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Vol. 22, No. 48 Week of November 26, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

AGDC pushes timeline

Potential Chinese development deal runs up against lack of FERC timeline

Kristen Nelson

Petroleum News

Alaska Gasline Development Corp. President Keith Meyer provided an upbeat update on AGDC’s Alaska LNG project to the Resource Development Council’s annual conference in Anchorage Nov. 16.

But that same day, AGDC delivered a letter and brief to the Federal Energy Regulatory Commission, asking that FERC set a schedule for its environmental review of the AGDC project, formally adopt U.S. Army Corps of Engineers mitigation measures for pipeline construction and grant any necessary waivers or exceptions to FERC’s Office of Energy Project’s Wetland and Waterbody Construction and Mitigation Procedures.

AGDC’s Alaska LNG timeline began when the state took over as project lead in December 2016. AGDC filed its FERC application in April 2017, received Fast Act Approval in August and signed a joint development agreement in China earlier in November.

AGDC is asking that FERC publish an EIS schedule in mid-December, publish a final EIS in December 2018 and issue a record of decision in February 2019.

The joint development agreement, signed by AGDC, Sinopec, the China Investment Corp. and the Bank of China Nov. 9 in Beijing, calls for specifics of the deal (interest rate, term of debt, system capacity, LNG shipping, pricing, operations and maintenance forecasts, contributions of parties, etc.) to be defined by May 2018, and definite agreements signed by the end of 2018. Project construction would begin in 2019.

The joint development agreement

Meyer said the joint development agreement was the result of thinking outside the box, and making a megadeal for a megaproject. He said the proposal to top LNG consuming Asian governments included an in-country bank providing the debt for 75 percent of the capital cost, while AGDC would provide 75 percent of capacity on the Alaska LNG project for the life of the loan to an in-country buyer as repayment of the debt. The in-country buyer would make debt service payments directly to the in-country bank, Meyer said, thus eliminating risks from credit and foreign exchange rates.

The lenders get 75 percent of the capacity, but have to pay for their share of operations and maintenance and for the natural gas, Meyer said.

The equity portion of the project, 25 percent of the capital cost, would be funded by the owners and the project company - AGDC - would retain 25 percent of capacity for sale into regional markets.

Meyer said that while partial ownership investment by a foreign entity is a possibility, AGDC would remain in control; there is also the potential for Chinese engineering and fabrication.

Economics of the project

Meyer said he still hears the economics of Alaska LNG questioned, but said the project, now estimated at $43 billion, is economic and balances an acceptable netback to the resource owner, a product delivered to customers at a market clearing price and adequate pricing for debt and equity markets.

To compete with both the U.S. Lower 48 and international LNG requires a market price of $8 per million Btu, Meyer said. Alaska has an advantage, he said, because shipping from Nikiski to the Asian market will be only 80 cents per million Btu, which means the price FOB at Nikiski needs to be $7.20 per million Btu.

He compared that to LNG from the U.S. Gulf Coast, which starts with a Henry Hub price of about $3 per million Btu, requires about $3.20 per million Btu for Gulf Coast liquefaction and then a shipping cost of $1.80 per million Btu, including transit of the Panama Canal.

The comparison with the international LNG price, based on a percentage of Brent, is in the same range: with a range of 12-14 percent of Brent, at 12 percent the international LNG price, with $63 Brent, would be $7.56.

Infrastructure cost

Meyer said the cost of the Alaska LNG infrastructure includes an annual operations and maintenance charge of about $1.4 billion, about $1 billion in O&M costs and about $400 million in PILT, payment in lieu of taxes, which comes to some $1.45 per million Btu. Debt service is $3.5 billion a year, based on 20 years at 5 percent, which comes to about $3.60 per million Btu for the debt. Payments to equity owners would be $1.1 billion per year, about $1.15 per million Btu.

