Gov. Bill Walker had a friend in the Japanese company Resources Energy, Inc. In fact, they kind of had a thing going.
So he thought.
The Japanese company represented potential buyers of Alaska natural gas, and selling gas to Japan is what has driven Walker for much of his professional life. REI gave breath to his hopes and dreams for an Alaska LNG project, which is why he ran for governor in the first place. That, and to “cut the state budget.”
So it had to be deeply disappointing to Walker this month when REI said sayonara and walked out on him.
The global LNG market is a tough neighborhood for Alaska’s high-priced resources.
IN THE WAY-BACK MACHINE
Walker is a street fighter. Starting in 2013, Walker used REI as one of the centerpieces of his campaign for governor, and he bludgeoned then-Gov. Sean Parnell for not taking a meeting with Walker and the Japanese company. Walker had brought REI executives to Alaska and said he could get a meeting with the governor.
Parnell wasn’t interested in meeting with Walker, who he knew was going to run against him. He also didn’t make time for REI. He had been meeting, however, with KOGAS, the Korean natural gas importer that is the largest in the world. REI, by comparison, was a new and entrepreneurial company formed by Japanese municipalities and manufacturers looking for their own supply of LNG. It was a start-up that didn’t have a track record, only aspirations.
Also, Parnell was forging “Heads of Agreement” documents with the three Alaska producers — ConocoPhillips, BP and Exxon. And he was busy resolving the Point Thomson legal dispute that Bill Walker had filed against the State and ExxonMobil in 2012.
Walker considered the refusal to meet with him and REI an unforgivable sin. He went public with his indignation and signaled his second run for governor.
“The most recent blunder … was Parnell’s refusal to meet with the dignitaries of the Japanese consortium, Resources Energy Inc. (REI) and afford them diplomatic courtesies,” Walker wrote in the Alaska Dispatch News in September, 2013.
“For decades Alaska has explored the viability of a large volume gas line anchored in long term contracts with the Asian markets. REI has made substantial investments seeking to buy state royalty gas at the wellhead for LNG production and shipment to Japan,” he said.
Walker went on to scold Parnell, saying he had some explaining to do.
A year later, Walker again scratched at the scab he had over Parnell’s refusal to take that meeting with REI.
The election season was in full swing by now. Just a couple of weeks before voters would choose their new governor, he blasted Parnell in yet another Compass piece in the Dispatch and in other newspapers around the state:
In summary: Walker was the LNG project expert and Parnell didn’t know what he was doing. Never mind that he had never actually built a gasline in his 30 years of talking about one; he had mainly just filed lawsuits against the same producers he would need in order to move a project forward.
WALKER AND REI GO STEADY
Immediately after he was sworn in as governor in December, 2014, Walker fixed the perceived slight: He signed a memorandum of understanding with REI. The company was now first in the door.
On Dec. 23, 2014, Walker described the MOU as “an important step forward in securing Alaska’s energy future.”
After all, Walker explained, REI was formed to explore the possibility of purchasing natural gas from Alaska and to build liquefaction facilities and an export terminal to ship the gas to Japan and sell it for $9-$10 per million btu to Japanese customers. At the time, Japan was paying about $15 per million btu.
REI wanted to seal a deal with a long-term price from North Slope producers and begin shipping to Japan by 2020. It may not have had all the pieces together, but the company had an ambitious schedule. It opened an office in Anchorage, and conducted studies that showed an Alaskan LNG export project was not only viable but was competitive. Walker encouraged REI publicly — and repeatedly.
Further, he said, “REI has contacted many Japanese governmental and private organizations that also want to buy gas from Alaska. REI is also working on a smaller LNG project in Cook Inlet to begin deliveries by 2020. The state will work with REI on this project through a coordinated permitting system and potential partial funding through the Alaska Industrial Development and Export Authority (AIDEA),” according to his press release.
Must Read Alaska went looking for the 2014 MOU with REI but found it had been removed from the governor’s web page:
SIGNING MORE MOUs
In September of 2015, Walker signed another MOU, this time with Kyoto prefecture, where he went to meet potential buyers and give a keynote address at what he dubbed “high-level meetings discussing Alaska’s liquefied natural gas potential with top-ranking executives in Japan.” They included the chief executive of Marubeni Corporation, a large trading company that markets LNG, the governor of Kyoto Prefecture and former Prime Minister Yasuo Fukuda.
