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Alaska LNG Draws Major Support from China as Sinopec, Financiers Step Forward

Three Chinese companies tentatively have stepped forward to help finance Alaska’s costly and long-stalled natural gas export dreams.

Gov. Bill Walker in China on Wednesday signed the five-party joint development agreement (JDA) to develop Alaska liquefied natural gas (LNG) with China’s state-owned Sinopec Group, the Bank of China and China Investment Corp. (CIC). Also signing on was the Alaska Gasline Development Corp. (AGDC).

“This agreement has all five necessary signatories -- the buyer, the lender, the investor, the developer and the state,” Walker said. “This is a big project with big players and big benefits.”

The project has been estimated to cost anywhere from $43-60 billion. As designed, Alaska LNG would have capacity for up to 20 million metric ton/year of LNG. Included in the design is a three-train liquefaction plant in Southcentral Alaska at Nikiski, an 800-mile, 1.1 meter diameter gas pipeline, a North Slope gas treatment plant, and interconnecting facilities to connect the Prudhoe Bay gas complex to the gas treatment plant.

“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,” Walker said. “This project will finally allow Alaska to reach its full potential as a state. As we move from having one of the highest unemployment rates in the country to the lowest, we will build a stronger Alaska.”

During construction, Alaska LNG is expected to create 12,000 jobs, he noted.

President Trump, who is in Asia-Pacific region for trade meetings, and Chinese President Xi Jinping were at the signing ceremony at the Great Hall of the People. