A study commissioned by three of the four Alaska LNG Project participants suggests alternative financing options currently being investigated could improve the project’s global competitiveness amid today’s lower energy prices.
Dave Barrowman, a vice president with the global energy consulting firm Wood Mackenzie, said during the Aug. 24 joint hearing of the House and Senate Resources committees that a state-led Alaska LNG Project backed with a third-party financing structure could drop the project’s all-important “cost of supply” by roughly 40 percent.
Unsurprisingly, the current financing plan for the $45 billion-plus North Slope natural gas export plan, which has the state, BP, ConocoPhillips and ExxonMobil funding the project through debt and equity, doesn’t pencil out, according to Barrowman.
That’s because upstream oil and gas companies typically require a higher return on their investments — Wood Mackenzie assumed a 12 percent return in its study — than do other potential investors.
An Alaska LNG Project relying on producer and state funding alone could deliver LNG to Asian buyers for about $12 per million British thermal units, or mmbtu, if it could be built for about $45 billion.
At $12 per mmbtu, Alaska LNG would struggle to clear return hurdles even at oil prices in the $70 per barrel range, according to the study. Barrowman said the current project has a cost of supply that is “significantly higher than other jurisdictions,” but also is not alone among prospective LNG projects with financial feasibility challenges.
While not perfectly analogous to the long-term contracts Alaska LNG sellers would need to secure to backstop the project, the spot price for LNG delivered to East Asian buyers was about $4.50 per mmbtu this spring, according to the Federal Energy Regulatory Commission.
Project leaders have continuously used a wide price range of $45 billion to $65 billion to bring Alaska LNG into production since the project structure took shape more than two years ago. Project Manager Steve Butt said during his Aug. 24 progress report to the committees that the overall cost has been driven to the “lower end” of the range, but a more definitive price hasn’t been settled.
If the state-led project being promoted by Gov. Bill Walker and Alaska Gasline Development Corp. President Keith Meyer can secure outside investors to buy into the project infrastructure — the North Slope gas treatment plant, the 800-mile pipeline and the immense Nikiski LNG facility — for returns in the 8 percent range, the cost of supply could potentially fall as low as about $7 per mmbtu, Barrowman said.
Echoing what Meyer has said since taking the helm at AGDC in June, Barrowman said equity and pension funds, pipeline companies and other utilities might be interested in a stake in Alaska LNG at sub-10 percent returns because the project would provide a stable, long-term income stream.
Those investors would then act as “tollers” and provide access and use of the facilities to the producers and other potential customers for a tolling fee.
The producers have all stated support for investigating a commercially viable state-led project.
“Certainly moving to a tolling system could be beneficial, disproportionately beneficial, towards Alaska LNG,” Barrowman said.
Anchorage Democrat Sen. Bill Wielechowski said to Barrowman after a presentation of the study that he “was expecting doom and gloom and I’m actually feeling a little optimistic at this point.”
Barrowman added that he has confidence in assuming an 8 percent return for third-party infrastructure investors because the Alaska LNG Project has virtually no upstream risk; the Prudhoe Bay and Point Thomson fields are established and the gas is known and is already being recovered and reinjected. That is a big benefit many other competing LNG projects do not have.
Under an ideal tolling structured project, “it may be possible to have a profitable project if the price rises, but it’s still going to struggle at $45 (per barrel of oil) — today’s prices,” Barrowman said.
Meyer said repeatedly during his testimony to the committee that he was happy to see the results from Wood Mackenzie, as it mostly supports what he has been saying.
AGDC, BP and ExxonMobil commissioned the study, but Barrowman said none of the Alaska LNG Project participants contributed to it. Wood Mackenzie relied on publicly available information about the project and its own expertise about industry standards to come to its conclusions, he said.
Resources Committee chair Sen. Cathy Giessel, R-Anchorage, a skeptic of a state-led project, said in an interview that the high-level study just raises more questions.
She questioned why other LNG projects around the world are not all using the third party tolling structure if the benefits are so obvious.
Giessel also said that constituents she has talked to during her reelection campaign have sentiments similar to hers about the project path.
“Universally, people are bringing up concerns about why is the state taking on a leadership role of a project the (producer) companies are saying is uneconomic right now?” she said.
Wood Mackenzie tied the financial viability of the Alaska LNG project to oil because prices in LNG contracts have long been formulated as a percentage of the price of oil. Barrowman noted there was a push to de-link LNG from oil in long-term contracts and move to North America Henry Hub-based pricing several years ago when increased shale gas production dropped the price of domestic natural gas when oil was still above $100 per barrel.
However, the subsequent fall of oil prices has buyers rethinking their strategy again, he said.
BP backs administration
Reaction to BP stating Aug. 25 it supports a state-led Alaska LNG Project was mixed among legislators that attended an update hearing on the project.
BP Alaska Region Manager David Van Tuyl said to House and Senate members the North Slope natural gas the company holds is the largest undeveloped resource in its portfolio and it understands the state’s desire to move the economically challenged project forward.
“BP is not giving up on the project,” Van Tuyl said. “Instead, we need to change gears and figure out how to reduce the cost of supply so that the project can be competitive. We believe that the best way to make that happen is with a state-led project and we support the state’s efforts.”
