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Vol. 22, No. 43 Week of October 22, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

AGDC aims at year end

Wonít have binding agreement, looking instead for solid LIO with LNG buyer

Kristen Nelson

Petroleum News

Legislators got an overview of progress the Alaska Gasline Development Corp. has made on the Alaska LNG project when they got a statutorily required update Oct. 16. The hearing was held jointly by the House and Senate Resources committees; also in attendance were members of the House and Senate Finance committees.

AGDC took over the Alaska LNG project in January after the North Slope producers decided to hold off on further work after the pre-FEED, front-end engineering and design, phase was completed.

Alaska Gov. Bill Walker wanted to continue moving the project forward and the state took over.

AGDC was represented by Dave Cruz, chairman of the corporationís board, Frank Richards, senior vice president program management, and Lieza Wilcox, vice president commercial and economics.

In introductory remarks, Cruz said that when AGDC took over leadership of the Alaska LNG project in January it rapidly began marketing Alaskaís project to Asian markets - in fact, he said, AGDC President Keith Meyer was currently in Asia marketing the project.

Cruz said the project will succeed or fail on its merits: It has to be able to meet the global gas price; returns to the state are necessary; and success will be based on those factors and on marketing.

Asked what it would cost the state if it doesnít move forward with the project, Cruz said if we donít finish this and meet the market window in 2025, then the state would probably look at it again in 2037, because itís cyclic and these are long-term contracts.

Thatís why thereís been so much activity within the corporation, he said, and why the board assigned Meyer one task: to get a gas customer for the project.

Spending

Richards said the current spend rate on the project was an average of $3 million a month. The board authorized $6 million to $6.5 million a month, he said, but AGDC has been spending as judiciously as possible and using in-house resources from work on the in-state line.

With pre-FEED completed, Richards said AGDC is in regulatory permitting and advancement, with a focus on de-risking the project. He said the corporation has been pushing commercial and financial discussions with potential partners, investors and customers.

This is month 10 of AGDC being at the helm of the project, Richards said, the Federal Energy Regulatory Commission Section 3 application was filed in April and AGDC is now addressing detailed questions from FERC.

Federal issues

In addition to working with FERC, which is the lead agency for the environmental impact statement, AGDC also needs permits and authorizations from the Pipeline Hazardous Materials Safety Administration, the Army Corps of Engineers, the Bureau of Land Management and National Marine Fisheries, in addition to a host of other federal, state and local agencies.

Under the reauthorization of the federal highway bill, FAST-41, Fixing Americaís Surface Transportation Act, major projects are recognized and elevated in the federal arena. Richards said AGDC hadnít planned to apply, viewing it as another level of federal bureaucracy, but did apply at the urging of the Trump administration, and from an Aug. 7 application was accepted Aug. 17.

Under the program the project gets a permitting timetable within 60 days, with a comprehensive schedule for all federal permits. Richards said AGDC hopes to have that permitting schedule within a few days.

He also noted that the presidential executive order issued Aug. 15 establishing discipline and accountability in environmental review and permitting for infrastructure provides for environmental reviews and authorizations within two years.

Richards said an issue the governor and AGDC have raised with Environmental Protection Agency Administrator Scott Pruitt is EPA Region 10ís designation of the Yukon River basin as an aquatic resource of national interest, a designation which encompasses the entire Yukon River watershed, some 200,000 square miles, and may have broad reaching impacts for any development in the Yukon River basin.

Pulling the plug

The issue of what would get the plug pulled on the project - and when - came up several times.

Cruz said if AGDC cannot get a customer that would be a deciding factor.

Asked about an October deadline that has been bandied about, Cruz said the board has always used Dec. 31, although the administration had a different date.

From the board perspective ADGC is looking at the end of the year, but he said getting a firm fixed take-or-pay contract wonít happened by then.

A solid letter of intent is what the board wants to see, Cruz said.

He said that in talking with marketing folks, if an Asian entity firms up a deal with a memorandum of understanding and then a letter of intent, they donít break those letters of intent, but it will take a period beyond the end of the year to reach firm take-or-pay contracts.

Cruz said that for the utilities AGDC is dealing with, they are very serious when they issue letters of intent.

Commercial issues

Wilcox said the commercial goal is to balance three objectives: clear the LNG market in the Asia-Pacific; have acceptable pricing for debt and equity markets; and have an acceptable netback for the state of Alaska.

AGDC is looking at a 2023-25 window when analysts expect to see the LNG market re-balance, Wilcox said, and because of the long-term development required for the Alaska LNG project AGDC believes it has to be on the front-end of the next wave to get the long-term contracts, which is why AGDC is working so hard on letters of intent.

AGDC completed its capacity solicitation at the end of August. Wilcox said AGDC and the state wanted clarity on how much LNG they would be representing in the market and how much LNG would likely be sold by upstream owners.

One result of the capacity solicitation was the determination that the major producers would prefer to have AGDC buy and market LNG, she said, but AGDC also secured foundation customer capacity rights, enabling it to carry out long-term LNG marketing.

In addition to the major producers expressing interest in selling gas to AGDC, one Alaska producer submitted a confirming intent to subscribe for capacity on the system; there was also one non-compliant response.

Wilcox said the state purchasing gas and selling the end product was not unusual for an LNG project.

The next steps in the capacity solicitation are reaching tolling agreements and purchasing gas, she said.

LOIs, IRS ruling

Wilcox also addressed the issue of what letters of intent mean for utility buyers.

These are non-bonding agreements, she said, and there are outs, but the LIOs are taken seriously. She said binding agreements are not signed until close to final investment decision because buyers want security on permitting and engineering.

Wilcox said utility buyers take LIOs seriously because they recognize they want supply in the timeframe of the project and could go for this location. These are generally large organizations, she said, and the LIO means the project has risen to the level that the potential buyer is committing resources to it and management is willing to indicate a minimum quantity and term.

Commenting on his view of the project, Cruz said an LOI doesnít get us a gas line, but it gives him confidence.

He said AGDC could then go back to investors and say the project has an LOI.

On the Internal Revenue Service private letter ruling which AGDC received, Wilcox said it is a confirmation that AGDC is tax exempt and its revenue is not taxable, with the degree of state ownership determining the benefit from tax exemption.

The ruling applies to AGDC, not the project and some taxes will be paid, she said, such as PILT, payment in lieu of taxes to local governments that are eligible, and third-party investors will pay tax on their revenue.



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