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Port authority proposes gas pipeline to Valdez, Canadian border Line would fork at Delta Junction, with equal amounts of natural gas going to Lower 48, to LNG plant for Far Eastern trade Kristen Nelson PNA News Editor
There’s a way to do a gas pipeline project without the state giving up all the benefits, Alaska Gas Pipeline Port Authority General Counsel Bill Walker said Sept. 21. The port authority, which would be tax exempt and would pay both the state and communities a portion of the profits from a project, has spent the last nine months working on numbers to show the benefit the port authority brings to a project as a financing vehicle.
Now, Walker told the Resource Development Council for Alaska, the port authority’s task is to get that word out.
The port authority had a meeting in Houston in August to explain to the producers the cost benefits of using the authority as a vehicle to finance a gas pipeline project, he said. “And all the producers came down for it. Every single one.”
“They were very interested, very encouraging,” Walker said.
“We’re no longer seen as competing. We’re not competing. … this is just a financing vehicle.” The goal, Walker said, is to extract the natural gas and sell it and a pipeline is a necessary part of that.
“We’re saying, ‘we’ll do it — we’ll do the pipeline’ and here’s how we can do it.” And the producers are intrigued, he said.
The port authority plan is a pipeline to Delta Junction which forks — half the gas goes to Valdez to a liquefied natural gas plant, half goes to the Canadian border to be shipped to the Lower 48. Market is independent power producers Rigdon Boykin of O’Melveny & Myers, special counsel to the port authority, said the authority is proposing a three-train liquefied natural gas facility at Valdez which would put 15 million tons a year into a Far East LNG gas market estimated at roughly 60 tons a year. To do that, Boykin said, requires accessing a new market — the independent power producers in Asia. In Japan, he said, approximately 30 to 40 percent of electricity can now be supplied by independent producers, and the same thing is happening in Korea, China and Taiwan.
Boykin said the port authority has been talking to independent power producers. “And we are absolutely convinced that there is a big enough market there to absorb gas at this price.” One independent power producer, he said, is ready to sign letters of intent and start serious negotiations for 8 million tons to go to Japan where the independent power producer would put in its own gas terminal. Working the numbers Earlier this year, Boykin said, the port authority got back from Bechtel the first set of numbers — for just a pipeline to Valdez and LNG sales to the Far East. “But that project ended up being uneconomical… And so we went back to the drawing board.”
Part of the reason the initial proposal — a conditioning plant at the North Slope, a pipeline and an LNG facility at Valdez — wasn’t economic was because of the very conservative approach that was used, Boykin said.
One of the instructions to Bechtel, which spent 55,000 man hours working on the numbers, was to do the project entirely from scratch and to put everything in. The port authority numbers, he said, include items like contractor’s contingency and debt service that would be in the real financing.
The costs developed for a port authority plan also include a gravel pad for the entire length of the gas pipeline, Boykin said, because of environmental reasons.
The basic facilities in the port authority numbers include a conditioning plant on the North Slope which would condition 8.7 billion standard cubic feet of gas a day, producing 6 BSCF a day to go into a 56-inch diameter pipeline. The difference in volumes, he said, is that about 2 BSCF a day of carbon dioxide would be removed and some gas would be used to run the conditioning plant.
The 56-inch line would run 550 miles to Delta Junction where it would be split into two lines: A 44-inch line would run the 150 miles to the Canadian border carrying 3 BSCF a day of gas and a 46-inch line would carry 3 BSCF a day of gas 256 miles to Valdez.
“The cost advantages of doing two projects at one time are just tremendous,” Boykin said. For the earlier proposal, a pipeline taking 3 BSCF a day to Valdez, the construction cost for the pipeline alone was $7 billion, with soft dollars for such things as financing costs adding $3.5 billion, for a total of $10.5 billion.
But doing the two-leg pipeline for 6 BSCF a day only brought the construction cost up by $2.7 billion, to $9.7 billion and the soft dollars up another $1.3 billion, for a total cost of $14.5 billion for carrying twice as much gas and building the second construction corridor.
“So the average cost per 3 BCF carried in each leg is $7.25 billion, versus the cost for the smaller, one-project line of $10.5 billion,” Boykin said.
The cost of the North Slope gas conditioning plant — from scratch, not including any equipment or compression currently working — is $4.2 billion, and for the three-train LNG plant at Valdez, $4.1 billion. The entire project construction cost is $18 billion — with contingencies, insurance, development costs, working capital, interest during construction (at $4.8 billion, the largest of these other items), financing, debt service reserve, the total is $26.4 billion.
“When we’re talking about our numbers, we’re putting everything in,” Boykin said. What LNG will cost in Asia The Valdez end of the system is driven by the price of LNG into the Far East. Boykin said that to move 15 million tons into that market, the port authority figured starting out that they would have to be getting $3.20 or less per million Btu. What they found, he said, was that their model worked at $3.10 per million Btu.
The financial model for the LNG portion of the project, he said, required that each year sales had to generate free cash to pay 1.7 times the amount required as a condition of the 100 percent debt financing. Then, the port authority had a goal of generating $370 million each year that would be split between the state and the communities in Alaska. The model was also based, he said, on a split payment plan for the gas. Up front, prior to debt payment, the producers would get 30 cents per million Btu for gas. The other payment the producers would get, he said, would be basically everything left over after debt was paid and the $370 million was paid.
“So when you solve for that, based on these assumptions, we ended up getting a $3.10 per million Btu price for LNG in Japan or $2.40 FOB Valdez. We think that’s a terrific price,” Boykin said. “When we started this we believed we had to get a price delivered in Japan of $3.20 or lower in order to sell this much gas in Asia and we’ve come up with 10 cents lower than that.” To the Canadian border The other part of the pipeline, the 3 BSCF a day going to the Canadian border, could be structured different ways, Boykin said. The producers could have an undivided interest in the pipeline or they could pay the port authority a fee for taking the gas to the border. In a tolling tariff case, the tariff that would be required for 1.7 times coverage (for 100 percent debt financing) is $1.15 per million Btu at the border, Boykin said. The producers, however, would get credit for liquefied petroleum gas carried in the line and for natural gas liquids extracted on the North Slope, so the effective tolling tariff would be 56 cents a million Btu.
The sale price of the gas would be the initial 30 cents per million Btu plus an estimated subordinating gas payment of $715 million a year, for an effective gas sales price of 79 cents a million Btu. In addition, he said, the port authority believes there would be at least another billion of benefit netback to the slope.
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