Alaska Legislative Budget and Audit Committee Receives “Key Issues” Report on Alaska LNG Project

December 12, GaffneyCline Energy Advisory submitted the final draft of “Key Issues: Legislative and Policy Options for Alaska LNG” to the Alaska Legislative Budget and Audit (LB&A) Committee.

GaffneyCline is a subsidiary of the Baker Hughes Company, a global company who owns and operates businesses specializing in the energy sector. LB&A requested the report from GaffneyCline to help legislators better understand the financial, economic, and regulatory issues associated with the Alaska LNG project. The report is the latest in a long list of materials requested by LB&A from various hired consultants.

According to the report, key inputs such as “capital cost estimates, gas supply arrangements, degree of federal support, and other important parameters” are not yet known. GaffneyCline admits, “It is not yet possible to set out a definitive picture of what steps may be required of the legislature in the coming months.” However, the report posits that “with over 170 LNG export facilities in 22 exporting countries, there is a considerable body of experience from which Alaska can draw and helps to provide guidance on what may be expected.”

The single most significant hurdle for the project identified by the report is the high capital and risk of cost inflation. Despite multiple budget assessments over the years, cost estimations have only been conducted at a Class V3 level, producing only a preliminary, highly uncertain estimation.

The Executive Summary of the report proposes two action steps for developing a “definitive package of enabling legislation and fiscal framework for the project:”

1. A detailed economic model of the project is required before the legislature can take an informed view as to the appropriate degree of government take that the project can sustain, and how this could evolve over time.

2. Given the likely involvement of federal government agencies in the evolution of the project, the degree of federal support and fiscal stimulus (if any) could also materially influence how the Alaska legislature approaches its own fiscal policy towards AK LNG.

GaffneyCline then details various economic considerations and market details related to the steps the Alaska Legislature needs to pursue to continue the project.

The report concludes: “The AK LNG project and associated gas pipeline is one of the most ambitious gas infrastructure projects ever attempted globally and would require resolution of a host of complex commercial, technical and logistical features to come to fruition. However, if fiscal and related terms are set appropriately, the impact on the State economy could be very material, especially in the medium to long term as profitability increases.”