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Global LNG study guided state decisions

Posted: February 11, 2014 - 12:03am
Senate Resources Committee members Sen. Click Bishop, R-Fairbanks, left, and Sen. Cathy Giessel, R-Anchorage, listen to Deputy Comissioner Mike Pawlowski, of the Department of Natural Resources, during a hearing on Senate Bill 138, dealing with building a gas pipeline, at the Capitol on Monday.  Michael Penn | Juneau Empire
Michael Penn | Juneau Empire
Senate Resources Committee members Sen. Click Bishop, R-Fairbanks, left, and Sen. Cathy Giessel, R-Anchorage, listen to Deputy Comissioner Mike Pawlowski, of the Department of Natural Resources, during a hearing on Senate Bill 138, dealing with building a gas pipeline, at the Capitol on Monday.

State officials were staring at grim projections when a consulting firm presented the findings of the Alaska North Slope Royalty Gas Study last year.

The study evaluated every liquefied natural gas project in the world, identified the price each one could sell its product at while still paying for the enormous development costs, and tabulated how much natural gas each project could offer to the global market.

“The Alaska LNG project is projected to be out of the money,” Peter Abt, a managing director with infrastructure developer Black and Veatch, said of the findings. “There are many projects at a break even price less than the Alaska project that are able to meet the global demand by 2025.”

State officials used this study for reference when finalizing two of the biggest policies established thus far in the project. Those deals are the heads of agreement document which outlines each party’s role, and the memorandum of understanding that outlines the state’s relationship with pipeline-builder TransCanada, said Mike Pawlowski, the deputy commissioner of the Department of Revenue.

“This was the analysis we used to get there,” he said. “If we didn’t change anything, those are the realities.”

The findings of the study were also part of the decision-making process when the administration began working on SB138 — the bill before lawmakers that proposes advancing the Alaska LNG project to the next stage.

“We’re not making blind decisions to go forward forever with the project,” Pawlowski said. “We’ve set it up to take a step and then stop to look at if the market is there or not.”

The study also served as part of the platform in the state deciding that becoming a participant in the project would be in its best financial interests, Pawlowski added.

Another section of the study included graphs designed to show the impact of various LNG project-financing models on the overall fiscal interests of the state.

For example, a financing model that is based completely on equity financing and zero debt yields less revenue from production and royalty taxes than models that include some debt, but it also yields higher tariffs — a benefit for state interests.

“We’re making a $70 million to $90 million decision now, and then we’ll make a bigger one later, then a bigger one after that,” Pawlowski said.

The study also identifies that Asian Pacific markets account for 70 percent of the global market for liquefied natural gas, and that the global market is expected to double by 2030 — though supply around the world is also expanding.

Should SB138 clear the Legislature this session, the next legislative break in the project timeline will come in 12 to 18 months, and there will be another in two to three years that would be the final decision to build or not to build the project.

The most recent estimate for the project cost, according to the producers, is somewhere between $37 billion and $54 billion. The state’s projection is about $45 billion — an increase of $18 billion since the 2008 estimate.

“All LNG projects are extremely expensive,” Abt said.

He added that increasing material and labor costs as well as scope changes for components of the project have contributed to the rise in cost — and that it’s not likely to stop rising.

“We expect the costs will be under continued pressure going forward,” Abt said.

Deepa Poduval, a principal with Black and Veatch, estimated that a final investment decision will be made on the project in 2017 or 2018.

If the decision is to build, the project should be operational around 2024, she said.

• Contact reporter Matt Woolbright at 523-2243 or at matthew.woolbright@juneauempire.com. Follow him on Twitter at https://twitter.com/reportermatt.

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