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Consultant questions state lead on AKLNG Report by enalytica for Legislature fails to find advantages in state taking over AKLNG, doesn’t think investors will see merit TIM BRADNER For Petroleum News
An oil and gas consultant to the state Legislature said it’s not uncommon for major liquefied natural gas project sponsors to realign their ownerships, as Gov. Bill Walker now proposes with the Alaska LNG Project, but that the state of Alaska faces a big credibility gap in attempting to take over the project.
The governor announced his desire for the state to take the lead on Alaska LNG July 18 in a speech to the Anchorage Chamber of Commerce, although the governor’s intent has been known for several months.
Also, the state-owned Alaska Gasline Development Corp., or AGDC, has advanced a concept plan to the industry partners in Alaska LNG for the state to lead project work past preliminary engineering that is to be completed by the end of the year.
In an analysis given the Legislature earlier in July Nikos Tsafos, of the consulting firm enalytica, said the large Alaska LNG Project has, “reached a roadblock as a (industry) co-venturer stated they are not prepared to proceed to the next phase of development (the front-end engineering and design, or FEED, phase).”
“This is not surprising or unprecedented. Many companies are re-evaluating their investment plans given the drop in oil and gas prices,” Tsafos wrote in his report to the Legislature.
“Nor is it uncommon for large projects to see changes in ownership and structure as they progress.
State options “In response, the state has outlined two options, either it can take the lead and seek ways of reducing the cost, or delay the FEED and potentially delay the project,” Tsafos wrote.
However, if the state now proposes to lead the project, and not delay it, it must demonstrate two things to succeed. “The first is that the state can execute. The state will have to set up and pay for an organization that replaced the current (industry) project team, a team that has at times employed 135-odd people with hundreds of years of (combined) experience,” Tsafos wrote.
There are examples of firms with little or no experience developing LNG projects, relying largely on contractors, “yet the organizational challenges should be not underestimated,” he wrote.
Tsafos cited the example of Cheniere Energy, which was headed by Keith Meyer, current president of the state’s Alaska Gasline Development Corp.
“Cheniere Energy had more or less 200 employees in January 2010 before it proposed an LNG export project at Sabine Pass. In January 2016, with two LNG projects under construction and development, it had 888 full-time employees,” Tsafos wrote.
Viability of commercial structure Secondly, the state will have to demonstrate to potential LNG customers the viability of its proposed commercial structure for the project. “Most LNG projects are driven and majority-owned by the resource owners, with buyers and other investors holding smaller stakes,” Tsafos wrote.
He acknowledged some exceptions where resource owners do not invest in the “midstream,” typically because involvement in LNG projects exceeds producers’ risk profiles. Tsafos could find only one project now underway with a structure similar to that being proposed by the state, in Cameroon, where a third party is building a floating LNG facility to produce about 1.2 million tons of LNG yearly, about 7 percent of that planned for Alaska LNG.
“Elsewhere in the world midstream-driven projects have generally failed,” Tsafos wrote.
Initiatives such as those proposed by the state (Tsafos calls them “infrastructure-driven”) make sense when commercial viability exists and buyers and sellers favor such a structure as a way to avoid committing their own capital and a third party steps in to facilitate the project.
May diminish chances of success Overall, “it is not clear that the state’s approach enhances the chances of success. If anything, it diminishes them,” Tsafos wrote. Under a state-led project Alaska would be responsible for 100 percent of costs instead of 25 percent and the cost of failure would lie with the state rather than shared with the co-venturers.
The state’s exposure could be $1 billion to $2 billion, “to pursue a project that, in the end, fails to advance,” beyond the final engineering, he wrote.
“It is certainly possible for the state to find equity investors-buyers, other producers and so on. In general, however, buyers want small shares in LNG projects, often only a few percentage points, and given the size of Alaska LNG the state would need several buyers in order to off-load a meaningful share of the equity,” Tsafos wrote.
“However, it is not clear that the state would have accomplished much. These are sophisticated investors who require adequate returns to compensate for the risk they are taking. Would these companies be willing to invest for sub-par returns in a project that the world’s largest companies deemed to be too risky and/or uneconomic?”
In summary, Tsafos wrote that instead of waiting for market conditions to improve, “the state seems to have opted for taking the lead and reshaping the project’s structure, and without much evidence that this is necessary to resolve the underlying problems facing Alaska LNG.”
“In doing so, the state has made project success less likely, and it has taken on considerably more risk, on the assumption that it will be able to offload that risk to new players who have yet to be either identified or shown to be interested in taking on high risk for low return,” Tsafos wrote.
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