Providing coverage of Alaska and northern Canada's oil and gas industry
May 2020

Vol. 25, No.22 Week of May 31, 2020

FERC has approved; economics remain issue

AGDC expects to provide new cost report for Alaska LNG Project to board in June; goal to select private project sponsor by year end

Kristen Nelson

Petroleum News

On May 21 the Federal Energy Regulatory Commission authorized the Alaska Gasline Development Corp. to construct and operate the Alaska LNG Project.

In addition to required permits, AGDC is still working on the project’s economics.

In a presentation to the AGDC board after FERC’s May 21 announcement, AGDC President Frank Richards said Fluor has concluded cost estimate reduction work with a cost estimate update to fourth quarter 2019 dollars. The Fluor work has been provided to the economic modeling team to develop a new cost of supply, and there will be a report to the board in June.

In a January update to House Resources, AGDC’s Interim President Joe Dubler (who has since retired), said there were 10 major tasks in the work Fluor was doing, including modularization and sourcing of supplies.

Dubler said Fluor would be looking at all cost elements with AGDC expecting a big component of reductions to come from the contingency, because when hard costs go down, contingency goes down as well.

2015 project costs

The joint venture agreement pre-FEED, front-end engineering design, cost estimate from 2015 was $10.7 billion for the gas treatment plant on the North Slope, $13.9 billion for the pipeline and $19.6 billion for the LNG production facility at Nikiski, some $44 billion. (The JVA included BP, ConocoPhillips, ExxonMobil and the state, represented by AGDC.)

Asked about the original cost estimate, Richards, then AGDC senior vice president, program management, told House Resources in January that the 2019 review of costs reflects increasing use of modularization in large projects, allowing a significant decrease in costs because construction is done elsewhere and facilities assembled on site.

The gas treatment plant was always a modular design, Richards said, because that is how North Slope construction is done.

But the LNG facility was originally designed with less modularization - more modularization there, in line with current industry practice, would reduce costs.

Economic viability

Overheads for the May board meeting list continued work with ExxonMobil and BP “on optimized project venture structure that enhances overall competitiveness” and work with potential project participants to assess project economics.

A workshop was held May 6 to review Fluor’s new cost estimates, and capex and opex cost estimate updates were provided to the modeling team May 12 and 15.

A summary of AGDC plans from the April 9 board meeting indicates the corporation formed key relationships in 2019 with “strategic parties” who have expressed interest in the project and with whom AGDC has been collaborating, with extension of those strategic party agreements planned.

The strategic parties have not been named.

The board supports AGDC continuing as project sponsor through the end of the year, with transition to a new project sponsor planned to be underway by Jan. 1, 2021.

The board passed a resolution at the April 9 meeting emphasizing maximizing the value of the state’s investment in Alaska LNG: “AGDC will work with strategic third parties to improve the economic viability and feasibility of Alaska LNG,” the resolution says.

Project competitiveness

AGDC is evaluating options to improve the project’s competitiveness, including the role of the state and federal governments, according to materials from the May 21 board meeting. On the federal side, since Congress is looking for ways to energize the economy with stimulus, the pipeline would provide an economic backbone for Alaska.

As far as state participation, Gov. Mike Dunleavy made clear after the final environmental impact statement was issued March 6 that the state did not intend to continue as project sponsor.

“The final EIS is a milestone in the Alaska LNG permitting process - a process still with significant hurdles. … FERC licensure is an important component in determining if Alaska LNG, which must be led by private enterprise, is competitive and economically advantageous for development,” the governor said.

The board was briefed in executive session April 9 on a strategic plan outlining how AGDC would take the project from state to private sponsorship, with transition to a private sponsor by June 30, 2021, based on a FEED decision support package “including a defined equity structure, defined financing structure, transition to the new Project Sponsor(s) and funding for ongoing WP&B (work plan and budget), as appropriate.”

The board does not support AGDC continuing as project sponsor beyond Dec. 31, 2020, the April 9 meeting overheads said.

“In the event there is not sufficient interest from Strategic Parties to lead the Alaska LNG Project, an open solicitation of interest will be made to other parties,” the materials said.

The board, administration and Legislature “will define an acceptable role, if any, in the Alaska LNG Project.”

If there is insufficient interest by a new project sponsor, “AGDC will put the Alaska LNG Project assets up for sale in a formal RFP process.”

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