Once upon a time, dating from the late 1960s, the liquified natural gas plant at Nikiski was the world’s largest, built to serve the growing Asia-Pacific market.
Nearly all of the LNG produced there was sold to two Japanese utilities for the past 50 years. But in recent times, shipments have gone in fits and starts as supply and demand waxed and waned.
Nothing has been shipped from Nikiski in 2016, and only a few shipments were made last year.
Now, just as Gov. Bill Walker is attempting to build the largest gasline project in the world, which would include a massive new LNG plant at Nikiski, the “Little LNG Plant That Could” is up for sale. ConocoPhillips is ready to exit from much of its natural gas holdings around the country as a debt-reduction measure.
Is the governor interested in buying a small LNG facility that is strategically located to export Cook Inlet natural gas?
Perhaps. As we know, the governor is attracted to all things natural gas, and preferrably under a state ownership model. Purchasing the plant would fit squarely within policy structure, nevermind whether it pencils out.
During a board meeting of the Alaska Gasline Development Corporation earlier this month, AGDC President Keith Meyer announced that he had toured the ConocoPhillips LNG plant days earlier to look at its capacity and attributes. A few days later, ConocoPhillips announced the liquefaction plant was for sale. Coincidence?
More importantly, is the plant a good fit for the AK-LNG project, which would build an 800-mile gasline from Prudhoe Bay to Nikiski, where LNG would be shipped to Asian buyers?
As they say in Alaska, the odds are good but the goods are odd. It’s a small plant, a small dock, and it’s 50 years old. Conoco has kept it in operating condition but it’s not as efficient as more modern plants. Nor does it have nearly enough capacity to service the 3.5 billion cubic feet of gas per day that is expected from the North Slope and Point Thomson.
The plant operated for six months in 2015 but has not shipped product in 2016 because the market is flooded with natural gas. LNG is natural gas cooled to minus 256 degrees Fahrenheit, which shrinks the fuel to 1/600th of its original size, making overseas shipping more economical.
GOVERNOR MIGHT BUY, LIKE HE DID WITH FAIRBANKS NATURAL GAS PROJECT
Although Gov. Walker may be interested in owning the historic plant at Nikiski as a tactic to advance the “bullet line,” a smaller gasline project that the state’s Alaska Gasline Development Corporation was formed to advance, the right buyer would likely not be the State of Alaska.
Government in general and Alaska government in particular has an extremely poor track record taking on projects that the private sector finds uneconomic. Does anyone remember the Alaska Seafood Center? The Delta Barley Project and the empty grain silos that stand in Walker’s hometown of Valdez to this very day?
A more direct case in point is the Point MacKenzie LNG project: In 2015, Governor Walker blocked the sale of the Titan LNG facility at Point MacKenzie in upper Cook Inlet. Hilcorp Energy had agreed to purchase that LNG plant, which supplies Fairbanks Natural Gas. Through his attorney general at the time, Craig Richards, the governor had the private sector Hilcorp purchase killed by the Regulatory Commission of Alaska. Richards said the State would not consent to the sale due to antitrust concerns.
Then, through the Alaska Industrial Development and Export Authority, the governor purchased the plant, as well as Fairbanks Natural Gas, and the trucks to ship the gas to Fairbanks. The state is now in the LNG and distribution business.
While Walker was assembling assets to form the Interior Energy Project, the price of oil had plummeted so low that Fairbanks residents balked at converting their homes and businesses to gas. The State is now stuck with a huge investment that only serves the original 1,100 customers of FNG.
The Interior Energy Project (IEP) costs continue to mount. AIDEA spent $54 million to acquire Titan, another $53 million to buy the Fairbanks Natural Gas utility, and bonded a $37.7 million construction loan for the Interior Gas Utility for build-out of the distribution system, a combined investment of $145 million, notwithstanding other administrative and overhead costs. First gas distribution was set for the end of 2016. The natural gas arriving would give the utility revenues to pay off the construction loan.
It hasn’t worked. Miles and miles of distribution pipe built throughout Fairbanks lie empty in the ground, unused. The IEP is well on its way to being as much a boondoggle as the aforementioned seafood center and barley project.
AIDEA always claimed that State ownership of the project was temporary, but as 2016 comes to a close, there appears to be little progress in completing the project.
The original business case for the State of Alaska elbowing its way into ownership of the Interior Energy Project was made by AIDEA in early 2015 with these projected scenarios:
$54 million dollar investment to purchase LLC membership interests
• Expected sale of Titan and AET assets for $15.15 million, Q3 2015
• Pass on elimination of corporate costs (taxes, return, etc.) to ratepayers and to build capital for expansion
• Develop and negotiate process to transition FNG to a Local Control Entity (LCE) as soon as possible
• Secure additional LNG /natural gas supplies
• Structure financing, using SETS, State Appropriation, Bonds to take out AIDEA investment and finance distribution system expansion.
• Exit investment in two years with estimated return of $2.91 million (5.06%)
None of this is likely to pay off anytime soon, and quite possibly never. The question now is, will Gov. Walker learn from his mistakes and approach State investments with more humility and less hubris? Or, will he double down on his boondoggle and propose State ownership of the ConocoPhillips plant at Nikiski at a time when the State can ill afford it?
Alaskans who are worried about being stuck with the bill for another state-owned business failure will want to keep a close eye on this one.