Must Read Alaska also went looking for that MOU on the governor’s web page, but it, too has been removed:
Of course, MOUs are not worth the paper they’re written on, but they’re symbolic “handshake” documents that tell the world something is going on. A company like REI especially found them comforting, and helpful when they approached investors. In Japan, having high-level government sponsorship is seen as exceedingly important. In Alaska, it’s more of a “defining the relationship,” (or DTR, to millennials.)
The Walker deal-making trips went on. The governor and his new team at the Alaska Gasline Development Corporation spent millions of dollars flying to Asia, Houston, and bringing potential buyers to Alaska. AGDC made a stab at opening an office in Houston, and finally did so. It is staffed with five contractors and costs $1 million a year. The governor and AGDC also quietly opened a gasline office in downtown Tokyo, renting space at $5,300 a month, with one employee, reconstituting the longstanding, official state trade office in Tokyo.
REI, meanwhile, decided it was smarter to move ahead with a less ambitious project — a smaller LNG export project using Cook Inlet gas and getting help from the Alaska Industrial Development and Export Authority — AIDEA.
That was 10 months ago.
In February of 2017, AIDEA described its work with REI this way: “REI is in the process of meeting with potential investors, looking for methods to fund needed FEED work for a large Southcentral LNG plant, and organizing with private energy companies. AIDEA continues to work with REI.” There were no other partners in the project.
That was one month ago.
THE ‘DEAR JOHN’ LETTER FROM REI
On March 23, 2017 the bad news came in the form of a letter from the Eiji Hashio, president of REI, to the governor:
“It is with regret that I write to you on behalf of Resources Energy, Inc. in Alaska and ERI in Japan to advise you that we will cease our efforts to develop an LNG export project for Cook Inlet natural gas as of March 30, 2017.
“This has not been an easy decision for us on the Japan side, but is one that is necessary given the present economics of LNG in Japan,” the letter continues.
“As you know from our involvement with our project, as well as the larger North Slope pipeline project, the Asian LNG market has seen significant price drops in recent years. A large supply of natural gas around the world has created continuing expectations for low prices from buyers. It also has made investors and commercial users reluctant to sign long term gas purchase contracts. Long term contracts are the starting point for securing a gas supply and the financing for plant construction. ERI in Japan simply could not secure the gas purchase commitments needed to advance our project in Alaska.”
REI was always a very small company, but they were Walker’s best hope for an “anchor customer,” the one he landed first, before he was governor. It was as close as he has gotten to a real gas marketing deal. He fostered the relationship, courted them, became governor and, like exchanging friendship rings, they signed MOUs together.
But the entire REI business model was to be a middle man for utilities. The market appears to have decided they were not needed in an era when the world is awash in natural gas.
Gov. Walker has another problem: He has stated that the only way the project would be viable is if the State of Alaska owns it, because the State doesn’t have to be as profitable as private companies.
“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,” he said last August. “This is how projects around the world are financed and Alaska’s will be no exception.
“The project team, which includes our industry partners, have spent several years and completed over $500 million in engineering, permitting and necessary work to complete pre-FEED. Now is not the time to shelve that excellent work and start again at a future date,” he said.
Now, in his third year as governor, there are no partners. Has he actually set the project back?
AGDC BUDGET: RIPE FOR TAKING
AGDC, meanwhile, is sitting on its last $102 million that the Legislature agreed to last year, and the burn rate continues at an impressive rate on a project that most Alaskans express little faith in, according to a recent Alaska Chamber of Commerce poll.
AGDC wants to spend all the money next year — Walker’s re-election year — for marketing and federal regulatory work. The word in the industry is that AGDC will file a permit application with the Federal Energy Regulatory Commission by April.
But as lawmakers look to cut services in a budget crisis, can they really afford to advance a $45-60 billion project that seems destined for failure?
As Alaskans ponder the Walker’s plan for an income tax, and as he pays the head of AGDC $750,000 a year, (and a dozen other employees a cool $200,000 plus, and benefits for all), is he moving the project forward? Or were the former partners — ConocoPhillips, BP and ExxonMobil — right when they said now is not the time?
Governor Walker has not yet issued a statement about REI’s departure from Alaska and what it means to his signature project.