Keith Meyer, CEO of Alaska’s state-owned gas corporation, knows Alaska LNG faces an uphill fight. Liquefied natural gas prices are in the tank, there’s huge competition and Alaska’s own finances are thin.
“But give us a chance,” he’s asking Alaskans.
Meyer hopes a combination of creative financing, a flexible commercial structure and the security of a major West Coast U.S. LNG supply will help the state lower the cost of delivering LNG enough to net some customers.
It’s like casting a lure out there, hoping the bait is good enough.
Getting buyers is most important. Not much will happen until there are customers.
Meyer said he expects to know within a year whether Gov. Bill Walker’s gamble of having the state take over the $45 billion Alaska LNG Project from industry has a chance.
Realistically, the governor’s initiative is the only game in town, because the industry-led approach is no longer an option, Meyer said. It’s either that, keeping Alaska out there as a supply source, or do nothing. It’s got to be done without any more state money, also.
“A year is enough time for us to get a sense as to whether there is a market out there and whether we can actually do this,” Meyer said.
Project lead by year end
AGDC will take over the project by the end the year from a four-party consortium now led by ExxonMobil Corp. The state is a partner in the group along with North Slope producers BP and ConocoPhillips as well as ExxonMobil. That partnership is now ending, however.
Earlier this year the companies told the governor that with the strains of current low energy prices they could not continue into a costly final engineering stage for Alaska LNG after concluding preliminary engineering, or pre-Front End Engineering and Design.
The industry partners offered to support the state stepping in as the project developer, an option Walker has accepted, and to make their gas available to buyers through a project developed by the Alaska Gasline Development Corp.
Costs were adding up for the consortium. The pre-FEED, largely complete, cost about $600 million, and the producing companies earlier spent about $125 million on feasibility and conceptual design work. Final engineering, or Front End Engineering and Design, was expected to cost between $1.5 billion and $2 billion.
Filing, marketing immediate goals
Meyer said his immediate goals are to file an application to build the project early next spring with the Federal Energy Regulatory Commission and simultaneously work to attract potential customers and third-party investors.
AGDC has $105 million on hand through appropriations from the Legislature and that is sufficient to undertake any supplemental engineering and other work needed for the FERC application and to pursue marketing, Meyer said.
“Alaska has a good story. We have the gas resources, we’re close to the markets in Asia and we’re in a politically stable region,” Meyer said. However, an 800-mile pipeline from the North Slope is needed, a burden some competitors don’t have. Overall, the competition is fierce, too.
Meyer acknowledged Alaska has competition. A gap of about 100 million tons per year between Asian LNG demand and supply is widely predicted by 2025, but there is about 800 million tons per year of new capacity in planned and proposed projects chasing any market opening, he said.
Modestly encouraging
Despite that, the state governor and a team of officials, including Meyer, returned from an initial marketing foray to Singapore modestly encouraged by their reception. The governor addressed a major LNG conference in Singapore and was invited by South Korea’s government to meet with officials there.
Meyer believes an attractive package can be put together for customers. “One thing we learned in Asia is that buyers there would really like to see a West Coast project. They are pretty tapped out on LNG from the new (U.S.) Gulf Coast projects but, for new supply, they like the reliability and security of a North American source,” he said.
This could be an advantage for Alaska because most West Coast North American projects, like those proposed for British Columbia and Oregon, face political and environmental challenges. “Our project faces challenges, too, but they can be managed more easily than challenges facing other west coast proposals, Meyer said.
That said, Meyer said the Canadian government’s Sept. 27 approval for the $36 billion Pacific NorthWest LNG came as a surprise and a signal that this project may emerge as Alaska’s most serious North America competitor for the Asia market.
Marketing plans
AGDC intends to be out marketing, however, and a new joint-venture LNG marketing relationship with ConocoPhillips gives the state’s effort credibility in the market, Meyer believes.
“This gives us a real-life gas seller. They (ConocoPhillips) want to sell gas, and we want to sell our pipeline capacity,” he said. Eventually the state’s substantial royalty gas holdings can eventually be sold through the joint-venture, he said.
AGDC’s marketing strategy is to pursue a lower cost of service by attracting third-party equity investors to the project who would accept a lower return on long-term capital deployed than the return producers would have required. Cheniere Energy, which Meyer once headed, and Sempra LNG had success with similar strategies with new U.S. Gulf LNG projects.
A recent Wood Mackenzie analysis showed that the third-party investment approach could dramatically reduce the cost of service in moving LNG to the world market, to the point that the Alaska might compete even in the current ranges of low LNG prices.
However, buyers would still have to negotiate purchases with North Slope producers but gas acquisition costs a smaller part in the final delivered price than the infrastructure expense, Meyer said.
Also, the Alaska project could peg prices to an index like Henry Hub that is tied to gas markets instead of linking prices to crude oil, Meyer said.
“This is attractive for a large utility which is very sensitive to the volatility in oil prices, and we’ve already gotten some positive feedback on that idea,” he said.
Third-party investment
The third-party investment strategy is sound, AGDC believes, because infrastructure equity funds are looking for good investments, and some now financing Gulf Coast LNG projects are doing so for returns of less than 8 percent, an assumption used in Wood Mackenzie’s modeling of the competitiveness of Alaska’s project.
Meyers acknowledged these investors typically come in after the project is “de-risked,” after uncertainties like regulatory approvals and marketing are resolved.
That still leaves construction and completion risk but Meyers believes a turn-key type contract can be negotiated with a large contractor to do final engineering and also offer a fixed bid to build the project.
He believes this strategy will work partly because of high quality of the preliminary engineering, or pre-Front End Engineering and Design, done by the ExxonMobil-led industry team, which also included a new cost estimate.
“We now have a very good estimate,” of $45 billion, the result of a very thorough pre-FEED, Meyer said. Previously the estimate was a range of $45 billion to $65 billion.
A contractor’s fixed price would be subject to detailed review, Meyer said, including by those doing financing and by the customers.
AGDC has target of getting the project in service between 2023 and 2025 which is only a bit more aggressive than the producer-led consortium’s completion target of 2025.
Achieving that will require a final investment decision in 2018 or 2019, Meyer said. That is the same target for FID set by the producer consortium, however.
