Despite uncertainties, state moves forward with LNG

Alaska Gasline Development Corporation President Keith Meyer addresses the attendees at a joint luncheon of the Kenai and Soldotna chambers of commerce Tuesday, Dec. 19, 2017 in Kenai, Alaska. Meyer explained some of the details of the recently signed Joint Development Agreement between the Alaska Gasline Development Corporation and several Chinese investors to develop the Alaska LNG Project, an 800-mile pipeline and liquefaction facility terminating in Nikiski designed to monetize the natural gas reserves on the North Slope. (Photo by Elizabeth Earl/Peninsula Clarion)

When Alaska Governor Bill Walker spoke Tuesday to members of the Soldotna and Kenai Chambers of Commerce, he wore an Alaska-shaped lapel pin marked with two lines: one tracing the route of the Trans-Alaska Pipeline System from Prudhoe Bay to Valdez, and the other marking the proposed route of the long-planned 800-mile natural gas pipeline from the North Slope to a liquefaction plant and export terminal in Nikiski.

 

Walker and President Keith Meyer of the Alaska Gasline Development Corporation (AGDC) — the state-owned company responsible for the estimated $43 billion pipeline mega-project — were in Kenai to tout a Nov. 9 memorandum of understanding between AGDC and three Chinese state-owned entities.

Meyer outlined a plan to bring a project based on the agreement into operation by 2025. Under a “debt for capacity” arrangement, China’s state-owned Bank of China would loan AGDC 75 percent of the project’s development cost, which AGDC would repay in LNG by reserving 75 percent of the pipeline, liquefaction plant, and terminal capacity for the Chinese state-owned hydrocarbon company Sinopec, which would in turn pay back Bank of China for gas it receives.

To have the terminal exporting by 2025 would require construction to begin in late 2019 after the state makes a final investment decision in early 2019, following a final financing agreement with the Chinese entities to be signed by late 2018, Meyer said.

“2018 is going to be our year of papering,” Meyer said. “We’ve got lots of paper: we’ve got the contracts with the buyers, we have the lender agreements, we’ve got the FERC process (permitting from the Federal Energy Regulatory Commission). We’ve got lots of paperwork to do to come to our final investment decision in 2019.”

Asked whether Alaska legislators will have a chance to examine and approve the contents of a final agreement with Chinese entity, Meyer said he hopes not to have an open negotiation but the legislators “will certainly have comment, and they’ll certainly know the content.”

At Meyer’s most recent presentation to legislators — a Dec. 4 House Resource Committee meeting — some committee members questioned him over the agreement’s allowance, according to its text, of “potential for Sinopec’s involvement in engineering, procurement, construction, and project management opportunities.”

“There’s some fear that the Chinese are going to come with all this construction labor,” Meyer said. “They’re not. But there is an opportunity for the Chinese to fabricate modules. A lot of LNG these days, and our gas treatment plant, too, is all modular. … They (Sinopec) have a very large engineering and construction company, so they’ve got the capability to do engineering for sophisticated projects. … We don’t want to miss an opportunity for their expertise.”

Sen. Peter Micciche (R-Soldotna) said localizing work on the project would be one of his concerns with the prospective agreement.

“What I’d like to see is the maximum possible amount of positions go to Alaskans,” Micciche said. “I’d like to see very little of the project going to outside labor groups — and ‘outside’ can mean Lower 48 or it can mean international. The things I’d be unwilling to support — I’d be unwilling to mortage Alaska’s future for a significant portion of the funding of the project, and I’m unwilling to put the Permanent Fund at risk if that’s something that’s being considered as part of the finance package security.”

Rep. Gary Knopp (R-Kenai) said that based on the Nov. 9 agreement, his concern about a possible final agreement would be the state’s ability to operate the plant and pipeline with proceeds from 25 percent of the capacity, but that he was mostly optimistic.

“I’m hopeful to see it go forward,” Knopp said. “I’d like to see more happening sooner.”

A key to the Legislature’s oversight of the project has been their control of AGDC’s budget, which is funded by appropriation. AGDC is planning to raise spending during its “year of papering,” according to an expenditure plan given at its Dec. 7 board meeting. It has recently been spending roughly $3 million a month, for a total expenditure of $28.05 million between January and October 2017. In January 2018, it plans to increase monthly spending to around $5 million a month. As of November, AGDC had a $75.12 million fund balance, which would drop to $40.98 million by June 2018 under the spending plan.

