AGDC scales back as it moves project forward

Alaska’s new gasline leaders offered some insight Wednesday into their plans to continue building on the progress that has been made on the $43 billion Alaska LNG Project while at the same time reevaluating its viability and doing so at a lower cost to the state.

Interim AGDC President Joe Dubler told the corporation’s board of directors that a primary emphasis is returning to the “stage gate” process used by the producer companies to advance Alaska LNG before the state took it over in late 2016.

BP, ConocoPhillips and ExxonMobil and the State of Alaska collectively spent roughly $600 million in the 2013-16 timeframe to get the megaproject through the preliminary front-end engineering and design, or pre-FEED, stage. At that point, with depressed oil and LNG markets, the companies offered to either hand the project over to the state or slow it down until global energy markets improved.

Narrowing the Alaska LNG Project cost from a $45 billion to $65 billion range down to the current estimated $43 billion was a primary product of the pre-FEED work.

Gov. Bill Walker chose for the state to continue the effort and under former AGDC President Keith Meyer — who was hired in June 2016 and fired by the board this January — work was focused on selling to project to LNG customers and investors while also initiating the federal permitting process to get approvals for early construction in 2020.

AGDC will now focus on determining whether or not it’s worth advancing to the up to $2 billion FEED stage gate, which would get the Alaska LNG Project to about a 40 percent design level and is necessary to make a subsequent final investment decision, according to Dubler. Given that, he said a 2020 start to construction is not realistic.

A desire to reinstitute the stage gate approach and get the producers directly involved in Alaska LNG again were priorities of Gov. Michael J. Dunleavy during his campaign.

“What’s needed to make a final investment decision — we don’t have everything in place at this time. We think it will probably be two years or so but we haven’t worked the schedule all the way out,” Dubler said.

“If you’re going to fail on a project you want to fail when you only have $500 million or a billion dollars into the project and not $4 to $5 billion into the project, so you stop at each gate and make a decision.”

Dubler said during a Feb. 27 legislative hearing on AGDC’s budget that corporation leaders are prepared to shut down operations if the Alaska LNG Project is not determined to be economically viable.

Under the previous approach, AGDC planned to hire one or more large firms to develop the project under an engineering, procurement and construction, or EPC, contract and that included the final technical development.

The corporation will also go through a new economic analysis of the project, according to Dubler, who noted the last time the project’s economics were assessed was in 2016. That evaluation, done by the international energy economics firm Wood Mackenzie, concluded low global LNG prices challenged the viability of a producer-led Alaska LNG Project and suggested state control could benefit it’s economics but did not draw firm conclusions on the viability of the current project structure.

Dubler said he doesn’t believe the changes will deter the potential LNG customers and investors AGDC has preliminary agreements with, adding that the corporation has sent letters to them explaining the changes and corporation officials will meet with several of them at the large LNG2019 conference in Shanghai in early April.

However, he did say the nonbinding joint development agreement framework AGDC has with three nationalized Chinese companies to finance up to 75 percent of the project costs in exchange for purchasing up to 75 percent of its LNG production capacity puts too much control in one place.

“We’re looking to diversify into more companies — get more people involved. We’re just looking to expand participation by investors and offtakers,” Dubler said.

AGDC officials have previously said the corporation has formal letters of interest from 15 potential customers entities; but those documents are confidential.

Commercial and Economics Vice President Leiza Wilcox said feedback from prospective customers remains positive because of Alaska’s location in relation to Asian LNG buyers.

On the investor side, she said indications are the initial Alaska LNG investors would likely require returns “in the mid-double digits.”

“Somewhere between 12 to 15 percent, that would be my feeling,” Wilcox told the board of directors. “For a long-term infrastructure project the expected rate of return can be lower and in the long-term the project can be put into the hands of infrastructure investors that expect a lower rate of return. It’s just a matter of who invests up front and who invests for the long-term; that’s part of the structuring of the financing package.”

Securing those infrastructure investors, such as pension funds, with lower return hurdles was a cornerstone of the approach AGDC took to the Alaska LNG Project under Meyer, who often cited the higher return requirements of the major oil producers as an impediment for developing the project based on their investments.

As for AGDC’s internal finances, Dubler said the corporation could complete its mission on a smaller budget to do its part to close the state’s $1.6 billion budget deficit.

The corporation has already cut $5 million out of its current year budget — mostly by cutting its contractor and legal expenses — and is downsizing its Anchorage offices. The Dunleavy administration’s fiscal year 2019 supplemental budget request includes transferring that $5 million back to the General Fund.

“We’re right-sizing for the narrower marketing focus and we’re advancing the FERC (permitting) process,” Dubler said.

However, he went on to say that with the $5 million reduction, AGDC expects to have roughly $15 million at the end of the current, 2019 fiscal year, but expects to need about $29 million in 2020 to complete the Alaska LNG environmental statement and keep the reduced scope of commercial work ongoing. Agency officials are working on a resolution to the funding issue, Dubler said.

“I’m not sure we can reduce enough to get there but we’re going to see what we can do,” he added.

House Resources Committee co-chair Rep. Geran Tarr, D-Anchorage, said in a statement offered to the Journal that she was pleased to hear AGDC is continuing with the Federal Energy Regulatory Commission environmental impact statement process started in 2017 under the Walker administration.

“This is the right decision. The state has invested hundreds of millions of dollars, and that investment must be maximized by achieving this critical regulatory approval,” said Tarr, who added that she’s looking forward to “closely evaluating any new proposals to change the ownership model to ensure the state’s strong position is maintained.”

There is a general consensus among industry experts and Alaska LNG observers that completing the project’s EIS would be beneficial in the long-term even if the project is not sanctioned in the coming years.

To date, AGDC has spent more than $260 million on the Alaska LNG Project.

AGDC leaders are scheduled to present to legislators March 22 in a joint House and Senate Resources Committee meeting.

Outside help

AGDC on Friday announced new partnerships with BP and ExxonMobil in which the companies will help the quasi-state corporation “identify ways to improve the project’s competitiveness and progress the Federal Energy Regulatory Commission authorization to construct the project,” according to a statement from the corporation.

Last year BP and ExxonMobil signed binding term sheets, which include pricing terms, to sell their respective shares of North Slope natural gas into the Alaska LNG Project.

“BP and ExxonMobil possess world-class LNG expertise which may help AGDC responsibly advance this project with maximum efficiency for the benefit of Alaskans, and I welcome their collaboration,” Dubler said in a formal statement.

BP previously supplied AGDC with technical assistance under an agreement from late 2016.

According to AGDC officials, the latest agreements ostensibly provide free volunteer help from the companies on value engineering and answering federal agency questions for the Alaska LNG environmental impact statement.

FERC officials said Feb. 28 that issuance of the draft Alaska LNG EIS would be pushed back about four months to June of this year due, in part, to responses the federal regulators still need to get from AGDC, according to FERC documents.

Additionally, Dubler said during the Wednesday board meeting that AGDC would seek third-party help from “quality, experienced LNG project owners and operators to build, own, and operate the project” if it reaches that point.

“We realize this is not something the state does. The state’s very good at some things; running integrated LNG projects is not one of them,” he added.

Former AGDC head Meyer often noted that AGDC would likely hire a firm to operate the project while it remained under state ownership.

That state ownership has been recognized by many, including Dubler, as a crucial economic benefit because it would likely exempt Alaska LNG operations from federal income taxes based on a 2016 ruling from the Internal Revenue Service.

Elwood Brehmer can be reached at [email protected].

03/11/2019 - 9:17am