Fauske discusses AGDC’s two projects

Organization working both an in-state natural gas line, ASAP, and the proposed Alaska LNG project to ship gas to Far East as LNG

Steve Quinn

For Petroleum News

Dan Fauske and his team at the Alaska Gasline Development Corp. are plenty busy representing the state’s interest in a prospective LNG export project during a pre-front end engineering and design phase these next 18 months.

But the organization’s president doesn’t want the public to forget that AGDC remains immersed in pursuing a $7.7 billion, 727-mile, 36-inch, in-state line designed to serve Alaska markets.

Recently AGDC announced that it is working exclusively with Calgary-based Enbridge on a prospective partnership.

Fauske recently spoke to Petroleum News about progress being made on the smaller line and the corporation’s role under the recent joint venture agreement between the state, North Slope leaseholders ExxonMobil, ConocoPhillips and BP.

Petroleum News: The public mostly sees you and your staff at committee hearings testifying, without necessarily gaining headlines. What can you tell people about AGDC’s mission and how it’s developed over the last few years?

Fauske: Our mission is pretty much the same as it’s been, and that’s to provide gas to Alaskans at the lowest possible cost. That’s been our mission statement since this whole thing rolled out when we were originally under HB 369, which was a plan to create a team. I was the team leader and our job was to write a report, which we delivered to the governor in July 2011 to show the feasibility of a smaller-diameter, lower-volume pipe to sustain Alaska hopefully with a commercial application at the end of it. The fact is there are not many Alaskans, not a great population base so that huge volumes of gas could be utilized. Also we were limited under AGIA (the Alaska Gasline Development Act).

So our mission has stayed pretty much the same. It’s morphed somewhat now with the passage of SB 138, which now brought us into the AKLNG project. Our piece of the AKLNG, of course, will be downstream and we will represent the state’s equity share position on that phase of a larger 42-inch, LNG project from Point Thomson/Prudhoe Bay to Nikiski. In the interim during the pre-FEED process, we will continue to develop our ASAP project in line with working on the AKLNG and eventually I think you will see an alignment of the two in bringing them together. I don’t believe you will see two projects. Hopefully the large LNG project proves to be successful through pre-FEED and then they move on into FEED because it can do greater things for the state than our line in the sense that it has large commercial application with the ability to pull gas off for in-state use. So, ideally that would be the way you go. During the interim we will keep working on our project until we’ve determined that it’s no longer necessary or that it no longer makes sense.

Petroleum News: The work that you speak of. How can you make sure that it’s of value to the state if the direction changes and the focus is entirely on the LNG export project?

Fauske: The work that we are doing - geotechnical, environmental, cultural, air quality - is all work that can be used on the other line as well. It’s all worthwhile engineering data. The state is developing assets. It now owns things of value that bring value to the bargaining table. We are going to be careful that we don’t duplicate work, that we are not producing the same kind of data gathering the producers and other are doing and that we protect the people’s money by not duplicating work, and also with the idea that work further down the road has value for the state.

Petroleum News: The public and some lawmakers endorsed SB 138 but with some skepticism or cautious optimism. Not so much based on the current statue as previous efforts to come up short. How do you feel about that?

Fauske: Absolutely. When you consider that we have a poster here in our office that announces first gas to Fairbanks and it’s from the 1954 Daily News-Miner. This debate has been going on for 50 years. It’s a difficult project to pull off because of distances. We have a huge resource in the amount of gas the state and producers have, but it’s a long ways from the market.

I think this is probably the most progressive attempt. With the signing of the JVA, the producers on board and the state as an equity partner, I believe in the sincerity of the industry with an honest attempt to see if we can commercialize this huge world-class asset that resides in Prudhoe Bay and other points within the state. I think that’s the significant change.

I think AGIA was a significant change as well but market conditions changed dramatically with the development of shale gas in the Lower 48. That blew the doors off that project. When I worked on AGIA under Gov. Palin, her people asked me to work on the financing side, you were looking at $10 gas (per mcf) at that time. Of course the price crashed after that. Combined that with shale gas, the project no longer made economic sense. But I think the work going forward is worthy. It’s expensive. There is no getting around it. It’s an expensive game to play in, but if we are successful, it will have huge benefits not only economically for the state coffers but also for the security of the majority of the state’s residents with a long-term dependable source of energy at a good price.

Petroleum News: When HB 4 passed and you were entrusted with advancing the state’s interest within the parameters of AGIA, did you ever envision your role would change and responsibilities grow to this level?

Fauske: I can’t say that I thought about that at the time. As it started to develop and as people started to witness the success AGDC has had in terms of compiling an incredible team and delivering a good work product. The intent of the authors of the bill was to create a pipeline company that would last long into the future, to have an entity with a business mentality, like AHFC when I was there for many years. This was a business that we ran. This too is a business. I can’t say that I was “Carnac” (the fictional sage soothsayer once portrayed by “Tonight Show” host Johnny Carson) who could look into the future. It makes sense now the state owning an equity share and that it’s worked out that we’ve been asked to take a piece of it. I’m proud of that. It’s a lot of work. I won’t deny that this is a busy place.

