The Alaska LNG Project is at an unexpected crossroads.
Consensus among state’s producer partners to continue the $45 billion-plus export plan for North Slope natural gas beyond this year has been lost.
Concurrently, new Alaska Gasline Development Corp. President and CEO Keith Meyer is presenting an option to overhaul the financial structure of the project that would allow the state to lead the project, but still depend on the producers selling their shares of natural gas from the Prudhoe Bay and Point Thomson fields into the project.
“This project needs a cooperative relationship with the producers and I want to have a cooperative relationship with the producers,” Meyer said during a daylong joint House-Senate Resources Committee project update hearing Wednesday at the Anchorage Legislative Information Office building.
Meyer’s vision of a state-led Alaska LNG Project — one Gov. Bill Walker has long alluded to — would keep the project on its current schedule for LNG exports by 2025, if not a year or two sooner. To do that, the state would take the lead role in marketing the project not only to potential buyers, but to potential investors as well.
The idea was met with predictable skepticism from legislators, particularly those in the Republican-led majorities.
They have spent more than two years familiarizing themselves with the existing Alaska LNG Project structure — that with the state, BP, ConocoPhillips and ExxonMobil as equity partners to the end.
Finance Committee members of each body also participated in the meeting discussion.
Meyer repeatedly emphasized to legislators that seeking out investors for the project that are content with lower, but stable long-term rates of return are the lynchpin to lowering the cost of the project beyond what can be done to engineer the cost down.
“Because we’re starting with a high-cost framework we’re going to have to beat this project down on rate-of-return,” Meyer said.
A state-led project could also reap tax-exempt benefits from the Internal Revenue Service, Meyer speculated, but he could not provide assurances on that front.
Alaska LNG Project Manager Steve Butt said the project team has narrowed the overall cost to the “lower end” of the $45 billion to $65 billion price range estimate that has been used almost since work began. He added, however, that the market still provides significant challenges to a $45 billion-or so project.
“I think at the right time the known (natural gas) resource on the North Slope will be developed, I just don’t know if that time is today,” Butt testified. “At the same time as we’ve cut 10 to 15 percent off the cost the market has gone down 50-60 percent. When I look at the market that’s a really heavy lift.”
While everyone is familiar with the oil price collapse over the last two years, the Asian LNG market has not been far behind. LNG spot market prices have fallen nearly 75 percent, to about $4 per million British thermal units, since the Alaska LNG Project plan was formalized in 2014.
The “high-cost framework” touched on by Meyer is unavoidable. To make the project economic, it has to be a mega project in the truest sense. The Alaska LNG Project is designed to process up to 3.3 billion cubic feet of natural gas per day — more than 10 times what the state currently consumes in an average day.
Prepping all that gas for transport down the 800-mile, 42-inch diameter pipeline will require a massive gas treatment plant on the North Slope.
Finally, the LNG plant and marine terminals planned for Nikiski will cover more than 600 acres and consume roughly half of the project cost.
Meyer insisted that adding responsibilities to the state’s role would not equate to adding risk. That would be spread among multiple investors and contractors.
In a previous interview with the Journal, Meyer said the financial structure change would transform the project from an LNG export project limited to the equity investors — the state and producers — to an infrastructure project that ships natural gas and processes LNG for anyone it contracts with.
“If you get this built, this becomes the way to open up the North (Slope) to explorers. It’s not just the way to monetize Prudhoe Bay and Point Thomson gas reserves,” he said at the June 29 meeting. “I think the state will be well served to have somewhat of an open access regime.”
At the same time, Meyer said AGDC would welcome any or all of the producers as investors if the project fit their criteria.
Legislators questioned him as to why it would be prudent for the state to move forward with a project that the world’s largest companies in the business are wary of.
“If the discussion is internal versus external capital, I’m open to discussion. If the discussion is more rogue in nature, I remain concerned,” Sen. Peter Micciche, R-Soldotna, said.
Meyer stressed the financial overhaul is a concept and not anything the state has committed to.
He also said numerous times during several hours of grilling by legislators that if the state wants to continue pursuing a project it has to evaluate other options.
“We have two choices: You can either delay the project or you can look for something different and I think we have enough support among the parties to look for something different,” Meyer said in response to questioning from Anchorage Republican Rep. Mike Hawker.
BP and ExxonMobil representatives testified that their companies continue to support an aligned project with the state and producers but acknowledged the market challenges.
ConocoPhillips Alaska Project Integration Manager Darren Meznarich said the company is committed to completing the pre-front end engineering and design, or pre-FEED, process this year as the project schedule calls for.
However, he followed that by saying ConocoPhillips is not likely to commit to the front end engineering and design, or FEED, stage in 2017, which could require the project partners to commit nearly $2 billion over a couple years and is the final process before a final investment decision.
Meznarich added that ConocoPhillips would still make its share of North Slope gas reserves available to a project it is not an investor in for commercially acceptable terms and is open to the concept proposed by Meyer and AGDC.
Elwood Brehmer can be reached at email@example.com.