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Oil company doubts about Alaska LNG led to talks for larger state role

  • Author: Alex DeMarban
  • Updated: June 24, 2016
  • Published June 23, 2016

Suggestions by Alaska's major oil producers they might stop work on the $55 billion Alaska LNG project next year prompted transition talks that could lead to the state taking a larger role in the project, a state official said Tuesday.

ExxonMobil, BP and ConocoPhillips did not say in early February they would leave the natural-gas liquefaction project, said Marty Rutherford, acting commissioner of the Department of Natural Resources. She is set to retire next week and Andy Mack has been named her replacement.

But they indicated with oil and LNG prices low, they were "not necessarily" moving into a costlier phase of the project set to begin in early 2017, she said.

That phase is known as FEED, short for front-end engineering and design. It's expected to cost the partners $2 billion. The engineering and design work will help determine whether the partners should give final approval to the project, a decision proposed for 2019.

"None of them were like, 'We're out of here, we're sorry,' nothing like that," said Rutherford. "But they all said this is a big issue and they weren't sure whether they were going into FEED."

Representatives of the oil producers said on Wednesday the companies are exploring ownership options with the state.

"I can confirm that the state has proposed a state-controlled project and conversations to better understand the proposal have begun," said Natalie Lowman, communications director for ConocoPhillips Alaska.

ExxonMobil and BP said they are committed to getting Alaska's gas to market.

The state currently holds a 25 percent stake in the Alaska LNG project, with producers sharing the rest of the ownership. The project would be one of the largest infrastructure projects ever built, with an 800-mile pipeline to move gas from the North Slope to a plant in Southcentral Alaska, where it can be chilled and compressed into liquid form for shipping to Asian utilities or other buyers.

Construction, if the project becomes a reality, has been proposed for somewhere between 2023 and 2025.

The project began to take shape in 2012 under then-Gov. Sean Parnell. ExxonMobil, the majority owner of the large Point Thompson gas field, has held the largest stake in the project.

Keith Meyer, the new head of the state-owned Alaska Gasline Development Corp., said Monday the state needs to take the lead in the effort.

Rebecca Logan, general manager with the Alaska Support Industry Alliance, said a larger role for the state would be a "concern."

"The state needs an Alaska LNG project, and we need the best people working on it and that's the private sector, the companies that do this every day around the world," she said.

Keith Meyer is the new head of the Alaska Gasline Development Corp. (Alex DeMarban / Alaska Dispatch News)

Meyer said Alaska can own the project but have very little invested. He said there are various ways to accomplish that, but one option is that contracts with LNG buyers can provide the financial foundation for money to build the line by attracting large institutional investors, such as hedge funds or retirement funds, interested in returns over long periods.

Other investors could include the oil producers, Asian buyers, or others, said Meyer.

There are lot of questions about how the state could pull off such a financing move, but it's possible, said Larry Persily, the former federal pipeline coordinator in Alaska and now an official with the Kenai Peninsula Borough.

"People go out with contracts in hand for real customers, good credit-risk customers that will make good on their payments and you can borrow money," he said.

But "project financing" of this size — raising perhaps $50 billion based on anticipated revenue — is unprecedented for an LNG project, said Persily.

"This is a lot of money, and we're an unproven developer," he said. "It's not like we've done this before. The lenders will ask more questions and want more guarantees" and greater returns.

The guarantees could be backed by the gas, but the oil producers currently own most of the gas, not the state, he said.

"The general rule is you get a return on your investment, and the less you put up, the less you make," he said.

Rutherford said the discussions with the producers have included talks about the benefits of state ownership, such as possible exemptions from federal taxes to help drive down costs.

All the parties are focused on an opportunity in 2023 and 2024, when key LNG supply contracts to Asian buyers from other sellers come to an end and could be replaced by Alaska gas, said Rutherford.

"It's a real market window and the governor has felt for a long time we must strive to ensure we hit that window, and that means not seeing delays in the project process, the design and engineering," she said.

The producers, even if they don't decide to own a portion of the project, will still want to make money off the Slope gas they own, she said.

"They see the market window and think the project should hit it," she said.

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