By Tim Bradner
Alaska community and business leaders are closely watching developments on the big Alaska LNG Project this summer. North Slope producing companies and the state of Alaska, which are in a partnership on the project, are engaged in preliminary engineering and environmental work, and key decisions are pending late this year and in early 2016.
Alaska LNG really encompasses three mega-projects rolled into one: a large natural gas conditioning plant on the North Slope, an 800-mile, 42-inch pipeline from the slope to Nikiski, on the Kenai Peninsula south of Anchorage, and a large liquefied natural gas, or LNG, plant at Nikiski. An earlier cost estimate is $45 billion to $65 billion, but that is being updated as part of the engineering studies now underway. The revised cost estimate, which could be available late this year, is obviously very important to the future of the project.
A fourth project now under construction will also be part of Alaska LNG if it proceeds. This is the $4 billion Point Thomson gas and condensate production project currently under construction about 60 miles east of Prudhoe Bay, on the slope. The Prudhoe Bay oil field holds about 24 trillion cubic feet (tcf) of gas and would be the “anchor” gas supplier for Alaska LNG but Point Thomson’s reserves of about 8 tcf will also be needed to support the pipeline and LNG project. Construction at Point Thomson will be finished in early 2016 and will initially produce 10,000 barrels per day of liquid condensates through a new 12-inch liquids pipeline that has been built from Point Thomson. If the big gas project proceeds, Point Thomson’s facilities will be converted to conventional gas production.
The preliminary engineering now underway, called Pre-Front End Engineering and Design, or “pre-FEED”, will set the stage for a decision by the partners to begin final engineering, Front End Engineer and Design or “FEED”, is expected sometime in 2016, although under the partners’ agreement the decision can be stretched into early 2017. Gov. Bill Walker hopes the decision can be made as soon as possible, possibly mid-2016, after completion of pre-FEED. The FEED decision is very important because it will be expensive, with cost estimates ranging from $1.5 billion to $2 billion, and requiring the first substantial investment by the partners. The state’s share of the FEED costs has been estimated at about $500 million. The pre-FEED costs are less, in total about $500 million, with the state’s share of about $100 million. This has already been funded.
The FEED decision is also important because it will be a major indicator that the project’s economics are favorable and that the decision planned in 2018 to actually build it, the Final Investment Decision, is likely. We’re told that very few large projects that reach the FEED stage do not wind up being built.
However, there are important decisions involving the state of Alaska’s partnership role that must be decided later this year. The state is a party to several project operating agreements that are needed among the partners, and the Legislature will have to approve some of these. Most important, the producing companies and the state have to reach agreement on fiscal (tax and royalty) terms on gas production and a way to lock in these terms for a period of years, most likely the terms of LNG sales contracts with buyers (the buyers will insist on stable fiscal terms). There are legal issues involved in this and Governor Walker has said that an amendment to the state constitution is likely to be necessary. The earliest this can occur is the November 2016 state general election. The deal on fiscal terms is necessary for the project and legislative approval is needed, but if a constitutional amendment is required a positive vote of the public will also be required.
Separately, the state will have to decide on whether to change its current partnership with TransCanada Corp., a pipeline company. Under the current arrangement TransCanada would finance and build, and own, the state’s 25 percent share of the pipeline and North Slope gas conditioning plant. The state would separately finance and own 25 percent of the LNG plant through the state-owned Alaska Gas Development Corp. Even this is a big financial undertaking for the state because the LNG plant represents about half of the total capital cost of Alaska LNG. Gov. Walker and the state gas team are considering keeping the current arrangement with TransCanada, ending it and having the state own (and have to finance) all of the 25 percent share of Alaska LNG, or exercising an option to buy into TransCanada’s share of the pipeline and gas plant. This decision will have to be made by the end of the year.
Negotiations are currently underway among the partners on all of these issues and the status is confidential. It is known, however, that the governor has asked for certain changes, such as an increase in pipe diameter to 48 inches; a Cook Inlet crossing on an alternate eastern route to one the project is now focused on, and a change in the way the project would market LNG and the state’s share of that. How the industry partners are responding to these requests is unknown at this time.
While there are still many unknowns, it is known that Alaska LNG is very important to future state finances and the continuation of oil production on the North Slope. After it is operating–2025 is the expected startup–the project would result in several billion dollars a year in new revenue to the state from sales of the state’s share of the LNG. As for continued oil production, the availability of a gas pipeline will encourage exploration on the slope for gas and, inevitably, new oil discoveries will also be made.
Tim Bradner is a natural resources writer for the Alaska Journal of Commerce