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State gas authority wants $3 million Board: Quick funding needed if Alaska is to be competitive for West Coast LNG Larry Persily Petroleum News Juneau Correspondent
While state officials are looking to see if there are any funding sources to cover the Alaska Natural Gas Development Authority’s $3 million request for planning work on a state-owned liquefied natural gas project, the first look will be to learn the governor’s opinion on the spending.
“We don’t know if the state is going to support this recommendation,” said Steve Porter, deputy commissioner at the Alaska Department of Revenue and liaison to the gas authority.
Porter said he expects to discuss the funding request with the governor’s chief of staff by early September. Meanwhile, he will research any funding options that might exist, such as the possibility of turning to the Alaska Industrial Development and Export Authority.
The Alaska Natural Gas Development Authority board of directors voted unanimously Aug. 25 to request state funding of up to $3 million this fall to prepare cost and construction timetables, a business and marketing plan to determine if the state can competitively deliver liquefied natural gas to the West Coast.
Board members, after listening to a presentation by Harold Heinze, the authority’s chief executive officer, agreed they must move quickly to determine the cost and construction schedule of a project to pipe North Slope natural gas to Valdez, liquefy and load the gas on tankers for delivery to West Coast terminals expected to open in 2007 and 2008.
“We have a very limited amount of time,” Heinze told the board.
Sempra Energy is moving forward with plans for an LNG receiving terminal on Mexico’s Baja Peninsula, just south of the California border, while a subsidiary of Japanese trading house Mitsubishi Corp. is working toward building an LNG terminal at Long Beach, Calif.
The Alaska Natural Gas Development Authority, established by a voter-approved initiative on the November 2002 ballot, is operating under a $150,000 budget granted by the Legislature this past session. Proponents of the authority had suggested a first-year appropriation of up to $3 million, but lawmakers opted for a much lower start-up budget.
“I’m going to blow the budget real quick here,” Heinze said of the accelerated effort to establish Alaska in the crowded Pacific Rim market for LNG. The authority’s job is to determine the feasibility of the state building, owning and/or operating a pipeline for shipping Alaska natural gas to market aboard LNG tankers.
Board asks for legislative hearing Heinze told the board Aug. 25 he would like to see a special gathering of key legislators early in September to hear a presentation on the authority’s progress to date and the need for an immediate boost in funding.
“I would propose that we ask some major committees of the Legislature to meet in some sort of joint session,” Heinze told the board. “If we get turned down, we get turned down. I don’t see us getting turned down,” he said. Porter said one of the first questions legislators will ask of the authority is: “Where is the governor on this?”
Cheryl Frasca, the governor’s budget director, said she did not hear of the $3 million funding request until the day of the authority’s board meeting.
“There is no way to appropriate money between sessions,” she explained.
The authority’s options are limited until lawmakers reconvene in January, Porter told the board. In addition to approaching the state development authority, perhaps finding a third-party to pay the bills would be another option, he said.
One board member asked if the gas authority could turn to the Alaska Science and Technology Foundation for funding, but others pointed out the Legislature abolished the agency and emptied its account into the state general fund this past session.
Heinze also suggested perhaps the authority could borrow the $3 million, but the board did not discuss that option in any detail.
More money next year The money is needed for conceptual engineering, project drawings, a detailed business plan, cost and construction schedule estimates, Heinze said. The state needs to be ready next year to make a decision on spending perhaps $200 million for full engineering of the project if it is to have any hope of supplying the Sempra or Mitsubishi LNG terminals, he told the board.
Under the new, rushed schedule, permitting and engineering design would be done next year, along with orders placed for pipe, compressors and other construction pieces requiring a long lead time. A go-or-no-go decision would be made in 2005, Heinze said, with two years for construction and gas to start flowing in December 2007.
Sempra expects to sign supply contracts by the end of this year, said Heinze, who met with company officials Aug. 18 in San Diego. A Sempra official declined comment Aug. 26 on the possibility of contracting for Alaska gas. “We’re looking at a number of potential buyers around the world,” said spokesman Art Larson, who answered the company does not negotiate its supply deals in the press.