At an $8 per million Btu price in the Asian market, and 80 cents shipping, LNG at Nikiski needs to be $7.20 - less the combined O&M, debt and equity payments of $6.20 - which leaves a $1 per million Btu netback to the North Slope.

That’s about $1 billion a year to the gas producers, a pretty significant number for oil companies, Meyer said.

And about $1.1 billion per year being returned to equity owners during the 20-year life of the debt; but once that debt is paid, that $1.1 billion per year comes back to the state.

Alaska could elect to be an equity investor, Meyer said, calling Alaska LNG the biggest economic driver in the state since the trans-Alaska oil pipeline was built. It will also, he said, spur new resource development, providing gas as a fuel for mining and other large industrial developments.

FERC issues

AGDC applied to FERC on April 17, 2017, for authorization under Section 3 of the Natural Gas Act to build an integrated system which will export LNG to foreign countries, as well as meeting in-state need for natural gas. In its Nov. 16 letter AGDC said it is requesting that FERC “take immediate action to progress the environmental review of Alaska LNG in a timely, efficient and cost-effective manner.”

AGDC said it is requesting that FERC use the environmental analysis done by the U.S. Army Corps of Engineers for the in-state line, ASAP, telling the commission that the pipeline for that project is “substantially similar” and that it “has raised the same wetlands issues currently being reviewed in connection with the Alaska LNG project.”

AGDC also requested issuance of an environmental review schedule by Dec. 15 and the granting of any necessary waivers or variances of FERC’s Office of Energy Projects wetlands procedures where those procedures “impose greater or more restrictive requirements than those imposed by the Alaska District of COE on the ASAP project.”

The Office of Energy Projects has made 801 requests for information to AGDC and “has informed AGDC that it will not issue an environmental review schedule until it has received responses to all of its requests and has reviewed them for completeness.”

AGDC said FERC regulations require a notice of an environmental review schedule be issued within 90 days of the notice of a project’s application, which notice was provided on May 1, 2017. Ninety days from that date was Aug. 1.

FERC has also declined to provide an environmental review schedule to the Federal Infrastructure Permitting Improvement Steering Council as required by FAST-41, Title 41 of Fixing America’s Surface Transportation Act.

Trump administration objective

AGDC told FERC its requests are supported by the Trump administration’s “objective of coordinating and streamlining the environmental review of infrastructure projects,” by Council of Economic Quality regulations and guidance, by Title 41 of FAST and by FERC Chairman Neil Chatterjee’s recent statement that FERC will look for greater efficiencies in its review processes in an effort to reduce the time it takes to perform National Environmental Policy Act analysis without sacrificing safety and environmental protection.

On the request for issuance of an environmental review schedule allowing issuance of an order by Dec. 31, 2018, AGDC said it continues to diligently respond to requests for information from FERC’s Office of Energy Projects, and has committed to responding to OEP’s requests by the end of January, but said “not all of the information requested by OEP is available at the current time.” AGDC said FERC “should issue a schedule now, while making it clear that such schedule is subject to modification if needed information is not received in time to meet the schedule.”

The reason, AGDC said, is that it is “making unprecedented commercial progress advancing Alaska LNG,” and having a schedule in place “will provide valuable assurance to the market that the regulatory process, and particularly Commission review of Alaska LNG, is on track and consistent with Alaska LNG’s targeted in-service date.”

FERC lead agency

FERC is the lead agency for Alaska LNG because it is an LNG export project; the U.S. Army Corps of Engineers is the lead agency for ASAP, the smaller line designed to deliver gas within the state.

AGDC is requesting that FERC adopt portions of the Corps’ draft supplemental EIS for the ASAP project, including methods approved by the Corps for constructing the pipeline through wetlands and mitigating impacts on the wetlands.

“AGDC began working with the Alaska District of COE on a wetlands delineation method in 2010 for ASAP and now has a refined method that identifies COE-jurisdictional wetlands,” which the Corps is using to “analyze project related permanent and temporary wetland impacts, evaluate construction techniques and develop mitigation measures,” AGDC said in a brief to FERC accompanying its Nov. 16 letter.

