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‘Tolling model’ gains some support
Alaska’s state-owned gas corporation is betting that its new commercial model for the prospective Alaska LNG Project will lower costs of supply enough for the big project to stay in the game despite huge market competition.
The Alaska Gasline Development Corp., or AGDC, is in the process of taking over the $45 billion Alaska gas project from a consortium of three North Slope producers and AGDC that has developed the project through the preliminary engineering stage.
The transition is expected to be complete by the end of the year, Keith Meyer, CEO of AGDC, told the corporation’s board Dec. 8.
“The big shift for us is to a ‘tolling model,’ where the infrastructure is owned separately from the producing companies,” he said. Under this arrangement, which Meyer said is typical for gas pipelines in the continental U.S., shippers negotiate to transport gas and have it made into LNG.
Shippers would either be LNG customers who buy gas from producers and pay to have it shipped and liquefied or producers who buy capacity to supply their own worldwide LNG supply portfolio, Meyer said.
“It’s a simple, accepted model. ‘You call, we haul, that’s all,’” he said, citing a gas industry slogan.
Meyer said AGDC could also adopt a “merchant” commercial model for customers who desire it, where the state corporation buys the gas on behalf of customers and also purchases capacity in the infrastructure, and then sells the LNG manufactured to customers. This arrangement might be attractive to large utilities in Asia, he told the board.
Financial exposure a concern Some state legislators are worried about the state’s financial exposure under such arrangements but Meyer said AGDC must ensure that the creditworthiness of customers, under either the merchant or tolling models, is strong, otherwise financing for the project may not be possible.
The commercial structure envisioned when the project was majority owned by the three large North Slope producers was much different. In this model each gas producer, including the state as a gas royalty owner, would produce its own through its share of infrastructure capacity, with each producer then marketing its gas as LNG.
That structure became unworkable when energy prices dived in 2015, Meyer said. The higher “hurdle rates” required by the producer-investors would make the Alaska LNG Project the most expensive among all of its major competitors, according to a Wood-MacKenzie analysis.
Premised on investors The new tolling-model approach is premised on the notion that an independently owned project which would attract investors, such as the state itself and possibly infrastructure equity investors like pension funds, could accept a lower return on capital than is required by producers, Meyer said.
That, combined with the advantages of exemption from state and possibly federal taxes for parts of the project that are owned by AGDC, could make dramatic reductions possible in the cost of LNG supply, Wood MacKenzie said in its report.
The tax exemption would be important. Exemption of the project from the state property tax alone, for example, could improve Alaska LNG’s bottom line by about $1 billion a year, according to the state’s estimates.
Major Slope producers are supporting the state’s approach in restructuring the project. “The Wood Mackenzie study showed us a road map, and we’re quite excited about a switch to a tolling model because it would facilitate our developing our global portfolio of LNG,” BP’s manager for Alaska gas commercialization, Peter Laliberte, said at a Dec. 12 seminar in Anchorage.
“The traditional models for developing large global LNG projects are challenged today, but we believe Alaska LNG has options,” as a state-owned project, he said.
“We support the state going forward and BP hopes to be either a customer or an investor in the project,” Laliberte said.
ExxonMobil, which managed the project through its preliminary engineering and regulatory work, also supports the new approach, company officials said at a briefing for state legislators earlier this fall.
ConocoPhillips expressed similar support and is also forming a joint-venture marketing entity with AGDC to market the company’s gas, as LNG, in addition to the state’s royalty gas.
The customer search Meanwhile, Gov. Bill Walker and AGDC are hustling potential customers in Asia and have pitched the Alaska project at major industry conferences such as the recent LNG Producers and Consumers conference in Tokyo, where the governor spoke.
“We presented the project and stressed the long-term reliability of a politically stable source, short and direct shipping and the advantages of cold temperatures in Alaska, which makes processing facilities more efficient than in warmer climates,” Meyer said.
“We also stressed the potential for growth of North Slope gas reserves. We have proved reserves for decades but potential new gas resources on the North Slope that would last for generations,” he said.
The message was well received in Tokyo despite the current glut of LNG. “People like the idea of a U.S. West Coast LNG source. They have enough Gulf Coast LNG, and there is now worry that with the falloff in Lower 48 drilling Gulf Coast gas could be subject to price increases and volatility in the Henry Hub gas index,” Meyer said.
Alaska is pitching more stable pricing as well as security of supply, he said.
Regulatory issues On other matters, AGDC is working through regulatory issues. The Federal Energy Regulatory Commission recently added a large number of new questions on the preliminary application filed with FERC by the industry-led consortium.
Meyer said the state gas corporation, which is inheriting the application, is gearing up to deal with it, relying on existing internal staff resources and contractors.
The contractors include many who were involved with submitting the pre-application, so they are familiar with the documents.
A related matter is an ongoing effort to secure a final Supplemental Environmental Impact Statement for the Alaska Stand-Alone Project, or ASAP. This is the parallel gas project by AGDC that was initiated as a possible fall-back pipeline to serve Alaska markets in case the big Alaska LNG Project faltered. Final engineering on ASAP, which is a 36-inch pipeline, is complete and AGDC is pursuing final regulatory permits mainly because they also help the larger project, a 42-inch pipeline.
Frank Richards, AGDC’s engineering vice president, said the state corporation was concerned with a slowdown by the U.S. Army Corps of Engineering on doing the final work on the SEIS, but recent meetings with the corps have resolved the concerns.
Wetlands mitigation A major unresolved issue for both ASAP’s EIS and the Alaska LNG Project is how to handle wetlands mitigation. More than 8,800 acres of wetlands have been identified along the pipeline route, according to Mike Thompson, who is directing permitting for the state corporation.
Under corps rules AGDC must develop a plan for compensation which Richards said would best be done by working with one of the existing mitigation banks in Alaska. AGDC is now working on a draft plan to submit to the corps for the ASAP EIS but it might also serve the Alaska LNG Project as the right of way is the same for both projects along the bulk of the 800-mile route.
Richards said mitigation is a large unknown expense, however. Discussions are being held with the state Department of Natural Resources on how state-owned lands might be involved in a solution, he said.
- TIM BRADNER
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