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April 2017

Vol. 22, No. 14 Week of April 02, 2017

Legislators hear from AGDC board members

Three members up for confirmation answer questions in House, Senate; communication an issue, as are costs, viability of project

KRISTEN NELSON

Petroleum News

Three legislative committees held confirmation hearings March 24 and 27 for Alaska Gasline Development Corp. board members, and legislators voiced some of the same concerns, including communication between the board and the Legislature, whether the Alaska LNG project is viable and what the costs would be.

Hugh Short, vice chairman of the board, was reappointed; Warren Christian and David Wight are new appointments.

Continuing board members include two commissioners, board Chair Dave Cruz and Joey Merrick, the board’s secretary-treasurer, both of whose terms are up in 2020. Commissioners on the board are Heidi Drygas, Department of Labor and Workforce Development, and Marc Luiken, Department of Transportation and Public Facilities.

Christian was appointed in 2016 to fill a term which expires in 2018; Short and Wight, also named in 2016, fill full five-year terms which expire in 2021.

AGDC enabling legislation specifies that the governor appoint members who bring experience in finance, pipeline construction and operations, gas marketing and large project construction management.

Trinidad and Tobago

Wight was president and CEO of Alyeska Pipeline Service Co. from 2000 to 2006 and prior to that was president and chairman of BP Amoco Energy Company Trinidad and Tobago from 1992 to 2000, at a time that company developed and constructed a liquefied natural gas facility.

Wight said Trinidad and Tobago has some similarities to Alaska - it’s isolated, it’s an island and didn’t have a lot of use for its natural gas. The company had a declining oil operation and he was interested in seeing if he could grow the business. Wight said he met a man who had problems with natural gas supply, got together with the government and Amoco took the leadership role. He said it took one group to take the lead, and that’s what he thinks the state is doing here.

On the issue of how much money the state would have to put in, Wight said he thinks Alaska should minimize state ownership but make it big enough to drive investment. Trinidad and Tobago was in for 10 percent of the initial project, he said, but after that devoted its funds to other needs such as infrastructure.

There are four natural gas owners on the North Slope, and Wight said he thinks that if four groups are trying to market gas separately it will make it much more difficult to reach an economic outcome.

Headed in right direction

Christian, president of Doyon Associated LLC, was previously president and general manager of ASRC Energy Services’ Houston Contracting Co. He said he has specialized in Arctic pipeline construction and is on the technical committee for AGDC.

He said he believes the Alaska LNG project is heading in the direction that the Wood MacKenzie report recommended - with third-party tolling, third-party financing and a possible federal tax exemption.

Asked how firm AGDC’s plans were to purchase the ConocoPhillips LNG plant at Nikiski, Christian said that at this point AGDC isn’t going to put in an offer on the plant.

On the issue of the in-state gas line project, ASAP, Christian said he believes only one pipeline will be built. AGDC looked at different sizes of lines - 36-inch (the proposal for ASAP), 42-inch and 48-inch - and Christian said he believes that if ASAP was built as designed it would have to be subsidized. But, he said, the determination of the final pipe size and the project will be based on what the market will bear.

Possible scaling of project

Short is co-founder, chairman and CEO of investment firm Pt Capital; prior to that he was president and CEO of Alaska Growth Capital, an Arctic Slope Regional Corp. subsidiary.

He told legislators the board’s strategy is to get the best cost estimate and move the project toward a reasonable build size and is working to identify an experienced engineering, procurement and construction contractor for the project. A 42-inch line looks most feasible, he said, and AGDC is looking at a way to scale the construction build through options such as starting with one train, very little compression and making the gas treatment plant more efficient and less cumbersome to build.

On the financing side, Short said third-party tolling and third-party financing give you more bang for the buck than tax-exempt status. With third-party financing, he said, you avoid the problem of partners having different hurdle rates which you have to blend before everyone will agree to proceed. Most of the bang, he said, is from bringing the hurdle rate down with third-party financing.

The second lever is the tax-exempt status, which requires a private letter ruling from the Internal Revenue Service. That requires the financing plan to be “fully baked,” which hasn’t occurred yet, Short said.

Project finance, third-party financing based on project economics, is the 80 percent driver in reducing cost, he said. If the private letter ruling doesn’t happen, that would increase the tariff.

On the project timeline, Short said AGDC believes it will be prepared to submit an application to the Federal Energy Regulatory Commission in April, and said there is some optimism under the new administration with its infrastructure focus.

Transparency

On the transparency issue, for which AGDC and the board have taken considerable criticism, Short said AGDC has spent eight to nine months negotiating transition agreements, most of which has to be done in executive session. He said it was frustrating for board members because there was so much they could only talk about in executive session.

Short said he and AGDC board Chair Dave Cruz have told each other that they would limit executive sessions to a minimum and told legislators they had his commitment to continue to be more outfacing and to do more outreach with the Legislature.

On the issue of gas sales Short said it was very difficult to negotiate a joint marketing agreement with four partners, although ConocoPhillips has said it would be interested in a joint sales agreement. But, he said, economics will indicate that the price would be fairly similar.






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