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Stage-gate returns
State wants shared risk for AKLNG project and legislative involvement
Kristen Nelson Petroleum News
Gov. Mike Dunleavy appears to be looking at several changes in the Alaska LNG Project - in addition to personnel changes already made: a return to shared risk; a return to a stage-gate process; and a return to involving the Legislature.
Those were all mentioned by Commissioner of Revenue Bruce Tangeman, who offered some idea of what the governor was thinking about the project Jan. 18, when he presented an Alaska LNG update at the Alaska Support Industry Alliance’s 36th Annual Meet Alaska conference.
He said the audience might be wondering why the Revenue commissioner was talking about the Alaska Gasline Development Corp. and said he wouldn’t be discussing any technical aspects.
Tangeman said the governor thought it would be an opportunity to share an executive view from the administration on the project following some recent changes at AGDC, specifically the return, as interim president, of Joe Dubler.
Dubler, who has been serving as executive vice president of finance and administration for Cook Inlet Housing Authority, held senior leadership positions at AGDC between 2010 and 2016, including vice president of commercial operations and chief financial officer.
Changes to date The governor replaced two of the public members of the AGDC board early in January. Doug Smith and Dan Coffey, both of Anchorage, were named to replace Hugh Short of Girdwood and Joey Merrick of Eagle River. With the new administration the commissioner members on the board also changed: Those seats are now held by Department of Labor and Workforce Development Commissioner Dr. Tamika Ledbetter and Department of Environmental Conservation Commissioner Jason Brune.
At its Jan. 10 meeting the AGDC board elected a new slate of officers, with Smith as board chairman, Coffey as vice chair and Warren Christian, a continuing member of the board, as secretary and treasurer. Dave Cruz, formerly the board chair, and David Wight, along with Christian, remain on the board.
The board then relieved Keith Meyer of his duties as AGDC president and named Joe Dubler as interim president. Meyer, formerly with his own energy logistics company - LNG America - and prior to that a senior executive with Cheniere Energy, was named to head AGDC in June 2016. Under Meyer AGDC eventually came under state leadership and worked AKLNG as a tolling project, infrastructure paid for by shipping fees on the pipeline and processing fees at the liquefaction facility.
Transition Under former Gov. Bill Walker the state took over the AKLNG project at the end of 2016 after its partners - ExxonMobil, BP and ConocoPhillips - indicated that due to economic issues they did not wish to proceed beyond the stage of pre-FEED, front-end engineering and design which was completed in 2016.
The transition to a new administration, Tangeman said, “is a great opportunity to pause and see exactly where we’re at in this process with the AKLNG Project specifically.”
He said this was a good chance to reach out to the state’s former partners for their views on the gas market and LNG market, and to get their expertise.
At the same time, Dubler and the new board members will be seeing where the project is in the Federal Energy Regulatory Commission process, he said. AGDC submitted a FERC application in early 2017 and has been responding to FERC information requests; FERC’s schedule calls for a draft environmental impact statement to be issued this February and a final EIS in November.
AGDC has described this phase in recent documents as de-risk regulatory, to be followed by lump-sum turn key FEED, with a final investment decision in 2019 and first gas in 2024-25.
Tangeman said there has been a lot of work done on the marketing side and with customers. (AGDC and the state signed a preliminary joint development agreement in November 2017 with China Petrochemical Corp., CIC Capital Corp. and the Bank of China Ltd. to work on commercialization of Alaska North Slope natural gas with as much as 75 percent going to China as LNG.)
But most important of all, Tangeman said, this is a great opportunity to re-engage the Legislature in this process.
A little history Gov. Dunleavy is very familiar with AKLNG and how the development of a successful mega project comes to fruition, Tangeman said. Dunleavy and other legislators were educated on the stage-gate approach, and there are a lot of knowledgeable legislators who’ve been around since the state began work on the process in 2011. Those legislators understand mega projects and they understand the stage-gate process, and it’s not because of the state, Tangeman said, but because of the partners the state used to have who have built these projects around the world.
It’s a great comfort that the state doesn’t have to be out there welding pipe, he said: We had partners who’ve done this around the world.
