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Sunday, April 22, 2018
HomeColumnsWith AK-LNG, China is not just interested in gas supply

With AK-LNG, China is not just interested in gas supply

By SCOTT HAWKINS
SENIOR CONTRIBUTOR

After sidelining three of the world’s premier energy companies in order to “go it alone” on an Alaska LNG line, the Walker Administration is now looking to China to salvage the troubled project.

The latest sign of this is in the Governor’s supplemental budget for 2018, where he has asked for an open-ended appropriation allowing him to accept and spend investments on the project – including from China — without further legislative oversight. It is similar in a legal sense to some of the state’s revolving loan funds.

Hawkins

There is much about Walker’s proposal that is troubling. He is asking for carte blanche authority to essentially sell the AK-LNG project to a foreign entity.

And not just any foreign entity, but one that is the main global rival of the U.S. The project Walker wishes to sell, which is the practical effect of his proposal, would be the largest energy project in the history of the U.S.

For a moment, let’s suppose that the Alaska Legislature gives Walker that carte blanche authority. How would that look?

The next big step for the project, besides getting its troubled FERC permit applications in order, is to enter into a project phase called FEED – “front end engineering and design.” This is where much of the heavy lifting takes place from an engineering standpoint.  It is massively costly, well north of a billion dollars.  It is what Walker hopes he can convince the Chinese to underwrite.

WHAT’S IN IT FOR THE CHINESE?

What would Chinese state interests want in return? Management control. Contracts for engineering and construction entities in China favored by Premier Xi Jinping’s regime. Strong influence over project economics, which could influence the netback value of Alaska’s gas resources. Financing packages from preferred Chinese financial institutions. In other words, de facto hegemony over a large part of Alaska’s economy and an important national U.S. energy asset.

Those who pay the tab name the tune.

Make no mistake about it, Chinese state interests will not make a major investment in an LNG project simply to lock in a gas supply. There are too many options in the Pacific basin for supply, including Canada, Australia, Indonesia, and even the Middle East.

If supply was the main consideration, far better to commit to several medium sized projects, thus diversifying risk. Many or all of these would be lower cost projects, too, thus improving the competitiveness of Chinese industries. Indeed, this is the most likely course of action for China.

A REALITY CHECK

As unsavory as the idea of Chinese state interests controlling Alaska’s next generation energy project may seem, it is not a very likely scenario. There are several reasons for this.

First, China’s appetite for new energy supply is likely to come in below current expectations over the next 20 years.  Indeed, GDP growth has been slowing in China since 2010, when it peaked at 10.5 percent.  In 2017 it stood at 6.8 percent, and is expected to ease back further from there.

A second and related reason is that the government of Xi Jinping is exerting ever-heavier control over the economy.  While this is good for favored state investment projects, it is not good for the economy and will push growth even lower.

A harbinger of where all this is headed is the recent approval of a rules change within the Chinese communist party allowing General Secretary Xi to hold his office for life. He now stands as the most powerful Chinese leader since Mao Zedong. One can safely say that the natural temptations of power to seek ever more power will be increasingly alive and well with China’s authoritarian regime in the years to come.


Indeed, as The Economist magazine noted in the cover article of its most recent edition, China has crossed over from an authoritarian regime to an outright dictatorship.


This phenomenon of an Asian country bursting upon the world scene, appearing invincible and seemingly headed for ever great power, reminds me of the overwrought fears about Japan in the 1980s.

While Japan had indeed rebuilt and re-industrialized on an impressive scale up through the 1980s, it took only one financial crisis, triggered by a small real estate development group called Recruit Cosmos, to lay bare the country’s structural economic flaws. Japan has never fully recovered its vitality since then.

Today, nobody worries about Japan ruling the world. Instead, we worry about China. Yet, the structural imbalances there are even more profound than those that faced – and continue to face – Japan.

Having traveled extensively in Asia on business, I have had the opportunity to witness these sorts of transitions first-hand. While China is a large, powerful country and will be for generations to come, her best days may very well be behind her.

The final reason not to worry about the Alaska – China Syndrome coming to pass is the most simple:  China has not yet expressed any real interest in the project.

The memorandum of understanding that Gov. Walker and his executives at AGDC waved proudly over the holidays after President Trump’s visit to China is little more than a photo opportunity.  If you actually read that very fluffy 4-page memo, it is nothing more than an agreement to talk about the project further. Possibly over tea.

In the meantime, Alaskans should sleep easily, worrying not about a Chinese takeover. Those of us who care greatly about the AK-LNG project should worry a lot more about the very wrong turn the project took when Gov. Walker decided to “go it alone.”

Yet, a gentle word of caution to legislators would be in order, if for no other reason than to avoid piling further errors upon past misjudgments, making the AK-LNG project even harder to salvage when the day for doing so finally arrives.

Scott Hawkins is an economist, business owner, candidate for governor of Alaska, and 35-year resident of the state.

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Suzanne Downing had careers in business and journalism before serving as the Director of Faith and Community-based Initiatives for Florida Gov. Jeb Bush and returning to Alaska to serve as speechwriter for Gov. Sean Parnell. Born on the Oregon coast, she moved to Alaska in 1969.

Latest comments

  • The legislature should be very wary of Governor Walker’s involvement with the gas-line project.
    Every financial arrangement he negotiates must be reviewed by an outside counsel with sufficient expertise and the entire AGDC operation should be reviewed by an industry consultant.
    I realize this will cost millions, but his record with the Alaska Gasline Port Authority indicates this is a necessary expenditure.

  • Walker is putting too many eggs in one basket.

  • The social implications of rapid industrial growth in and around a small village economy is measured more by perception and expectation than by the actual implementation of the plan. Because of the uncertainty and the lack of hard answers, the folks in Nikiski are becoming a little anxious. So even if the LNG plant never arrives, the speculation and rumors that it’s “hard on track” will confound the natives.

  • First, only the federal government can conclude a “Treaty, Alliance, or Confederation.” States can make an “Agreement or Compact” with other states or with foreign powers but only with consent of the Congress (Article I, section 10). So my question is: When did Congress allow Bill Walker to make this compact with China?

  • The State of Alaska, Dept. Of Agriculture has a MOU with a foreign government already. In fact, they spend a pretty penny, flying state employees there a couple times a year. This has been going on, under the radar, for quite some time, despite the questionable (and possibly illegal) activity.

  • China should be the LAST resort for Alaska’s financial backing in LNG or ANY other project. USA debt to China should be a lesson already learned folks.