“We have no other project that will revitalize our economy the way the gasline will.” – Gov. Bill Walker, State of the State Address, January 18, 2017
The Alaska LNG project is Gov. Bill Walker’s plan to save the Alaska economy. Unfortunately, few of those knowledgeable in the field are lining up behind him.
Today, the Alaska House Natural Resources Committee and the Senate Natural Resources Committee receive their periodic updates from the Alaska Gasline Development Corporation on the progress being made toward a $65 billion project that AGDC is charged with completing.
The private sector partners have all left the project: TransCanada, BP, ExxonMobil and ConocoPhillips are out. Governor Walker is in charge.
At today’s hearings, the vice presidents of AGDC are expected to give testimony, because President Keith Meyer is in Japan checking out the new AGDC office in Tokyo.
PRE-FEED DONE: The pre-front-end engineering and design work has been completed for the LNG project. What’s logical now is to move into the FEED stage. FEED is the last “gate” in the decision-making process. In this business, if you get as far as FEED, you’re very likely to have a project.
Alaska is not there yet. The private partners did not want to move ahead with a project that was not economical for them. Gov. Walker wanted to go it alone.
PRE-FEED 2.0: What is likely next is FEED-light or a gap year of pre-FEED, burning up the clock while locating new financing, now that the partners have left.
The governor will have to go out on the financial markets, perhaps to a sovereign fund from a foreign entity, and secure financing. How that financing will be collateralized — or guaranteed — is of concern to Alaskans. Ultimately, it may put our largest asset, the $50 billion Alaska Permanent Fund, at risk.
GAS GLUT: There’s a lot of talk about “windows” of time when natural gas will not be abundant in the Pacific basin, as it is today.
Meyer of AGDC says the window is between 2023 and 2025.
BP’s economists say there may be a “gap in unmet demand” in 2025-2030.
No one is that good at saying what the window will be, because there are too many unknowns in the market. Essentially, players can get a forecast that tells them anything they want to hear.
But what we know right now is that gas is $3 a mmbtu, or million British Thermal Units. It’s flowing out of the Gulf Coast toward Asia and it costs a total of between $8 and $9, delivered to the same customers Alaska wants to court.
The Wood Mackenzie Report commissioned last year for BP, ExxonMobil, and AGDC shows Alaska’s best case scenario is $11 per mmbtu, delivered. That makes Alaska’s project one of the highest cost options in the world.
CONVERTING IT TO A UTILITY MODEL: When that $11 number came out, it was obvious why the private sector was backing away and suggested if the State insists on moving forward, it consider the gasline a utility, which can operate on a lower rate of return. It would be considered state infrastructure, such as a toll road, which a state might build and then charge people to drive on.
A key component is that the federal government not tax the project. But in reality, that’s a long shot. In a report by Manley & Brautigan to the Legislative Budget and Audit Committee, the tax lawyer Charles Scheutze concluded:
This is a good deal different from the project being described by AGDC. The lawyer is saying that the project must be owned, developed, and operated by the State in order to avoid taxation.
Having the State actually operating the gasline is of great concern to those who have seen other government-run projects experience lavish cost overruns. It is also alarming to those familiar with the poor track record the State of Alaska has amassed over the years dabbling in private sector endeavors.
The work ahead for the next year or two is nontechnical, financial work. There will be no buying of steel in the near future. Those who work on the gasline project will be working with bankers and private equity companies. They’ll be sorting through the legal issues and the commercial agreements.
There won’t be any big breaking news during this timeframe. The signals to watch for will be nuanced from the Governor’s Office. Look for a possible change in the next year, and a new look at a downsized gasline for in-state use only — owned and operated by the State of Alaska.