Petroleum News: You’ve noted AGIA. As you are working now under the JVA and HB 4’s original mission, is there any value left over from AGIA?

Fauske: I think a lot of the data that’s been complied and the engineering that’s been going on, it can certainly be utilized. There were monies expended but there is also useful engineering data compiled. So it wasn’t a total bust. There was work going on, I think worthwhile work.

Petroleum News: You’ve said you’re looking at this from a corporate side not so much a government side. What have you learned in all of this, maybe about the market or about building a team you noted?

Fauske: I learned that you have to be patient. I learned that as you manage and develop mega projects, that’s a strategy employed around the world by the industry and by us as to how you proceed. I learned that you don’t change dates on the calendar, that you develop good, solid information. I learned that you are making a business decision, not an emotional one. That is, if this makes business sense, it will happen. If it doesn’t, it means it didn’t make good business sense. We as Alaskans can’t anticipate or expect firms that will invest money because that’s what Alaskans want.

I’ve heard that debate before. That’s more in line with if you do a smaller line for in-state use, then you can then factor in the intrinsic value toward society and what you are trying to do. You want it to be a business decision as well, but there’s a different motive or goal than an LNG project.

If you go back and look at the history of the last five years, a lot of this was triggered by the fact that Mayor Sullivan held brownout practices. There were real concerns that there was not going to be enough gas to supply the Railbelt on the coldest days. A bill was passed to get a storage facility built to help forgo that. What it did was it woke people up to the fact that Cook Inlet and some of these gas resources are not necessarily good forever. There has to be future development and exploration and sources of gas. That’s been a learning process in reference to keeping an eye on the prize and figuring out what you are trying to do.

Now the mixed bag of HB 4/ASAP/AGDC in conjunction with SB 138/large liquefaction, those are two different animals that are working toward the same purpose in a limited way. The missions are somewhat different, but they are mutually beneficial to each other at this stage going forward.

Petroleum News: You are under a mandate to maximize the value of the state’s gas, but that value could make it out of reach for the public, but you are still maximizing the value. How do you reconcile that?

Fauske: The maximizing the value is a section of the state’s constitution. SB 138, that’s a large commercial application with off takes for in-state use. HB 4 is specifically directed at providing gas to Alaskans at the lowest possible cost. I don’t want to be misunderstood here. It is premature at this point. I’ve said this to legislators and others. It’s not an either-or decision yet. We don’t know enough. We will know more over the next year or 18 months as data is collected. I also know the market is volatile as we’ve always known.

The LNG market is changing on a daily basis and that to consider doing a project that ranges in cost from $45 billion to $65 billion, this is a major, major undertaking that we hope to be successful on, but there are a lot of things that come into play, particularly world markets. Now you are trading into a world market and you’re trading into the forces that are out there.

Petroleum News: How far have you progressed with the in-state developments? You’ve got a pretty formidable staff in numbers.

Fauske: We’ve made a great deal of progress. There are a lot of people working, if you will, on the consultant side. That was always part of our deal in that we were not going to create this bureaucracy that had to be fed on an annual basis. These are project driven. Take for instance, a great deal of work we are doing is with a group called Arctic Solutions, which is a joint venture between Fluor and WorleyParsons, who are huge engineering firms who have a great history for a lot of great work here in Alaska. The main effort there is the gas treatment facility in Prudhoe and the design and continued work on the pipeline engineering. There is a great deal of work and several hundred people involved across the country.

We’ve got a fairly large shop here in Anchorage but a vast majority are project based. They come and go. They have certain pieces of the project they do and then their end of it is done. As we’ve progressed this thing, that’s how this is going to work. It’s project-based staffing requirements and benchmarks with work to be completed within certain timeframes.

Petroleum news: How do you sustain that momentum while also working under the guidance of the JVA?

Fauske: As we progress both projects in the interim, we learn more about the market conditions and the success of the pre-FEED if you will on the AKLNG side will have a great deal to do with impacting AGDC. I think there is a strong sense that people don’t want to give up one in terms of the other at this juncture. People want to be cautious so we aren’t standing there saying oh jeez we did it to ourselves again. I think that there is a real positive to take away in that we have potential for a large commercial operation; we have potential for a smaller version to sustain ourselves with some commercial activity. But we have to be patient and do good work pushing it forward. Even the AGDC-ASAP line is a major project. I joke that only Alaskans would call a 36-inch, 800-mile pipeline little.

Petroleum News: Speaking of the size of the line, you are no longer restricted to have the line at 500 mcf or less capacity. If this were the project that prevails, are you able to go beyond that if the market is there?

