State considers taking over Alaska LNG project

OREANDA-NEWS. August 29, 2016.  The state of Alaska is considering taking sole ownership of the massive Alaska LNG export project because of profitability concerns by its current producing partners.

Alaska LNG, which has an estimated cost of \\$45bn-\\$65bn, is among the most "economically challenged" LNG export projects in the world, according to a report that consultancy Wood Mackenzie presented this week to a state legislative committee.

Alaska LNG is a joint venture of ExxonMobil, BP, ConocoPhillips, which have large North Slope reserves, and the state-owned Alaska Gasline Development Corporation (AGDC).

The three producers are backing a proposal for AGDC to take sole ownership of the project by late this year and complete engineering studies and the regulatory review process on its own. If Alaska LNG is able to secure long-term customers, the producers would sign long-term capacity contracts on the planned 800-mile (1,287km) pipeline and sell gas to the project.

"We don't want to rush into the largest energy project in North America only to lose money for all of us," David VanTuly, BP's Alaska manger, yesterday told Alaska's House of Representatives' resources committee. "Now is not the right time to make a commitment."

The Alaska legislature would need to approve the proposal.

The partners have spent a combined \\$600mn on a preliminary engineering study that is expected to be completed next month. But the producers do not want to commit to funding their share of a detailed engineering study scheduled to start next year, at an estimated cost of \\$2.3bn-\\$3.9bn.

Alaska LNG is scheduled to come on line in 2025-26 with capacity of 20mn t/yr, equivalent to 2.5 Bcf/d (71mn m?/d) of gas.

Two potential advantages of the state taking over the project are that it may not have to pay federal income taxes or federal taxes on interest from construction bonds. But two tax experts hired by the state told the committee on 24 August that it unlikely that the Internal Revenue Service would approve such arrangements, as the project would significantly benefit specific for-profit companies and not just a political subdivision.

Alaska governor Bill Walker said yesterday that "now is not the time to shelve" the project, adding it would be the "most significant and most immediate financial get well card" in a state that has been hit hard by low oil prices.

The project as currently structured needs long-term oil prices of at least \\$70/bl to earn standard 12pc rate of return, but it could struggle to achieve such a return even if oil prices reach that level, Wood Mackenzie said. Oil prices in the \\$70/bl range would translate to a delivered price of \\$11-\\$12/mmBtu to Asia from Alaska LNG, the report said.

In contrast, significantly cheaper US Gulf coast projects only need a delivered price of \\$8-\\$9/mmBtu to Asia to achieve the same rate of return, it said.