Gasline board approves formation of holding companies
Alaska Gasline Development Corp. leaders have approved the formation of a subsidiary firm to manage funding for the $43 billion Alaska LNG Project as they look towards what will be a critical year for the massive natural gas export plan.
Unanimously approved by the AGDC board of directors at its Nov. 8 meeting, 8-Star Alaska LLC provides the state-owned parent corporation with a place to hold equity investments in the project while maintaining the benefits of the federal tax-exempt status as a government entity, according to AGDC President Keith Meyer.
8-Star is where equity contributions from general third-party investment companies, groups or individual Alaskans would be placed, while strategic investors with experience in the LNG realm or technical expertise would put their money into another tax pass-through.
That second company, Alaska LNG LLC, would build, own and operate the gas pipeline and liquefaction system, Meyer said. AGDC would have to transfer project authorizations, permits and data to Alaska LNG or enter into use agreements that would allow the operations subsidiary access to what it needs to do its work.
“This is all part of getting ready for the equity road shows and equity offering that we’ll really put in high gear next year,” he said at the meeting.
He stressed that the tiered companies are necessary because AGDC won’t sell shares in itself; it will remain completely state-owned.
As the Alaska LNG Project funding is currently envisioned, 75 percent of the estimated $43 billion construction cost, which includes $9 billion in contingencies, would be debt-financed through the Bank of China in exchange for selling Chinese oil and gas giant Sinopec Corp. rights to three-quarters of the project’s 20 million tons per year of LNG production capacity. The remaining roughly $11 billion would be raised through equity investments going to 8-Star and Alaska LNG LLC.
“This nested structure does give us a little bit of a leverage advantage in that because of the way this is contemplated 8-Star would own a controlling interest in the project — 51 percent let’s say — by providing 51 percent of the $11 billion. But then we, AGDC, could have a controlling interesting in 8-Star, which could be a little more than half of 8-Star,” Meyer described. “So, if you do that math you could actually control the project company for about $3 billion.”
The name 8-Star references the eight gold stars on the Alaska flag, but Meyer also noted that Article 8 is the portion of the Alaska Constitution that places the state’s natural resource wealth in public ownership and the number eight is considered lucky in some Asian cultures — and places AGDC hopes to sell into.
In concurrence with setting itself up to move into the financing and contracting stage of developing the Alaska LNG Project, AGDC is in the process of finalizing the commercial agreements that will underpin the project financing.
“We’ve now got the banks fully engaged. We’ve got Goldman Sachs fully engaged on the equity side; so now it’s shepherding a lot of paperwork and we want to start to get into what I call preconstruction activities,” Meyer said, adding that corporation officials need to start making decisions regarding where they will get the 800 miles of 42-inch steel pipe and placing other orders with material manufacturers in the near future.
In March, AGDC contracted with Goldman Sachs to assist in soliciting equity investments in the project. The nationalized Bank of China is leading the debt roundup.
On the commercial side, Meyer said President Donald Trump’s trade dispute with China has not slowed down negotiations with Sinopec, although China’s 10 percent tariff on U.S. LNG imports still applies for now.
A team of negotiators from Sinopec and Bank of China traveled to Anchorage in late October, and experts from Sinopec also met with BP and ExxonMobil officials for confidential, technical briefings on the Prudhoe Bay and Point Thomson field gas resources that the companies operate and would feed the Alaska LNG Project, according to Meyer. The two companies have signed preliminary gas sales agreements with AGDC.
“That gave them a pretty good check in the box that, ‘ok, the resource is actually there.’ Up until that point we’d been providing them studies but they really wanted to look at the underlying data,” he said.
Additionally, a delegation from Vietnam including the country’s vice minister of industry and trade and PetroVietnam Gas CEO Duong Manh Son was in Anchorage Oct. 22 to further LNG supply talks between the government-owned corporations.
PetroVietnam Gas is one of several potential smaller LNG customers that could augment sales to Sinopec as an anchor customer.
Meyer said PetroVietnam Gas would likely start as a 1 million tons per year LNG customer with the opportunity to increase sales as the country grows its textile and manufacturing sectors.
Parnell to review project for Dunleavy
Meyer has long acknowledged that AGDC’s schedule to have the Alaska LNG Project in service by as early as 2024 is aggressive, but he said Nov. 8 that now-tightening global LNG markets mean Alaska needs to continue moving quickly to keep up with the competition.
“Acceleration is sort of the word I’ve picked for 2019,” he said.
Ever-growing demand from China for LNG has pushed the expected global market equilibrium point from about 2025 closer to 2022, according to Meyer. That has pushed potential sellers in other countries to advance their projects while taking shots at U.S. competitors.
In early October, a Shell-led consortium formally approved LNG Canada, a $40 billion, 14 million tons per year export project ending in Kitimat, British Columbia, just south of Alaska. The future of that long-discussed project had been up in the air previously.
“Canada pulled out all the stops. They dropped the tariffs; they’ve given tax breaks and then just two weeks ago the head of that project, LNG Canada, in Japan slammed the U.S. supply. Because of the trade war they’ve sort of said, ‘Look, the U.S. is not going to be a big contender but don’t worry there’s Canada,’” Meyer said to highlight the global LNG picture.
He also said that Russian officials have specifically targeted Alaska LNG as a casualty of the trade issues between the U.S. and China in state-run news reports to promote their own LNG projects.
“We’ve got some pretty good competition out there globally,” Meyer added.
Finally, he emphasized that state leaders need to be unified behind advancing the Alaska LNG Project to maintain the momentum the project has now.
Gov.-elect Mike Dunleavy, a Republican, and many Republicans in the Legislature — who may take back control of the House pending the final outcome the Fairbanks District 1 race — have been highly skeptical of Gov. Bill Walker’s state-led plan for the project.
“I’m hoping that under the new leadership and under the changes in the Legislature that government and AGDC are working in great harmony. I’ve sort of said to the AGDC people here that there’s just a whole new level of alignment and harmony here that will help us focus on the fight out there and not the fight in here,” Meyer said. “The fight is with the Russians and the Canadians and the Qataris and a couple others I won’t mention but we’ve really got to be focused on that broader perspective.”
Meyer said he does not think he needs to “sell” the project to Dunleavy’s incoming administration.
“I’m hoping that our actions and results will sell the project on their own,” he said in an interview.
Former Gov. Sean Parnell, who now practices business law at the national firm Holland and Hart, will advise Dunleavy on the gasline project during the transition of administrations.
Parnell emphasized in a brief interview Nov. 13 that he is volunteering on Dunleavy’s transition team and is not part his administration. Parnell had not yet signed any agreements with AGDC to review confidential documents, he said, as he was in the early stages of the work.
Under Parnell’s leadership in 2014 the state partnered with BP, ConocoPhillips and ExxonMobil to advance the Alaska LNG Project with the companies collectively owning a 75 percent equity stake in the venture and the state taking a minority role along with TransCanada, a pipeline company.
The Legislature bought out TransCanada’s interest during a special session in 2015. Walker chose to put the state in the lead in early 2016 when the companies decided to slow the project as a result of depressed global energy markets at the time.