Persily: LNG project issues numerous

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Federal coordinator talks challenges, potential for Alaska liquefied natural gas; cost a huge issue, location has some advantages

Steve Quinn

For Petroleum News

There aren’t many people who can speak to the prospects of Alaska getting North Slope gas to market with authority backed by decades of frontlines work.

Larry Persily is among them. He has served as the Obama administration’s federal coordinator for a natural gas pipeline since his 2010 appointment. At the time, the state and North Slope producers were working on an overland line designed to feed Midwest markets. That changed with the rise of shale gas fields altering the markets.

From there, Persily went from someone who would coordinate permits to overseeing team of researchers reporting on global markets, the status of Alaska projects to market gas and what’s happening with North America’s emerging export efforts.

Persily sat down with Petroleum News to discuss the latest developments with the AKLNG project and what’s going on globally.

Petroleum News: Against the backdrop of past delays and setbacks, what do you make of the producers application for an LNG export permit?

Persily: It’s a serious effort by the three North Slope producers to see if they can put together a project that’s economically attractive. As part of that, it’s also one they want to see if they can get approval to build and operate, then export LNG. You might as well file early to see if you can get that or if you can have a problem with it. It makes sense to get in and find out if you can get export authorization or how long it will take or if there are any problems before you start spending billions on the project as opposed to multimillions.

This isn’t like a penny stock on the Toronto stock exchange where some mining company tripped over a gold nugget. Large publicly traded companies have some very strict rules. They don’t just conjure up news to entertain shareholders.

Publicly traded companies don’t make public statements, don’t make regulatory filings and don’t do things on a whim. It shows that they are serious and they are willing to tell shareholders, investors and the market they are making a serious run at this project.

So when a publicly traded company makes a statement it needs to be accurate and certainly is going to be judged by shareholders and investors. It doesn’t mean they are starting construction today, but it’s a key step to getting a construction decision, which is greatly dependent on the market. I wouldn’t expect it to drive stock unless the world thought they were crazy.

Petroleum News: Your office’s report noted that the application was for exporting to free trade and non-free trade nations. Could this gas be going someplace other than Asia or is this just being thorough?

Persily: Oh, they could. But realistically Alaska is close to Asia. Alaska is far from Europe. People always think of Asia as a wide encompassing area: That could be Japan, Taiwan, South Korea, China, Thailand, India, Indonesia. We need to think of it not just as Japan. Pakistan wants to become an LNG importer. With shipping distances it’s pretty hard to conceive of this anyplace on the Atlantic.

Petroleum News: (Researcher) Bill White cited a provision about the North Slope gas possibly needing to clear an extra hurdle under the 1976 law saying these exports, “will not diminish the total quantity or quality nor increase the total price of energy available to the United States.” Wouldn’t the state’s export history satisfy that or is this different because the history is with Cook Inlet gas?

Persily: That’s all Cook Inlet. That’s the presidential determination from the 1976 law applied only to North Slope gas. There was a determination issued in 1988 that’s never been rescinded and the companies’ position is that it’s still valid. At some point the White House is going to have to weigh in with its view of it.

Petroleum News: Should Alaska be treated almost as a separate market from the Lower 48?

Persily: Certainly that is the companies’ argument. That is the way the Department of Energy has always looked at it before because sending Alaska’s gas overseas does not affect supplier price in the Lower 48 because it’s not connected to the Lower 48. That’s always been how the Department of Energy has looked at the ConocoPhillips applications for exports from the Nikiski plant, and I think that’s the expectation of how they will look at the new project from the North Slope, but we’ll have to wait to see what they say. It’s logical. If you can’t deliver this gas to North America, it shouldn’t affect price of supply down there, in the Lower 48.

Petroleum News: With that in mind, who is our competition?

Persily: It’s not like there is only one project that is going to get built. There are probably a dozen new LNG projects that will be built over the next 20 years. I think the competition is economics. Those dozen over the next 20 years are going to be the 12 that are most competitive on price. And certainly that would include Alaska, British Columbia, the U.S Gulf Coast, East Africa, Russia, Tanzania and Mozambique. Those are going to be the big players trying to get theirs picked over the next 20 years. It’s not like it’s us versus the Gulf or us versus Canada. We are all competing to see who can be the most economically attractive out there.

Petroleum News: (Researcher) Jeanette Lee’s report recently mentioned East Africa as a region looking to get into the export market.

