AGDC sketches China deal, seeks timeline from regulators

By 2019, the Alaska Gasline Development Corporation (AGDC) is hoping three Chinese state-owned entities will become partners in its plans to export North Slope natural gas to China via an 800-mile pipeline to a terminal in Nikiski.

To secure Chinese investment by 2019, however, the Alaska state-owned AGDC may need to push federal regulators who’ve been preparing since April to study the project’s environmental impacts, according to AGDC’s Senior Vice President Frank Richards.

Speaking on Friday to the Kenai chapter of the trade group Alaska Support Industry Alliance, Richards outlined the Nov. 9 agreement with the Chinese groups which would tentatively finance 75 percent of the $43 billion pipeline project with loans payable in gas. He also spoke of AGDC’s efforts to get the Federal Energy Regulatory Commission (FERC) — the energy infrastructure permitters responsible for the project’s Environmental Impact Statement — to commit to concluding their work by the end of 2018.

The deal

AGDC hasn’t publicly released the text of the non-binding Nov.9 agreement, which its president Keith Meyer and Alaska Governor Bill Walker signed on an energy-centered trade mission to China led by U.S President Donald Trump and Commerce Secretary Wilbur Ross.

Richards said its details — such as interest rates and terms of debt — will be hashed out in further negotiations expected to conclude in May 2018, leading to the binding “definitive agreement” signed by the end of that year. The basic framework, however, he could easily sketch for the Alliance audience.

“75 percent of the project financing comes from China in exchange for 75 percent of the capacity of the project,” he said. “AGDC retains 25 percent of the equity for ownership of the project for our use to be able to sell to other countries.”

Under the agreement’s “debt for capacity” arrangement, China’s state-owned Bank of China would loan AGDC 75 percent of the estimated $43 billion cost, which AGDC would repay in LNG by reserving 75 percent of the pipeline, liquefaction plant, and terminal capacity for the Chinese state-owned hydrocarbon company Sinopec, which would in turn pay back Bank of China for gas it receives.

Richards said that the Bank of China had initiated negotiations with AGDC.

“They aggressively came to us when they heard about this deal we’re working on,” Richards said. “They came and sought us out. They came to Alaska and we took them to the North Slope. They’re keenly interested in the project to be able to participate.”

The China Investment Corporation — a state-owned sovereign wealth fund similar to Alaska’s $61 billion permanent fund, though much larger at $813 billion — could also finance the project. This would be part of a new strategy of investing the fund in U.S infrastructure for China Investment Corporation, which its chair Ding Xuedong announced in January 2017 at the Asian Financial Forum in Hong Kong, according to Reuters Business News.

The remaining 25 percent of financing cost, and equivalent 25 percent of future capacity, would belong to AGDC and other equity investors. Richards said AGDC “is seeking potential partners” but plans to keep a majority share of the equity. AGDC has also signed memorandums of understanding with other prospective Asian buyers for the output of its capacity share, including the Vietnamese state-owned PetroVietnam Gas and the South Korean state-run KOGAS.

Once operational, the greatest share of the project’s annual returns would initially go to debt payments. AGDC calculated about $3.5 billion a year would go to paying back the Bank of China via LNG to Sinopec, while $1.1 billion in annual returns would be distributed between the state and other equity investors. About $1.4 billion of the returns would cover the pipeline’s operation and maintenance, plus the payments AGDC would make in lieu of property taxes to borough and municipal governments in areas where the pipeline and liquefaction plant will be located.

Between $1-2 billion of annual returns would go to buying gas from Prudhoe Bay producers BP, ConocoPhillips, and Exxon Mobil, though these deals have yet to be made. The state would receive a 25 percent royalty share of this gas, potentially about $250 million. In lieu of cash, the state may take this royalty value as gas which it could also sell through the pipeline to the in-state market.

Federal regulators

In addition to nailing down a definitive agreement by the end of 2018 and having a final investment decision in 2019, the schedule Richards presented to the Alliance anticipates another crucial event around this time — a December 2018 conclusion from the U.S Federal Energy Regulatory Commission (FERC) on the project’s environmental impact.

Though AGDC requested the Dec. 2018 completion date when it submitted its roughly 50,000-page permit application to FERC in April, the agency hasn’t stated when it plans to finish its studies.

FERC hasn’t yet begun creating an Environmental Impact Statement for the 800-mile gas pipeline. Instead, it has returned 801 questions by AGDC’s count — sending the most recent round in July — regarding issues it says the application doesn’t fully address.

Richards said that AGDC has answered about half these questions, many of which he described to the Alliance audience as “a little bit picayune.”

“One of them that FERC asked is how AGDC is going to prevent poaching along the new pipeline right-of-way,” Richards said. “Well, from my perspective that’s not AGDC’s perspective, that’s a law enforcement, a wildlife enforcement issue, so that will be someone else’s responsibility. We know every rock, we’ve identified every tree, we know every wetland along the route.”

Other unanswered FERC questions concern uncertain impacts of the project’s liquefaction plant on Nikiski, such as how the Kenai Spur Highway will be rerouted around the proposed plant and terminal, and how AGDC would compensate setnetters who presently fish the beach in front of the planned terminal. AGDC has committed to answering them by January 2018.

In a Nov. 16 letter to FERC Commissioners, Richards wrote that although not all the information FERC requested before starting the environmental review “is available at this time,” the agency should publish its schedule for the review by Dec. 15, subject to change if AGDC fails to deliver the necessary information.

Richards requested that this schedule include the Dec. 31, 2018 finish and suggested FERC could meet it by loosening a set of wetland construction criteria which FERC has said the project does not meet, accepting instead previous permitting work by the U.S Army Corps of Engineers, which applied different standards to a similar pipeline.

The Alaska Stand Alone Pipeline is a plan for a smaller project meant to serve the in-state gas market with about a sixth of the capacity of the export-oriented Alaska LNG pipeline. AGDC is also guiding the Standalone Pipeline — meant to be a backup project for the export pipeline — through an Environmental Impact Statement process, with the U.S Army Corps of Engineers rather than FERC leading the permitting. The Army Corps hasn’t given a permit to the Standalone pipeline, though it finished an Environmental Impact Statement for it in 2012.

The Standalone Pipeline would share about 670 miles of the Alaska LNG pipeline’s 800-mile route. Much of this distance would be through wetlands — an environment in which the Army Corps of Engineers and FERC make differing allowances for construction. Richards characterized the Army Corps work on the Standalone gasline and FERC’s ongoing permitting of the present project as “a duplication of effort” and said FERC should accept instead the Army Corps’ less constricting requirements for the smaller pipeline instead of FERC’s own rules, issued in May 2013, which the project doesn’t meet.

According to a supporting brief for AGDC by lawyer Howard Nelson, FERC guidelines limit the pipeline right-of-way in wetlands to 75 feet, while for the Standalone pipeline the Army Corps accepted rights-of-way between 120 feet and 350 feet including temporary workspaces and land used in construction.

Another difference between FERC and Army Corps requirements is the work surface allowed during construction in a wetland. AGDC’s plans would lay down use gravel pads that would become permanent after construction. Though Nelson’s brief states that the Army Corps of Engineers permitted such gravel construction pads during the Trans-Alaska Pipeline construction in 1975 to 1977, FERC’s May 2013 rules suggest using wood mats or icepads instead.

“AGDC has explained that other alternatives it has been requested to explore… such as transporting additional mats or wood chips, or removing granular fill (gravel) after construction, would create greater environmental harm than AGDC’s proposed methods,” Nelson wrote.

Reach Ben Boettger at benjamin.boettger@peninsulaclarion.com.

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