Fauske: Certainly. We’ve always said that we will design this for 500 mcf per day but through looping and compression, we can go that route. If the other project failed or just stopped, I would imagine there would be a great deal of pressure for the ASAP line to reconfigure itself and in conducting an open season see what kind of bids you have out there or interest you have from commercial activities from various entities around the state, like Agrium or the mining industry.

Petroleum News: You talk about the desire for the project. Are you still on track to conduct an open season in the second quarter of next year?

Fauske: It’s kind of a moving target. We are evaluating in conjunction with the other project. The last thing you want to do is have a non successful open season where nobody comes. We are progressing on that schedule. Unless something changes over the next few months, we are going to continue with that. We haven’t carved it out in granite yet as far as a date. You have to have an awful lot of stuff that has to come together before you file with the RCA.

Petroleum News: Would it hurt the project if you waited another year until the administration comes back to the Legislature with its project development contract at the end of 2015?

Fauske: It could hurt it from the aspect of cost. Time is money. There could also be advantages to waiting. What you would weigh against it is potential for additional business, more refined numbers and a better open season going forward. You would weigh all of those things. There is a potential for that to happen as we weigh the market conditions and other things going forward.

It goes back to my point about being a business decision and you don’t chase calendars with these things. That’s where people make mistakes. They try to alter the calendar, speed things up and that’s where mistakes were made worldwide. You’ve got to stay the course. The numbers will speak for themselves as you move this project along.

What I’m getting at, is if you focus on a date on a calendar as a must have but you don’t have the supporting data going forward, that’s what I’m talking about. What’s more important? A date or having good data going forward? What’s more important? Political pressure getting something done quicker when you’re not ready or being patient? You try to move as quickly as possible, but you need to be cognizant that to move forward you really need to have your ducks lined up.

By the time you go to Wall Street to secure long-term financing one of the greatest things under discussion is what’s the risk? Risk equates to interest rates, which equates to money. All of that stuff has to line up so you hit your targets of what you want: your numbers; your interest rates; your cost of capital; your cost of construction. Risk mitigation is huge on something like this. That’s where other projects get into trouble.

This is a tough place to build anything: unbelievable terrain; huge distances. You try to get it down to as risk free as possible. You still have those risks, of course. You just have to be careful. You have to trust your engineers and trust your instincts. Work with the board, the legislators and the governor’s office, and others. I don’t take this lightly at all. This is a major deal going on here. I take a great deal of pride in a lot of the work I did at AHFC, billions of dollars in bond deals we put together. We can account for every nickel of it. I suppose there is a little bit of luck in it, but we understood the rules going in and the amount of risks.

Petroleum News: You’ve noted some of the unique hurdles. Are there any advantages?

Fauske: One of the advantages we have as a state is that lot of the folks here were engineers on TAPS in the ’60s and the early ’70s. There are people here who worked on West Dock. Just getting it to Prudhoe Bay is a major undertaking. I remember in the earlier years in Barrow when the ice never went out. How do you get the barges in? We have a lot of people who have been doing this for many, many years. They can’t control the weather, but they can certainly be in a position to recognize the risks that are out there and how to mitigate them. Think about it. It’s not like I’m going to call up True Value and see what kind of pipe they have out in the yard. Placing that pipe order is huge - billions of dollars. But, it’s all doable. All of this stuff is solvable when you’ve got real good professionals - our neighbors, people who have been here for decades doing this stuff. It’s not like they are getting on a plane and going home. They live here and they want this to work.

Petroleum News: Let’s talk about Enbridge. What do you like about Enbridge as far as a prospective builder?

Fauske: What I like is that they are interested in the project. When we started out, there were about 10 different firms. We narrowed the field. As we were down to the final two, they put together the best proposal moving forward. We haven’t signed anything yet. We are still in the process of figuring out how this is going to go forward. They are an impressive firm and we are very pleased so far with our discussions with them.

Petroleum News: Is still to be determined how much the state would own?

Fauske: This started out as a process where we maintained we would be seeking a builder-owner-operator. So we haven’t determined yet at what point that equity partnership would be. With financing, you’re looking at 70-30 debt to equity. Their assessment of the project, that’s another nice option, having another set of eyes looking at this. Don’t forget, they are a pipeline company. That’s what they do. None of these things are a done deal or a given in reference to does the project make sense to them? Is it something they want to invest in? We anticipate they will. We are hopeful, but that will be analyzed over the next 18 months.

Petroleum News: How do you sell this as a viable project and investment to any pipeline company with AKLNG out there?

Fauske: It certainly makes it more difficult. You’ve asked a good question. I don’t have a good answer for you at this point. We need to see how the two projects line up as AKLNG concludes its pre-FEED over these next 18 months. I’m always repeating it, but this is a critical time we are in.