Alaska's dream of building a massive liquefied natural gas (LNG) export terminal could be coming to an end. For years, former Alaska Gov. Bill Walker pushed the massive $44 billion capex intensive project as a way to offset decades of dwindling oil production in the country's largest state. He even led delegations on numerous occasions to both China and Japan drumming up support for the project and looking to secure long term off-take agreements necessary to help the project reach the all-important final investment decision.
However, Alaska's new governor, Michael Dunleavy who took office in December, is taking a different approach to the project that was earmarked to send LNG cargoes to Asia-Pacific, a region that accounts for 72 percent of global LNG demand, with that amount projected to reach at least 75 percent amid more demand coming from China.
Dunleavy made changes in January to the board of the Alaska Gasline Development Corporation (AGDC), the company in charge of developing the Alaska LNG project. In November, then-AGDC President Keith Meyer delivered an upbeat status report on the progress of the project. Now, however, new AGDC President Joe Dubler is more cautious. He told legislators during a Feb. 27 Alaska Senate Finance subcommittee meeting that the quasi-state corporation holding the state's dream of a large natural gas pipeline project is in the process of scaling back while evaluating the technical and commercial viability of the Alaska LNG project. Dubler, who officially took the helm at AGDC on Feb. 1, emphasized that Gov. Dunleavy replaced four board members and hired him to "refocus the corporation," according to media reports in the state.
"What (Dunleavy) wanted us to focus on was the Alaska LNG Project to determine if the larger project with the export capacity could meet economic hurdles without undue execution risk," Dubler said to members of the Senate subcommittee for the Department of Commerce, Community and Economic Development budget, which AGDC falls under. "If it is (viable) we're going to solicit world-class partners for FEED, which is front-end engineering and design and completion of regulatory efforts," he said. "If we do all of our work and we determine that the project does not look like it's going to be viable we will wind the project down, close the corporation up and return all the current funds that remain to the General Fund." Related: Major Breakthrough Could "Turn Back The Emissions Clock"
The Anchorage Daily News said that the message is a sharp contrast to what former AGDC President Keith Meyer often stressed. Meyer and former Gov. Bill Walker emphasized the state would only go forward with an LNG pipeline and export plan if it was economical, but there was never an indication the corporation would give up on finding a path forward for Alaska LNG if the current plan ultimately didn't work.
Dunleavy could veto appropriations to AGDC, disband it and transfer remaining Alaska LNG funds to the state's General Fund. However, that would require legislative approval. To date, some $260 million has been spent by the AGDC on the Alaska LNG project.
This is not the first time that doubt over the Alaska LNG project has surfaced. In 2016, three of the project's four partners (BP, Conoco Phillips, and ExxonMobil, all North Slope producers) pulled out of the project. The fourth project partner is the AGDC. What tilted the oil majors' final decision at the time was a report by energy consultancy Wood Mackenzie which stated that the Alaska project was "one of the least competitive" LNG projects in the world. The report was commissioned by BP, ExxonMobil and the state.
The project has a massive capex due to several factors. For one, an 800-mile pipeline would have to be built to move gas from North Slope fields to a liquefaction plant in Nikiski (about 60 air miles southwest of Anchorage). Also, much of that pipeline would have to be built on permafrost, adding even more cost. Related: Lower Buying Appetite May Jeopardize New LNG Projects
Second, construction costs are much higher in Alaska than for competing LNG projects in the Lower 48, which means that gas sold at the Alaska LNG project would have to bring in higher prices for the project to break even. Some estimates place Alaska LNG project gas exports as high as $10/MMBtu just to be profitable.
Yet, in 2016 after the three partners pulled out Walker kept the politically divisive project alive by considering alternative and third-party financing models. Last March, the Bank of China Ltd. and Goldman Sachs agreed to serve as the global capital coordinators for the project. Both entities were to reportedly help AGDC raise equity to fund full-scale development once all the necessary permits were in place.
The state government and the AGDC also signed an agreement in 2017 with Chinese lenders and China Petrochemical Corp., or Sinopec, to advance discussions on the LNG potential in Alaska. Now, all of that could fall to the wayside, undoing years of work under a former governor and possibly causing the state to lose a large part of the world's largest and most lucrative LNG market.
By Tim Daiss for Oilprice.com
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I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets… More
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