“We were going to jump on their back and ride them across the finish line to a successful and profitable project,” Tangeman said.
Dunleavy was in the Senate in 2013 when this was really starting to heat up with the AKLNG process - the three companies had been working the project and approached then-Gov. Sean Parnell about bringing the state in as a fourth partner. Tangeman said this was very appealing to the state, which knew its limitations, and gave the state an opportunity to participate side by side and share the risk. And in a stage-gate process the state wasn’t obligated to put $10 billion on the table on day one. Because it was a stage-gate process, a decision was made at the end of each stage whether to move forward with the process - and with funding.
Early days At the beginning it was a rather small group of state officials involved: Department of Natural Resources Commissioner Dan Sullivan and Joe Balash, DNR deputy commissioner; Revenue Commissioner Brian Butcher and Tangeman, who was then deputy Revenue commissioner.
And the companies knew, Tangeman said, that they wouldn’t have DNR and Revenue in the room forever - those departments were negotiating memorandums of understanding, heads of agreement and then joint development agreements. Eventually DNR and DOR would fall back into their roles and AGDC would continue as the state entity. AGDC had been working on the Alaska Stand Alone Pipeline project, so was logical as the continuing state entity in the project.
“The late, great Dan Fauske” was at AGDC then, along with executive VP Joe Dubler, Tangeman said, and they knew they weren’t going to be out there welding pipe - but they brought tremendous financial background to the table and the state became comfortable with the stage-gate process. The state knew its partners had built projects like it around the world.
The goal, he said, was a profitable economic driven project, not a schedule driven project.
The Legislature had been well educated for more than a decade by groups like Wood Mackenzie on failures around schedule-driven projects, something the ExxonMobil project manager, Steve Butt, hammered home constantly, Tangeman said.
AGDC committed to engage the Legislature through the decision-making process: It was a very good relationship back then, he said. AGDC, DNR, DOR would come before the Legislature and legislators got all the information they would need.
He said those state agencies were in front of the Legislature asking them to appropriate money to continue work on the project, and legislators understood that at every stage-gate decision they would be brought back in and would have to approve money.
It’s been several years since there was a stage-gate process discussion, Tangeman said: The Legislature has really been set aside for the last several years.
AGDC has been moving the FERC process forward and marketing the project, Tangeman said, and Dubler will get up to speed on progress there and on the benefit of the work that has been done.
Moving forward Tangeman said the administration looks forward to re-engaging with its partners on the North Slope. We understand, he said, what took place with the price of oil and gas over the last couple of years and will be discussing the project with them to see if there is an appetite to reengage and move forward as a partnership again.
A stage-gate approach will be put in place “so we know - and Alaskans know - exactly how we are going to move the project forward.”
Tangeman said it’s been very quiet as to how we go from point A to point Z, so it will be critical to get those stage gates in place so we know exactly how this is going to work going forward.
Mega projects, he said, cannot be schedule driven and must stand on their own economics.
Most critically, the risk must be shared.
Under the previous administration 100 percent of the risk was brought inhouse to the state.
“Gov. Dunleavy is not comfortable with that,” Tangeman said: It is important to bring partners back in; if this is to move forward we need to share the risk.
And while some legislators have been around and understand the project, there are a lot of new legislators this year, about 25 percent of the Legislature is new, Tangeman said, and AGDC will have a busy session re-engaging with the Legislature and bringing them up to speed on what’s taken place and where the state is in the process.
He said confusing messages on the project had been going out over the last couple of years and that it was critical that Alaskans understand 100 percent where we’re at in the project and where we need to be.
A lot of hard work and money has gone into the project, Tangeman said, including the FERC project, which, he said, seems the most critical point right now.
All this hard work has gotten us to a 10-yard-line, he said, “but I think we still have a lot of work to do to get to the 10-year line.”
It’s important that Alaskans understand where the project stands, he said: There won’t be a final investment decision this year; that’s a long way away and many steps to figure out how the state can bring the project to fruition.
He said Gov. Dunleavy and the administration look forward to working closely with AGDC and the Legislature to analyze where we are in the stage-gate process and how we can progress the project as a unified team moving forward.
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