The president of Sempra Energy International, Darcel Hulse, was equally vague in his comments in World Gas Intelligence on Aug. 20. The Pacific Basin, Hulse said, “is full of stranded gas.”
Mitsubishi officials, who met with Heinze on Aug. 19 in Long Beach, need an indication from Alaska that it can deliver gas by 2008. If not, there are other suppliers looking for the business.
The authority’s original schedule called for spending a few million dollars next year on conceptual engineering and cost estimates, with the hundred-million-dollar design work in 2005, Heinze said, but the possibility of selling LNG for the Sempra and/or Mitsubishi terminals requires speeding up the process.
Heinze admitted to the board that construction in 2006-2007 “is a real push.”
He also acknowledged that moving up the work on cost estimates from next year to this fall will mean “some lessening of quality, but nothing of significance.”
Estimates provided to the board show the project would require 10 LNG tankers, at $200 million each, with $4 billion for the 36-inch pipeline, $4 billion for a liquefaction plant at Valdez, and $2 billion for a gas treatment plant on the North Slope.
The preliminary $12 billion total budget would pay for a project to move 2.2 billion cubic feet a day out of Alaska.
State to rely on Yukon-Pacific The accelerated timetable for cost estimates, design and construction decisions will be helped by using much of the material prepared over the years by Yukon Pacific Corp., a subsidiary of CSX Corp., a Florida-based rail and freight transportation company. Yukon Pacific has been working since the early 1980s to obtain financing and natural gas contracts for a project to bring Alaska LNG to market.
“We’re going to draw heavily on their work, there’s no kidding about that,” Heinze said.
Former Alaska Gov. Wally Hickel, who helped establish Yukon Pacific in 1983 and later donated his shares to a charitable trust, addressed the authority at the start of its meeting, giving a pep talk for the effort.
“I’m not dreaming, although I’m a dreamer,” he said.
Hickel encouraged the board to work quickly, for fear the window is closing on Alaska’s opportunity to grab a spot in the LNG market before other suppliers get there first. And if the major North Slope gas producers don’t cooperate, Hickel said it’s time for the state to get tough.
He suggested the authority and other supporters of the project push for the state to take back North Slope leases if the producers refuse to sell their natural gas for the LNG project. If that doesn’t work, he said, the state could go to court in an attempt to cancel the leases.
In addition to relying heavily on Yukon Pacific’s work, state gas authority members also heard Aug. 25 from the Alaska Gasline Port Authority, which has been working since 1999 to develop a project to bring Alaska’s North Slope gas to market.
The port authority, comprised of the city of Valdez, the Fairbanks North Star Borough and North Slope Borough, is eager to help the state authority, said Dave Dengel, Valdez city manager.
The port authority first concentrated on building a gas pipeline to Valdez to ship LNG to Far East markets, then switched to promoting a “Y Line” to bring gas to Valdez and also to run a line through Canada to Lower 48 markets. Then, most recently, the group decided LNG for the U.S. West Coast is the way to go, officials told the state authority.
Getting tankers could be a problem One problem cited by the port authority is getting enough LNG tankers built by 2007-2008 to carry Alaska gas. Federal law requires that only U.S. tankers carry cargoes between U.S. ports.
Port authority representatives told the state gas authority they had researched the possibility of U.S. shipyards building tankers and learned it would be 2007 or 2008 before they could even start construction — mostly because they had never built an LNG tanker and would need to learn the trade from a foreign shipyard first, then schedule the work around their U.S. Navy contracts.
Heinze responded it probably would be best if the state authority contracted with a private operator for LNG tankers on the Alaska route, rather than have the state own and operate a fleet of vessels. “You really don’t want to own tankers that go sailing beyond our shores.”
LNG to the Far East could move on foreign tankers, and although the state authority is keying its fast-track schedule on domestic markets it isn’t forgetting overseas sales. Heinze told the board he is planning a marketing trip to Japan, South Korea and Taiwan for October or November, and he is looking for two board members to join him.
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