He continued by saying mega projects such as the Alaska LNG Project regularly are restructured at some point.
“We think a state project with state ownership could be the best structure to make the project more competitive,” Van Tuyl added.
He cited the Wood Mackenzie study that indicated financially handling the Alaska LNG infrastructure — North Slope gas treatment plant, pipeline and Nikiski LNG facility — as a tolling utility with third party investment could lower the needed rate of return.
Rep. Dan Saddler, R-Eagle River, asked Van Tuyl why BP didn’t propose state leadership in the first place.
Van Tuyl responded that the major producer typically starts with an equity model in its projects first. When cost estimates and market conditions made it clear the original plan wouldn’t compete globally, the company became open to other ideas, he said.
“We think this is a pathway worth pursuing because the stakes are worth it,” Van Tuyl said to Saddler.
Meyer testified in the first day of hearings and has said numerous times prior that funds favoring long-term, predictable infrastructure investments would likely be willing to take substantially lower returns on investments than oil and gas companies usually are.
Under Walker, the state Division of Oil and Gas has not accepted BP’s annual development plan for the Prudhoe Bay until the company includes in the plan what it has done to market the gas. BP has insisted the information is proprietary and could violate anti-trust laws and a Sept. 1 deadline to give the state what it is demanding was just a week away when Van Tuyl testified.
In interviews, several legislators in attendance during the two days of hearings said BP’s enthusiasm towards a state-led project just breeds apprehension.
Senate Finance co-chair Anna MacKinnon, R-Eagle River, said she appreciates the company’s cooperation with the administration to continue pursuing Alaska LNG, but she’s also not surprised by BP’s stance because state leadership inevitably means more financial risk to the state.
“I’m just not enthused about state ownership,” MacKinnon said in an interview.
House and Senate Finance Committee members were invited to participate in the two-day joint Resources Committee hearing.
Anchorage Democrat and House Resources member Rep. Geran Tarr concurred with MacKinnon’s skepticism about BP backing the state plan.
It should be expected that BP would be fine with allowing the state to build infrastructure that allows the company to sell a massive, stranded resource, she said.
According to Tarr, to gain support for the plan, AGDC and the administration still need to establish what level of financial commitment the state would be facing, how many employees the corporation will need to hire to manage the megaproject and how much revenue can the state expect from a project that must accept lower returns to be economic.
“I want to better understand the risks the state is going to take on,” she said. “I want to get into the details.
Giessel noted that while the state-led proposal is still young — it came to the forefront during media interviews with Meyer in June — she’s not sure if enough weight is being given to legislators’ concerns.
Wielechowski was more positive about BP’s position.
“It’s good to see that BP is interested in this. They’re the operator of (the Prudhoe Bay Unit) and that’s where an enormous amount of the gas is, so it’s good to hear that,” Wielechowski said.
ConocoPhillips’ Darren Meznarich said because of energy market conditions the company is unlikely to directly participate in ramping activity into the front-end engineering and design, or FEED, phase in 2017. At the same time, he reiterated that the company would make its share of North Slope natural gas available on agreeable terms and would “still be an active participant if this project goes forward,” through upstream infrastructure investments.
ExxonMobil Senior Commercial Advisor Bill McMahon said the company, as the current project lead, would do its part to ensure a smooth transition to a state-sponsored project and is willing to explore all options to monetize the immense gas resource.
Walker said in a release following the hearing that the state is looking at alternatives to continue the project because “the most common denominator for every growing economy is low-cost energy. Monetizing our gas on the world market makes it possible to deliver low-cost energy to Alaskan homes and businesses and to create thousands of construction and long-term operation jobs.”
He also emphasized once again that the Permanent Fund will not be part of a state-led Alaska LNG Project.
“Let me be clear, a project that is not economically viable will not be built. If economically viable, it will be financed by long-term purchase contracts secured before the first piece of pipe is laid, not by the Permanent Fund,” the governor said. “This is how projects around the world are financed and Alaska’s will be no exception.”
Van Tuyl also referenced the possibility for federal tax exemption on at least a portion of a project with state ownership, another cost cutter.
Financial attorneys, including former Revenue Commissioner and Permanent Fund Board Chair Eric Wohlforth, told House and Senate members prior to Van Tuyl’s comments that the prospect of getting state ownership of an LNG export project to pass multiple legal tests for tax exempt status is modest at best.
Wielechowski added that a scenario in which the state could still benefit from a project the producers don’t prioritize is not unfathomable, as evidenced by the Wood Mackenzie analysis, he said.
“You can very easily envision a scenario where (the producers) could still make a pretty decent profit but they would choose not to do it because they have so much other competition elsewhere and they would prefer to make money elsewhere. This is where we get out of alignment with the producers,” he said. “This project can still be profitable for the producers potentially and still be profitable for us and there can be a lot of reasons why the producers would say ‘No, we choose not to do this.’”
Either way, Wielechowski and Tarr both said the Alaska LNG Project should not be politicized.
“This project is going to outlive all of our political careers,” Tarr said. “We need to go with the Ted Stevens approach of ‘To hell with politics, let’s do what’s best for Alaska.’”
Elwood Brehmer can be reached at [email protected]