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Port Authority moves ahead with plans for gas pipeline, LNG facility Memorandum of understanding signed with Bechtel Corp. for design, procurement, construction of line, Valdez plant Kristen Nelson PNA News Editor
The Alaska Gasline Port Authority, established by voters in member communities this fall, is moving ahead with its plans to finance and build a pipeline and plant so that it can sell Alaska North Slope gas in the Far East as liquefied natural gas. Voters in the Fairbanks North Star Borough, the North Slope Borough and the City of Valdez approved the port authority in October, financial and construction firms are onboard and gas sale terms in the final charter between the state and BP Amoco p.l.c. are substantially different than those in the draft charter, which were vigorously opposed by the port authority.
Profits from the port authority will go 60 percent to the state of Alaska; 30 percent to communities in Alaska based on population size, with a base of $50,000 per community; and 10 percent to the founding communities.
Board of port authority named The board of directors of the port authority, three members from each of the founding communities, began meeting in November. Members include: Hank Hove, mayor of the Fairbanks North Slope Borough, chairman; Dave Cobb, mayor of the city of Valdez, vice chairman; George Ahmaogak, mayor of the North Slope Borough, secretary; Dave Dengel, Valdez city manager, treasurer. Other members of the board are: Charlie Cole, Fairbanks; Richard Glenn, Barrow; John Kelsey, Valdez; Thomas Napageak, Nuiqsut; and Barbara Schumann, Fairbanks. Bill Walker is general counsel for the port authority
Model sets it apart Port Authority board chairman Hank Hove told PNA Nov. 18 that the port authority has signed a memorandum of understanding with Bechtel Corp. for design, procurement and construction of a natural gas pipeline from the North Slope to Valdez, together with a liquefied gas facility to supply the Asian market.
What separates the port authority project from other gas projects, Hove said, is that the project has an economic model.
He said this kind of “hard-dollar cost estimate” has never been done on a project to market Alaska North Slope gas. “ I believe now that we’re probably the only folks on the scene, either in Alaska or not, who actually have a firm idea about what a gas pipeline will cost to construct and what it will cost to operate and what the margins are and what the right economic model looks like,” Hove said.
Bechtel has been providing data for an economic model developed for the project by the authority’s financial advisor, Taylor-DeJongh Inc. Bill Walker, general counsel for the port authority, said Taylor-DeJongh, appointed after the October vote approving the port authority, was financial advisor for the last six liquefied natural gas projects worldwide.
Bechtel is funding their own costs, Walker said, because the port authority does not have the money it takes to do cost estimates for a project this size.
“That’s where a Bechtel comes in and fronts those costs, much of it internally, because of the size of their company,” he said. Taylor-DeJongh is also working largely on a deferred fee arrangement.
The port authority communities each contributed $100,000 in start-up money and Yukon Pacific Corp. contributed $250,000.
Changes in the agreement with BP The port authority wanted to release its economic model earlier, Hove said, but waited until everyone was satisfied that it, because “we didn’t want to come out with anything that wasn’t going to be supportable down the road.”
Once they had the model, Hove said, they shared it with the administration, and also argued strongly in town meetings against the gas sale provisions in the draft agreement between the state and BP and ARCO. They won on some issues and lost on others.
They fought and won on price specifications for a natural gas sale which were in the draft and were replaced by market price in the final. They won on volume of gas to be sold — the 1.2 billion cubic feet per day specified in the draft agreement was eliminated from the final. They also won on the rights of the producers to recover liquids from the gas stream “delivered to any downstream point” — arguing that this would require the gas pipeline to transport, without a fee, liquids for the producers; that provision was dropped.
They fought and lost on the draft agreement’s specification that gas would be sold as it comes off the low temperature separators at the Prudhoe Bay central gas facility. And they fought and lost on the specification of a 100 percent take or pay arrangement for the sale of gas.
Benefit to state could be as much as $1 billion The economic model which the port authority rolled out in November is based on 2.5 billion cubic feet a day. Originally, Hove said, the port authority asked for 2.2 billion, but that, he said, was based on running three 4-million-ton a year LNG trains.
When Bechtel finished its analysis, which took into account the lower ambient temperature in Valdez which makes the LNG conversion process more efficient than at many other sites, they found those same LNG trains could each produce 5 million tons a year of LNG instead of 4 million tons. “Now we’re operating a 15-million-tons-per-year facility,” Hove said, requiring the 2.5 billion cubic feet per day of feed.
At the port authority estimate of 30 cents per million cubic feet at the wellhead, the economic modes estimates state benefits (royalties, severance tax, corporate income tax, excess cash from project going to state and communities) of $472 million if the producers sell lean residue gas; $802 million if the port authority can buy rich residue gas; and $948 million if the port authority buys raw gas.
Raw gas, Hove said, is the port authority’s preference because then the authority owns the natural gas liquids and can sell them.
There are much lower benefits to the state if the port authority buys lean residue gas, Hove said, based on the fact that lean residue gas would have to be “spiked” with propanes and butanes to meet the Btu requirements of buyers. “It runs about 1,050, 1,060 (Btus) …off the gas conditioning facility in lean residue form,” Hove said. “That needs to be in the area of 1,100 Btu per cubic foot to make it salable.”
Cost analysis now at plus or minus 25 percent Bechtel is working on cost estimates for the different components — the pipeline, the LNG plant, the conditioning. Right now, Walker said, “we’re operating somewhat north of 25 percent.” The financial markets, he said, require that the cost estimate be in the plus or minus 15 percent range.
Hove said: “It’s $9.15 billion plus or minus 25 percent, which means, obviously, you could go as high as $11.4 or as low as $7 (billion).”
The next cut, Walker said, will be 15 percent plus or minus. “That narrows those ranges down and that (15 percent) range is sufficient to satisfy the capital markets.”
The port authority has requested an opinion from the Internal Revenue Service on whether or not revenue from the port authority would be tax exempt. That should take four to six months, Walker said.
The expectation from legal exports the authority has consulted is that the IRS will rule that revenue is tax exempt. “It’s being done all over the place,” Walker said: “If they’re not letting us do it then they’ve got to close down JFK and the Port of Seattle and the Port of Tacoma and … the Bonneville Power Administration.”
In fact, Hove said, the IRS opinion is being sought “only for the purpose of providing comfort to the financial markets.”
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