Legislators push back on Walker gas plan; industry takes wait-and-see approach

Just as things seemed to be going reasonably well for the large Alaska LNG Project, the $45 billion to $65 billion gas pipeline and liquefied natural gas initiative in which the state is a partner, Gov. Bill Walker may be throwing a wrench into the works.

State legislators, and the state’s industry partners in the big project, are now worried about the governor’s Feb. 18 announcement that he will pursue a larger version of a small state-backed pipeline intended now to supply gas to Alaskans.

The governor’s proposal is being seen as a possible competing project to the large pipeline and LNG project. That project, Alaska LNG, is now in the preliminary Front-End Engineering and Design, or pre-FEED, phase, with negotiations now underway to advance to the more detailed engineering phase next year and possible construction beginning in 2018.

Walker’s announcement came out of the blue. Legislative leaders were not informed in advance, nor apparently were state administration officials working on the gas project alongside the industry partners.

House Speaker Mike Chenault, R-Nikiski, and other House leaders are now worried about the mixed signals from the state caused by the governor’s announcement.

They introduced House Bill 132 on March 2 to block Walker from spending money to compete against the joint-venture project, unless the larger project fails to advance.

Walker took offense and within minutes after reading an Associated Press story on HB 132 convened a hasty press conference and questioned the motives of the House leaders. He also said he would veto the bill.

“I’m absolutely shocked. Alaskans should be outraged. Who are these people (the bill sponsors) really working for?” the governor said.

Following Walker’s remarks, Chenault said the main concern was the likely confusion in the market caused by two Alaska gas projects being promoted simultaneously.

Chenault and Rep. Mike Hawker, R-Anchorage, said their intention with the bill was to create a mechanism for transparent and frank discussion of the governor’s plan through legislative committee hearings.

“We don’t like conducting business through press releases and op-eds,” Hawker said.

When he and Chenault went earlier to meet with Walker to get more details on his plan they got very little, Hawker said. That was the final motivation to introduce the bill, he said. On March 2 Walker said more information on his plan will be forthcoming.

House Majority Leader Rep. Charisse Millett, R-Anchorage, criticized the governor for questioning motives of the bill sponsors, which include her.

“It is a long-standing rule in the Legislature never to impugn the character of another public official. We expect everyone to have good motives. Legislators were disappointed to see the governor say what he did, “in an emotional press conference,” Millett said.

Rep. Bob Herron, D-Bethel, who is also a cosponsor of HB 132, said his motivation is to best represent 17,500 people in his Bethel-area district, the vast majority who are Alaska Natives.

“They see their interest as in getting a large gas project because they know that is their future,” Herron said.

The governor originally announced his idea Feb. 18 in a press release as he appointed new board members to the Alaska Gasline Development Corp.

ADGC also is a partner in the larger joint-project with North Slope producers BP, ConocoPhillips, ExxonMobil and TransCanada Corp.

Industry partners in the project were not pleased about the governor’s announcement.

At the time, ExxonMobil spokeswoman Kim Jordan said, “Now that the governor has announced that the State of Alaska is sponsoring a project in direct competition with the Alaska LNG Project, we are assessing the impact on our forward plans.”

The company is leading the Alaska LNG Project on behalf of the partners, including the state.

ExxonMobil dispatched a group of executives including Steve Butt, an ExxonMobil manager who is in charge of the project, to meet with Walker in Juneau Feb. 26 to discern the governor’s intentions. 

Jordan said only that the meeting was “constructive.”

In his March 2 impromptu press conference, Walker said ExxonMobil told him in the meeting that they are no longer concerned with the plan now that they understood the governor’s goal, which is having more options for the state.

Jordan, the company spokeswomen, would not verify that, however. She said her company has no comment on Walker’s version of the meeting. 


Wait and see

Speaking on background, several company representatives said they do have concerns but are waiting to see what the governor really does.

They doubt Walker can really develop a state-backed pipeline as a serious alternative, but the concern is more on how the mixed signals will play in Pacific gas markets, where the producing companies are now promoting the idea of LNG from Alaska.

“It just causes confusion. It means that when we have a meeting in Japan we have to spend the first third of the meeting trying to explain what the governor is up to,” said one company manager.

A more serious concern, several companies said, is how confidential information can be secured among the partners when the state is working on a competing project.

Walker also said he still supports the larger joint-venture gas project but wants the state to have a more viable backup plan ready as an option.

“All of the producing companies have other LNG projects they are working on that will be weighed against our project here,” Walker said March 2, citing an ExxonMobil LNG project in British Columbia. “Why can’t we have an option, too?”

