Gas line accord is promising, but we’re a long way from pipe

Kudos to Gov. Bill Walker for his liquefied natural gas coup in China. For years our governor has been waving the flag for Alaska gas in Asia and now, finally, we may have a customer. The deal was penned with President Donald Trump and Xi Jinping, China's president, looking on during Trump's trip to China. What a great photo op!

Walker bristled when asked by an Alaska reporter by phone if the agreement, being called a joint development agreement, is just another memorandum of understanding, or letter of intent, to buy our gas (several of these have been signed by different countries). This agreement has a schedule, to be done by the end of 2018, and a conceptual project outline, for Sinopec, the lead Chinese company, to pay for three-fourths of Alaska LNG's $43 billion estimated cost, so it's much more than just another MOU, the governor said.

Still, the governor acknowledges there is a long way to go. "There are more steps before a final investment decision is reached, but having the largest LNG buyer in the world participating in this project means the Alaska LNG Project has favorable market engagement at the highest level," the governor said in a press release.

Sinopec, for its part, is cautious: "We are really positive about this project but what we are (signing) is a letter of intent for future cooperation, not a contract," Lu Dapeng, a Sinopec spokesman, told The New York Times. "The area (Alaska) definitely has the resources but it still requires extensive research and analysis to determine how big is the market and then to decide on the scale of the final cooperation accordingly," he told the Times.

[Alaska gas line agency reaches deal with Chinese oil company, financial institutions]

A skeptical assessment, from an independent analyst, comes from Hugo Brennan, Asia analyst at Verisk Maplecroft, a consulting firm. He told Bloomberg: "This kind of commercial agreement allows Trump to portray himself as a master dealmaker, while distracting from a lack of progress on structural reforms to the bilateral (U.S.-China) trade relationship. The deal is politically expedient, yet its non-binding nature gives Sinopec the flexibility to quietly back away."

Despite the cautions we should be upbeat about this and hope the deal does come together, and also recognize that the hard part, negotiating an actual contract, still lies ahead.

State legislators are rightfully focused on whether the China negotiations will cost the state's Alaska Gasline Development Corp. more than the $70 million it has on hand, much of which is committed to important ongoing regulatory work for the project.

The governor has committed that he won't come back to the Legislature for more money until there is a firm gas sales deal. So far this deal isn't firm, and the Chinese aren't offering any money up front.

If the agreement can be done by the end of 2018, however, there are other hurdles. Before a final investment decision is made to actually build the project the final engineering and final cost estimates must be done. ExxonMobil Corp., when it led Alaska LNG under previous consortium of North Slope producers and the state, estimated the final engineering, or front-end engineering and design, cost at between $1.5 billion and $2 billion, and that it would take about two years to do competently.

[Here are 5 big questions about Alaska's gas line deal with China]

Post 2018 deal-signing, it will have to be decided who will pay for this. Will the Chinese pony up the money before it's really known what the project will cost? Should the state fund it? Legislators will want to know.

It has been suggested that the final engineering and cost estimating could be fast-tracked or not done as thoroughly as ExxonMobil would do it. I'm no expert but people I talk with who are experts warn that taking short-cuts in the final stage of planning and engineering on a megaproject is a recipe for disaster.

It was instructive to me to read recently that Chevron's departing CEO, John Watson, blames inadequate planning and engineering for part of the huge cost runup — $37 billion to $54 billion — at the company's Gorgon LNG project in Australia, which is smaller in scale to Alaska LNG.

There's more than the engineering needed to make this opportunity real. In the near term, like in the fiscal 2019 budget, state agencies like the departments of Natural Resources and Revenue will have to bulk up with staff, consulting firms and attorneys to be competent in negotiations. The governor should look  at what these agencies spent during negotiations within the prior industry-led consortium as a guide.

To build support for this initiative the governor must lay out what resources are needed and present a plan to the Legislature. Just like the engineering, we can't low-ball funding the negotiations. That will set us up to be snookered — big time.

Tim Bradner is copublisher of the Alaska Legislative Digest and the Alaska Economic Report.