Report: LNG project must be state-led, but chance of success is 'low'

A new report from the Alaska Legislature's oil and gas consultants offers advice for the state's long-held dream of selling North Slope gas, finding some agreement with the governor on a state-led effort but adding that odds now for a successful project "are low"  — even if it can be built for $45 billion, $10 billion less than some estimates.

However, if liquefied natural gas prices rise or other favorable event occurs, the state must be ready with a single voice to move the project forward, according to the five-page report from Nikos Tsafos, president of the small consulting group Enalytica.

That involves having a clear plan in place and an experienced state team ready to negotiate with sophisticated companies such as ExxonMobil, whether the state is a full owner as it currently is, or holds a minority stake. A state leadership role is key because the three major oil and gas companies owning North Slope leases often don't get along, and the state needs to broker disputes, Tsafos said.

"The state is indispensable — it wields the biggest veto, it has the most leverage and the broadest toolkit, and it can mediate disagreements between the (gas) producers. But the state cannot achieve all it wants — it can nudge the parties, but it cannot wish away the complexity or even go it alone," Tsafos said.

In an interview last Wednesday, Tsafos said the report offers a "reflective" tone discussing lessons learned since Enalytica's involvement with the project starting in 2014.

The five-page report was created under Enalytica's seven-month contract with the Legislative Budget and Audit Committee that ends Jan. 31. The contract pays $3,000 for a day's work, with a $60,000 overall cap.

The report was released on Friday. It required a few days to prepare, he said.

In the report, Tsafos labels the current project's chance of success as "low," with the next $2 billion phase, known as FEED for front-end engineering and design, in question.

The report calls for the state to establish tangible goals and a timetable defining when the project should be halted — or continued if circumstances improve.

"Meetings do not mean progress," Tsafos said. "Progress means money secured, gas bought or sold, capacity reserved for the infrastructure, contractors signed up — and all done in detailed and, ideally, binding, term sheets," Tsafos wrote. "Otherwise, this process may never succeed but never fail either."

Numerous proposals and billions of dollars have been spent to tap North Slope gas reserves over the decades, without success. Falling gas prices have often killed enthusiasm, forcing the state, oil companies and others to abandon efforts until markets for gas improve.

The latest concept — to ship gas in an 800-mile pipeline, liquefy it, and haul it in tankers to Asian countries — has been pursued since 2012. But the effort recently lost its major private investors — lead partner ExxonMobil plus ConocoPhillips and BP.

Now, just the state remains, with its Alaska Gasline Development Corp. effectively looking for new business partners, such as Asian utilities to sign supply contracts that underpin financing arrangements and attract investors.

Even if the pipeline can be built at its low-cost estimate, problems remain, the report said.

“Today, the cost is closer to $45 billion — which is an improvement, but not enough,” it said. The general average construction cost for the line had been estimated at $55 billion, up to $65 billion.

And concerns have increased that the state agency will spend its last $100 million — atop the $150 million it has already spent — only to fail.

"The worst outcome is this: the progress made so far in the regulatory process stalls, and the state spends months (or years) and tens (or hundreds) of millions of dollars to conclude that the assumptions made to justify the 'state-led' project were wrong (especially since these assumptions look implausible to begin with)," the report says.

AGDC president Keith Meyer was not available for comment on Monday.

Gov. Bill Walker has said the state will back off the project by Sept. 1 if buyers or investors can't be found to support it.

Tsafos said on Wednesday he's looking for more detail, such as signed agreements with buyers accounting for 80 percent of the project's potential gas output. The report also says a timeline is needed to lay out other specifics, such as deadlines for getting reports to the lead permitting agency, the Federal Energy Regulatory Commission.

Enalytica also recommends the agency test its assumptions about a state-led project, including presenting proof that big institutional investors like pension funds would actually put money in liquefaction projects and accept lower returns than the oil companies have sought. Meyer has often made that argument to help explain how the state can attract new investors.

The project will continue to be expensive even if the state can secure a federal tax exemption from the Internal Revenue Service, another challenge the project faces. The report adds that consensus is key, among Alaskans, the state and oil companies. And the state should be prepared to somehow provide the fiscal stability — a euphemism for a long-term deal on taxes — that oil companies have long sought.

"Without agreement on fundamental trade-offs that the state might be called to make, it will be difficult to settle on a plan that receives widespread and deep support," the report says.