Despite his statements supporting the larger project, which have been made many times, many legislators harbor a belief that Walker still prefers a gas project with construction led by the state and the state holding the majority of ownership.

In a Feb. 19 press conference, when he announced his plan, the governor said his idea of a percentage of ownership is “at least 51 percent,” which is consistent with what he said during his campaign for the governor’s seat last year.

What Walker proposes is to expand throughput through the smaller gas project that AGDC, the state corporation, was developing as a backup plan to get North Slope gas to Alaska communities in case the large project falters.

The smaller project, known as the Alaska Stand Alone Pipeline, or ASAP, is now designed to move 500 million cubic feet a day, which is enough to supply Alaska utilities in Interior and Southcentral Alaska and have some gas left for regional industrial uses, such as fuel for mines or gas-based manufacturing.

Walker argues the small throughput makes the ASAP hopelessly uneconomic, and requiring a massive state subsidy, if it were actually built. His proposal is to expand throughput to 2 billion cubic feet per day or more to make the project more economical, and to find a partner to develop an LNG plant.

One company the state has had some contact with is REI Alaska, a small Japanese-owned firm working to develop a 1 million ton-per-year LNG plant in Cook Inlet that would tap Cook Inlet gas.

REI doesn’t yet have financing from Japan to develop the project but hopes to do that this year if a gas supply can be secured. The company is talking with Cook Inlet gas producers but is also interested in state royalty gas from the North Slope if a pipeline is built.


Upsizing ASAP

The ASAP is now designed to be built with 36-inch diameter pipe and could technically transport as much as 1.6 billion cubic feet per of gas if more compression were added, AGDC President Dan Fauske said earlier in briefings.

Throughput could even be boosted to 2.5 billion cubic feet per day under certain scenarios, he said.

From a practical point of view, the governor’s plan faces big obstacles besides angry legislators in developing a larger project.

For example, ASAP does not include an LNG plant unlike the larger Alaska LNG Project. Also, its pipeline now ends in

the Matanuska-Susitna Borough north of Anchorage, where it would link with the existing regional gas pipeline owned by Enstar Natural Gas Co.

To sell the gas not consumed in Alaska, the state would have to attract an LNG partner, and also extend its pipeline to a Cook Inlet port site. Although it would add costs, this may not be a big obstacle because REI’s proposed LNG plant is adjacent to Port MacKenzie, the Matanuska Susitna Borough’s industrial port on Knik Arm.

There are other wrinkles with a link to an LNG export project, however. One is that the North Slope gas treatment plant plan for ASAP would process raw gas to a quality suitable for home heating and power generation, but not for LNG.

To be processed into LNG, much more of the carbon dioxide in the North Slope gas would have to be removed than is possible with the current design for the ASAP plant. This could be done, but it would add expense and delay for the redesign.

Another unknown is what additional permitting and regulatory requirements might be needed for an expanded ASAP project. More compression would certainly be needed to move more gas and this may require one or more compression stations to be built along the pipeline route.

The current ASAP has no compressor stations, and relies on enough compression being done on the North Slope to move 500 million cubic feet per day, the current volume planned, all the way to Southcentral Alaska.

Adding compressor stations would almost certainly require another supplemental environmental impact statement, which would add costs and 18 months to 24 months to the schedule.

No gas, or cash

One more twist: The state now has no gas supply. At the March 2 press conference the governor talked about the need to be out in the market with Alaska’s gas but the state cannot begin marketing independently with any creditability because it has no gas to sell.

Legally, the state’s royalty share of gas is delivered only when the leaseowners, the producing companies, produce their gas.

The governor also spoke March 2 on the producers’ “duty to produce” under the state lease if a buyer with credibility is available, but there is huge potential for dispute over when and how a buyer makes a credible offer.

House Majority Leader Millett said the legal theory of “duty to produce,” which has been advanced by a private attorney based in San Francisco and spoken of often by Walker, has been around for years but never tested in court. It would be aggressively challenged by producers, she said.

“The last thing I want is for Alaska’s gas to be tied up by lawsuits for 20 years,” Millet said.

Fundamentally, however, the state does not have the financial capability now to take on even the smaller-size ASAP project, which is estimated at $10 billion as now designed, much less a scaled-up gas project.

The oil price drop has cut state revenues, which are mostly from oil, in half. Budget deficits of $3.5 billion are projected for this year and next, and while the state does have cash reserves those are sufficient to support the state budget for only a few years, much less take on a commitment for financing a North Slope pipeline.

Tim Bradner is a reporter for the Alaska Journal of Commerce.