To get more detailed financial information, AGDC has required legislators to sign confidentiality agreements, citing the need to preserve secrecy in negotiations with other interests. Knopp, Micciche, and Rep. Mike Chenault (R-Nikiski) said they have not signed agreements.

Chenault, who has previously criticized AGDC for not being open enough with the Legislature, said he would continue to “pester the administration for information” about the project, but has no problem with the confidentiality agreement.

“But the problem is how to get information back to your constituents,” Chenault said.

One gasline-related measure that legislators can expect to see, Walker said, is a bill authorizing AGDC to accept money from sources other than the state.

The Nov. 9 agreement calls for the Chinese Investment Corporation — a Chinese state-owned sovereign wealth fund similar to Alaska’s $61 billion permanent fund, though much larger at $813 billion — to be an investor in the project, although AGDC can’t presently accept funding from a source other than legislative appropriations. A bill to remove this restriction could also allow AGDC to accept investment from private equity and other potential financiers. Meyer said he’s had discussions with other groups interested in a piece of the project, mostly in investment in an project company that would hold ownership of the pipeline.

Global Competition

Five LNG export terminals are presently under construction in the United States — in Maryland, Georgia, Virginia, Texas, and Lousiana — according to the U.S Energy Information Administration. All expect to be operating by 2019, and if all are sucessful, it would almost double the U.S’s LNG export capacity by that time. Meyer said these projects are more likely competitors of Alaska’s than others closer to China.

“Our competition with this project is not the Russians — it’s the Texans,” Meyer said to the Chamber of Commerce audience.

Prior to joining AGDC in June 2016, Meyer held various executive positions at the Houston, Texas-based Cheniere Energy and served as president of its marketing company until his 2008 resignation. Cheniere completed the Lower 48’s first LNG export terminal — an $8 billion plant in Sabine Pass, Louisiana — in 2016, and plans for a second terminal, an $20 billion facility in Portland, Texas, to begin exporting in 2019.

Meyer said that though Gulf Coast LNG will be marketable in Europe and South America, he didn’t expect it to compete with Alaskan LNG in the Pacific market because of the passage through the Panama Canal. The Panama Canal Authority is allowing passage to one LNG tanker per day, according to Bloomberg business news, but plans to raise the number to 10 by 2019.

As for the Russians, this month the Russian Yamal LNG project — a $27 million LNG plant on Russia’s arctic Yamal Peninsula — exported its first cargo of gas to the Malaysian state-owned energy company Petronas and is planning to start filling long-term gas contracts in April 2018 according to an announcement by its owners, the independent Russian gas producer Novatek.

Like AGDC’s proposed project, the Yamal LNG facility has heavy investment from Chinese state entities. Chinese state-owned company China National Petroleum Corp has a 20 percent equity interest in Yamal LNG, while the Chinese state-owned investment company Silk Road Fund owns an additional 9.9 percent. China ultimately provided 60 percent of the capital for the project, according to the Stockholm International Peace Research Institute.

Meyer said the icy waters around the Yamal Peninsula — requiring gas to be transported in ice-breaking carriers — raised the cost of Yamal gas to the point of being not competative with Alaska’s in the Chinese market.

“It’s happening — it’s not real economical, but it’s a government mandated project,” Meyer said of the Yamal LNG facility. “Most LNG buyers are utilities. When you look at a utility trying to get reliability of supply, and they have Alaska or Russia, I say Alaska wins pretty easily on the reliability side.”

Local questions

In Nikiski, uncertainities about the project’s local effects still remain.

The project would require the Kenai Spur Highway to be moved around its liquefaction plant to a presently undetermined new route — an unknown that has left some residents wondering for years whether or not to plan a move.

Decisions about the road and about AGDC’s plans to continue purchasing the 800- 900 acres of local land they’ll need for the project have been stalled by negotiations for land purchased by a previous incarnation of the gasline effort. AGDC is negotiating for the 600 acres of Nikiski land purchased by the previous AK LNG Project — in which AGDC was a 25 percent partner with oil and gas companies BP, ConocoPhillips, and ExxonMobil — now in the hands of an ownership company formed by the previous project partners. Meyer said these negotiations are continuing alongside negotiations with the producers for the pipeline’s gas supply.

Reach Ben Boettger at benjamin.boettger@peninsulaclarion.com.

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