Keith Meyer, the new president of the Alaska Gasline Development Corp., told a joint House-Senate Resources committees meeting June 29 that with infrastructure-type financing AGDC could step into the lead on the Alaska LNG Project, maintaining momentum in an unfavorable market.
Under the plan which the Legislature approved with Senate Bill 138 in 2014, the state took an equity share in the project along with the producers, with shares based on natural gas ownership.
Meyer said the technical team has done an excellent job on cost reduction, but it is now time to look at other aspects of cost, financing and the cost of capital to get the project done, including taxes.
The project cost is a bit high now to clear the market and as a result the project is slowing down, Meyer said.
Asked by Rep. Mike Hawker, R-Anchorage, if he was prejudiced against producer participation and ownership, Meyer said he was not. Equity-based financing, with each party owning a share of the capacity, works well in certain regimes and works well for project participants because it gives them more significant control over the project.
He said he didn’t necessarily support equity-based financing for major infrastructure in Alaska because if the pipeline is built it will lower the barrier to develop North Slope resources, providing a significant transportation corridor and if there was open access to that pipeline providing capacity for newcomers.
Meyer said it’s a cost of capital issue - when times are tight an equity based model has a somewhat higher hurdle because producers have a higher cost of capital than infrastructure investors.
In response to a question from Rep. Dan Saddler, R-Eagle River, on why Meyer was recommending a shift in the project structure, Meyer said his basic charge was to see how AGDC can get the project moving, pick up the pace and see if the project can hit the next market window in the mid-2020s.
That’s what the discussion is about, he said: is there a different structure that may lend itself to infrastructure financing, federal tax exempt financing.
Meyer said while he has suggested the state could increase its ownership share, there isn’t a link between share and funds that need to be invested. That’s only for an equity project.
On an infrastructure project, he said, the majority of project investment can come from large infrastructure funds that take a lower rate of return.
The producers are welcome to be owners, Meyer said, but if the project is done right it won’t meet hurdle rates for the producers, while for infrastructure funds the returns will be very attractive.
Meyer said that on the current path the project it is not going forward; the issue, he said, is should the project be slowed down or should we try something different.
The producers are willing to work collaboratively, he said, and discussions are underway on what can be done differently.
Meyer said he was not suggesting that work has been wrong or that the path is wrong, but the market has changed rather significantly. And in a downturn you can delay or look for something different. There is enough support among the state’s partners to look for something different, he said.
Sen. Mike Dunleavy, R-Wasilla, asked how Meyer came to the conclusion that the project was not moving forward.
Meyer said there was some disagreement on the pace of FEED, and probing deeper he found the parties were not aligned on going to FEED.
Hawker asked for any concept documents on the proposed changes that AGDC has presented to the producers and Meyer said those could be forwarded. He said the AGDC team wants to provide what they’re going for, but not the blow-by-blow negotiating documents, which become confidential once producer comments are incorporated.
Under the commercial framework concept Meyer presented to the committees AGDC would form a special purpose entity which would be the project company, which would have principles designed to keep the project on track with competitive rates. The project company would engage competent technical and commercial advisors.
He said the roles of the producer parties might change because while AGDC’s aim is to keep project participants together, some may choose not to invest in the next stage.
He also said the framework would allow parties to participate and exit with minimal impact on the project pace.
And under the concept project ownership may not equate to gas ownership.
The project company would be a midstream business and there would be the potential for alternative financing with federal tax reduction options, lower-cost third-party equity investors and non-recourse debt to minimize financial exposure.
Hawker questioned decoupling the state from the risks of ownership.
The state has two choices, Hawker said: a cautious and deliberative approach or a more aggressive approach where AGDC takes the lead, owns the entity and a third-party would fund it.
Hawker asked how the state’s risk in the project would be managed and said the state has positioned itself to minimize risk and maximize benefits. With ownership comes risk.
Meyer said the proposed changes would decrease risk because under an open equity structure there is significant cost overrun risk.
Hawker said risk hedging means the owner transfers, offloads the risk. But, he said, for less risk you pay a price and receive less somewhere along the way.
Meyer agreed that you have to pay to give up risk, and said the contractor would charge you for taking some of the construction risk.
Hawker questioned whether if the state owned the project and laid off risk through an artificial entity and secured financing on a non-recourse basis, if it could really walk away if the project failed and the investors lost. He asked if the state could abrogate that much risk and whether there would be the risk that investors would “pierce the veil” and go after the permanent fund.
Meyer said risks would have to be identified, quantified and acceptable to the state before it took them on.
Under either structure, Meyer said, the risk has to be acceptable to the state or the project wouldn’t go forward.