Alaska LNG shares the right of way with the ASAP pipeline for some 670 miles, AGDC said, and told FERC that the Corps’ experience with Alaska projects “presents FERC with a prime opportunity to streamline its EIS process by relying on the COE on Alaska-specific wetlands issues.”

AGDC said adoption of the Corps’ EIS would be consistent with the Council of Economic Quality’s regulations and guidance. “CEQ strongly encourages agencies performing NEPA analyses to coordinate environmental reviews and avoid duplication,” AGDC told FERC.

AGDC also cited Executive Order 13807, issued by President Trump Aug. 15, which notes benefits to the nation from more efficient and effective federal infrastructure decisions, and declares it to be the policy of the federal government to conduct environmental reviews in a “coordinated, consistent, predictable, and timely manner in order to give public and private investors the confidence necessary to make funding decisions for new infrastructure projects,” and noted that the Council of Economic Quality recently published a list of actions it will take based on the executive order’s directives to modernize federal environmental reviews and authorizations.

AGDC also said it applied for, and was accepted, for Alaska LNG to be included as a covered project under Title 41 of the FAST Act, intended to streamline the permitting process and reduce duplicative federal efforts that slow infrastructure development.

Wetlands waiver

AGDC is requesting a waiver of OEP’s wetlands procedures to allow the Corps to determine construction and mitigation procedures best suited for construction through Alaska’s wetlands, and told FERC it should rely on the Corps’ expertise “without regard to OEP’s generic national Wetlands Procedures.”

Those procedures allow for projects to seek waivers or variances, but said not all impacts can be avoided, AGDC said, and FERC “should rely on and defer to the COE to determine the need for and level of such mitigation, rather than imposing more restrictive and impracticable construction methods that would delay and significantly increase the cost of Alaska LNG.”

AGDC said it is understandable that OEP would request additional information to determine if a waiver is warranted, but “the uncertainty and delay caused by this process is having an adverse impact on the project and is unnecessary in light of the analysis of these issues already performed by COE, which has the primary responsibility for regulating construction through Alaska wetlands, as well as the experience to do so.” AGDC also said the OEP’s procedures “do not have the force of law, and are not suitable to the unique conditions in Alaska.” It noted that it has filed a 120-page document “providing the rationale for AGDC’s intended procedures for construction through wetlands, including a list and description of construction modes it intends to use in different working conditions for Alaska LNG.”

Specifically, AGDC is requesting that, to the extent permitted by the Corps, wetlands along the pipeline be delineated “using an established Alaska-specific ‘point’ method in lieu of a requirement to walk the 800 miles of the pipeline;” permanent gravel be allowed for construction; a right of way through wetlands wider than 75 feet be allowed; and stripping and replacement of topsoil be required only during summer uplands construction.

Wetlands in Alaska

AGDC said the waivers are needed because 43 percent of Alaska is classified as wetlands, and the Arctic foothills and Arctic coastal plain areas are approximately 83 percent wetlands, with 65 percent of all U.S. wetlands located in Alaska.

With the high percentage of wetlands in Alaska and frequently remote or inaccessible field conditions, some of the requirements of OEP’s wetlands procedures are impracticable for Alaska, while the Corps has recognized Alaska conditions and “allows wetlands delineation methods to be modified for larger Alaska projects,” AGDC said.

In addition to what it believes are justifications for waivers of the wetlands procedures, AGDC also said the OEP procedures “are neither regulations nor rules that have been the subject of notice and comment procedures under the Administrative Procedure Act,” and thus “are not codified and do not have the force of law.”

FERC is the lead agency for NEPA review for LNG export facilities, but that “does not provide the Commission with authority to allow FERC to impose more restrictive environmental conditions than the agency specifically tasked by Congress with the primary responsibility under a statute to protect that part of the environment,” which AGDC said, is the responsibility of the Corps of Engineers under the Clean Water Act.

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