Persily: The last several years there have been tremendous offshore reserves in Tanzania and Mozambique that have been discovered, and the countries would like to monetize it. Anadarko, BG Group, ENI and Statoil, they are all there. They are looking at investing in those two countries. No one has gone to final investment decision yet. They are like everybody else. They are on the drawing boards.

Petroleum News: Last year when we spoke, we weren’t discussing those countries the way we are today. Is that an illustration of how unpredictable the market is and in just a short time?

Persily: Sure. Spot prices are down. Construction costs are up. Who knows what Japan will do with nuclear? Who knows what China will do with its economy? There is always a market uncertainty. Strong projects will persevere. You may have down periods in the market like any other businesses in commodities whether its soy beans, or natural gas or coal or cotton. If your project is a good investment, you’ll ride out the bad years and enjoy the good years

Petroleum News: OK, that’s the supply side unpredictability. Are you hearing or seeing anything on the demand side, something like China migrating away from coal for example - or anything along those lines?

Persily: Well China’s energy needs are growing so much that it’s not so much reducing the volume of coal as it is needing more energy from gas. They are not going to get rid of coal. It’s too cheap. There’s too much invested in it. As the demand for energy grows, clearly they are using more and more gas. China certainly realizes there is a public health issue with too much coal. It’s killing people. China talks pretty seriously about using more gas but coal provides more than 60 percent of their energy. It’s not going away. If gas can command shares of growth in the future, that’s a lot of gas.

Petroleum News: When I asked about competitors, thinking about Alaska’s efforts in the past, some believe the state’s been its own worst enemy. Is that a factor as well?

Persily: Alaska often has unrealistic expectations. Alaska got filthy stinking rich off of oil. We are not going to get filthy stinking rich off of natural gas. It just is not as profitable a commodity. It costs too much money to move the same Btus of gas as it does oil; it’s just not as profitable a product. But it’s still profitable. So if Alaskans expect to replicate the filthy stinking rich as oil, that same wealth, then we would be putting too much of a burden on the project; it just can’t afford it. We can still make riches off gas and profit from revenue and affordable energy for Alaskans. We just need to be realistic. The world is not short of natural gas. The world has way more gas and lots of potential suppliers. If we want to sell into that market, what is it going to take so we can be competitive and so we can still prosper from it?

Petroleum News: Some have said part of being the state’s own worst enemy often lies with the political battles and that doesn’t allow for advancing legislation. Can that be a factor still?

Persily: Sure. Politics can get in the way of everything, be it state, municipal or federal level. Of course.

Petroleum News: You folks noted the high number of applications out there. Well into the 30s. Are those daunting numbers?

Persily: Yeah, there’s a lot. Everyone knows they’re not going to build all of them. I’d be shocked if 10 years from now there were half a dozen. Ten years ago, before shale, everyone thought the U.S. was going to import LNG. At one point there were 42 proposed import terminals. Obviously we didn’t get 42 import terminals built. Now all the import terminals in the Lower 48 want to become bi-directional and get in the export business. It costs $50 to file an export license for LNG plus lawyers time. It’s when you start doing the environmental and engineering work that shows you’re serious.

Petroleum News: What are some of the other uncertainties in the U.S. export market whether it’s regulatory or otherwise?

Persily: There’s always regulatory. You need permits: federal; state; municipal. There are always risks of litigation. But with the markets uncertain, no one is going to spend billions unless they have secure sales contacts and terms that produce a reasonable profit for them. I think a chance to get financing depends on the market and the customers. The biggest uncertainties are what’s happening in the market; what are customers willing to sign; how much are they willing to pay; can you make money at that price or do you drop out because you are too expensive.

Petroleum News: When you are talking about demand, at least for a project like AKLNG, are you talking about buyer or buyers, or even high multiple buyers?

Persily: Multiple buyers. Nobody takes one. You could easily have a dozen or more customers - more than that. It’s complicated. No one company can take that much so it would be more than a dozen customers.

Petroleum News: As you look at the state’s position with SB 138, what are the strengths and what are the weaknesses?

