Xi and President Donald Trump, Walker signed a letter characterized as a joint development agreement with Sinopec, the Bank of China and the country’s $813 billion sovereign wealth fund. (Photo/Courtesy/Office of Gov. Bill Walker)

Gov. Bill Walker and his gasline team touted an agreement signed Nov. 8 with three Chinese mega-corporations as the largest step the state has ever taken towards finally putting together a North Slope natural gas project.

After a few days to digest the situation, legislators’ reaction has been more subdued.

Senate Resources Committee Chair Sen. Cathy Giessel, R-Anchorage, said she first sought out LNG industry experts to determine exactly what the arrangement, characterized as a joint development agreement by Walker and Alaska Gasline Development Corp. President Keith Meyer, substantively is.

Walker stressed the joint development agreement between the state, AGDC and the integrated Chinese oil and gas giant Sinopec, the Bank of China and the $813 billion sovereign wealth fund China Investment Corp., includes all the pieces needed to make the $40 billion Alaska LNG Project a reality: a gas seller, buyer, and project financiers and investors.

Meyer said in a briefing following the signing that the substance of the joint development agreement goes beyond what would be found in a letter of intent from a prospective gas buyer or project investor.

AGDC Board of Directors Chair Dave Cruz emphasized during an October project update to legislators that the state-owned corporation was seeking to have a letter of intent by the end of the year. Meyer has repeatedly said letters of intent are paramount for gas sellers because while they fall short of being a full-fledged take-or-pay contract, Asian gas customers do not back out of them.

The joint development agreement keeps AGDC on schedule to make a final investment decision on the project at the end of 2018, Meyer said further Nov. 8.

On the other hand, Giessel described it as “another in a line of (memorandums of understanding)” with potential Asian LNG customers or investor companies.

“I’m not sure it was more significant than other things we have seen in the past,” she added.

In June, AGDC announced it had reached a non-binding MOU with Korea Gas Corp., to establish a framework for Kogas, as it is commonly known, for the government-owned utility to participate in developing and possibly investing in the Alaska LNG Project. It was also widely reported at the time that Kogas had entered into similar agreements with competing LNG projects around the world as well.

Most recently AGDC announced a similar MOU with PetroVietnam Gas Nov. 12. Meyer said in a press release that the agreement with PetroVietnam complements the Chinese deal because a portion of the Alaska LNG Project’s capacity — designed at up to 20 million tons per year of LNG — remains available.

South Korea and Japan have traditionally been the region’s primary LNG importers, with China joining them of late. Other East Asia countries have not participated in the LNG trade on a large scale, but the downturn in global LNG prices that has challenged the Alaska LNG Project has some countries in need of energy looking more at LNG as a viable option.

“Vietnam is a new entrant into the LNG industry but has the potential to be a rapidly growing customer of LNG and we look forward to participating in the growth of the Vietnamese economy by providing reliable and stable natural gas supply,” Meyer said.

Regardless of party, many legislators have been skeptical of the Alaska LNG Project since it became clear last year that Walker’s administration would take the lead of the megaproject from the state’s former producer partners.

Some have questioned the state’s ability to succeed in the cutthroat LNG industry with worries about what it might end up costing. Others have asked why the state would want to move ahead when the presumed expert entities — BP, ConocoPhillips and ExxonMobil — sought to slow down the Alaska LNG until market conditions improve.

BP subsequently signed on to assist AGDC behind-the-scenes in developing the project this year.

Still others have more quietly commended the governor for trying to make something happen.

The announcement from Beijing doesn’t seem to have changed those sentiments much.

Giessel noted the state hasn’t fully secured a right-of-way through all of the federal lands the 800-mile pipeline would traverse and hasn’t yet gotten thorough feedback from financial advisors, among other necessary tasks.

At this point, she said the potential buyer-investor agreements are to her “incredibly premature.”

If Walker and Meyer can get a firm commitment from the Chinese corporations Giessel said she would still be apprehensive about the resulting deal, calling the Chinese firms “experienced and very strategic” negotiators, while describing AGDC officials as “clearly amateurs in comparison.”

“The very first goal the Legislature had (for Alaska LNG) is gas for Alaskans,” she said. “That gets lost in a lot of these discussions.”

Based on general market projections Meyer has said gas sales from the project would generate about $1 billion annually, of which the state would be privy to about $250 million through royalties and taxes. If Alaska were to raise the cash to be a primary equity investor, the Alaska LNG Project could return $2 billion per year or more to the state during the 20-year debt service period. Once the debt is paid would be the potential to return upwards of $6 billion per year to Alaska LNG investors, according to AGDC’s calculations.

The corporation bases the figures on a broad 75 percent-25 percent debt-to-equity financing plan with an 8 percent average equity return through the debt term. Finding investors for the project’s infrastructure willing to accept a smaller return than major oil companies would in exchange for a long-term, stable investment has been Meyer’s primary counter to concerns about the producers wanting to wait on development.

Another issue legislators have raised is to what level would AGDC allow gas customers to invest in the project. Large, often government-owned utilities and companies signing up to buy billions of dollars worth of LNG over decades also reliably want a small equity stake in the project so they have access to and can vet all of the other financing and construction contracts.

If a gas buyer is allowed too large an investment stake in Alaska LNG it could exert leverage on AGDC and prevent the corporation from negotiating the best deals it could for the state.

The Legislature would ultimately have to approve any deal involving state money AGDC would agree to.

As of Nov. 14 Giessel had not seen a copy of the joint development agreement, which Meyer said would be made public within about a week after the Nov. 8 signing.

One of her counterparts in the House, Resources Committee Co-chair Andy Josephson, D-Anchorage, said he is optimistic about the progress AGDC has made while acknowledging no one has made a firm commitment to Alaska and numerous important terms remain cause for speculation.

He said the significance of the agreement being signed in front of President Donald Trump and China President Xi Jinping shouldn’t be forgotten.

“One does get the sense that, notwithstanding all the competition in the world, that President Trump and President Xi want something to happen,” Josephson said.

The AK LNG agreement was part of a much larger collection of trade deals between U.S. and Chinese firms totaling $250 billion — which Trump promoted as a big step towards balancing trade between the countries.

While noting the Chinese government’s human rights violations as a concern for doing business on the government-to-government level along with the U.S. adversaries China does business with, Josephson said country is already Alaska’s largest trade partner (mainly through seafood exports) and the state’s natural gas could play a part in solving the China’s massive coal-driven pollution problem, which the government is finally acknowledging.

“I think there’s reason to applaud what happened and I’m glad the House chose not to join the Senate in stripping away $50 million from AGDC’s budget,” he added, in reference to a capital budget amendment and political message to the administration quietly approved by the Senate in May to move about half of the corporation’s available funding to other state functions such as education and public safety.

The House reversed the move and it was not part of the budget compromise passed in July.

Elwood Brehmer can be reached at [email protected].

11/15/2017 - 10:17am