Persily: Alaska’s weaknesses are construction costs. It’s very expensive to build anything and that certainly goes against the project. Its strengths are it’s closer to Asia than anywhere else in North America. It’s closer to Asia than British Columbia and it’s closer than the Gulf. Its strengths are that it has 35 trillion cubic feet of proven reserves. There are no exploration risks. With a lot of other projects, once you start drilling you don’t always know what you’ve got. Well on the North Slope, they know what’s there. Prudhoe Bay production costs will be pretty low. It’s being produced every day. It just isn’t being converted into an LNG product. Because of Alaska’s cold temperatures, the equipment to run the compressor stations, the gas treatment plant, the liquefaction plant will be much more efficient than say a piece of equipment sitting in the Middle East - maybe as much as 15 percent more efficient. So, you’ll get more LNG for less energy and less money going in. That’s a serious advantage. So weather efficiency. Proven reserves. Shorter distance for tanker runs. Prudhoe Bay has a high Btu gas. It’s perfectly suited for the Japanese market where they burn higher Btu gas than in the Lower 48. So the question is whether all that can overcome the costs of construction up here and how that compares to all the projects around the world.

Petroleum News: What about SB 138. Has the state really advanced the state’s position in getting a gas line project moving?

Persily: The companies do seem to like having the state as a partner. They feel it aligns the state and the companies better. Other people would disagree with that; they disagree that’s good public policy. Regardless that’s what the Legislature approved. The companies like the state as a partner in the project. It reduces the companies’ risk. They put up less money because the state is going to put up some. It gives them fiscal certainty with the state as a business partner so from that perspective it’s an advantage.

Petroleum News: Now when you were deputy commissioner of Revenue (in 2002), did the idea of state ownership ever come up?

Persily: We considered it and rejected it, but keep in mind back in 2002, the state was down to its last couple of billion dollars in the budget reserve. We were running huge deficits. There was no way we could have afforded it even if we wanted to.

Petroleum News: Lawmakers often like to look for a model when discussing projects and analysts or consultants often have one handy, but as you look at this arrangement with the state, there really isn’t one in this case or is there? What could you compare it to?

Persily: Nothing. There is nothing of this size comparable in the United States. There is just nothing like it in North America where they are looking at 25 percent stake in an oil and gas project. There is nothing to compare it to.

Petroleum News: So is it a trailblazing thing or is it a case of finding your way around in the dark, or a little of each?

Persily: If you support it, you would say trailblazing. If you oppose it, you would say probing in the dark, but there is still nothing comparable.

Petroleum News: You folks did cite other major projects - airports, tunnels, LNG projects - which did not come in on time or on budget. What kind of cautionary tone should that set?

Persily: It just proves the point that good project management is essential. Cost overruns are pretty painful. Certainly as a partner the state will be responsible for some of the cost overruns. People just need to know that.

Petroleum News: With AGIA off the table, as you look back, was there any value to it?

Persily: Who knows on a political value? Much of the work the state paid for under AGIA can be used for this project. it was done for the gas treatment plant on the North Slope, for the pipeline and compressor station as far south to Fairbanks. You will need all that for this project, too. So as far as data gathering it can be used here. Money spent for the section of pipe from Livengood east to the Canadian border, no, that’s of no use to us. That doesn’t mean it’s worthless. It would be of some value to the state Division of Geological and Geophysical Surveys when they went out and looked for earthquake fault lines and found a bunch, they got to use that information. Did the state get the full value? No. You could say the same thing about the Knik Arm Bridge. If that thing does not go ahead, did the state get value? Some maybe, but not the full value. That’s the risk you take with big projects.

Petroleum News: Let’s talk about the three steps connected to a project: Pre-FEED; FEED and FID (final investment decision). To a lot of people, these are industry terms. Even Bill (White) said the terms can be different. So let’s start with pre-FEED.

Persily: It’s as significant as FEED, but it’s a half billion to start putting together your engineering, design and environmental data to see if you have a viable project. It’s not going to give you a black and white answer. It may tell you it’s hopeless; then you stop. Then if it looks favorable, then you go into the front end engineering and design. That’s $2 billion plus. When you’re done spending with that much money, then you have a pretty good idea how much it’s going to cost to build it and how long it will take to build it. It would be ridiculous to go right to full engineering and design for $2 billion when you can spend a half billion and you can test it first. You go in increments. You say I’ll spend a half billion and see if this is plausible. If not I’m only out half a billion. If it’s plausible, then I’m still interested and I’ll go at it with $2 billion. Pre-FEED is sort of roughing it out. FEED is the final details.

Petroleum News: So when you get to FID, what does that tell Alaskans or investors?

Persily: It tells someone this is what it is. I made a final decision to invest in a project. I’m going to start ordering steel and modules and hiring people. It tells them that their dream has finally come true.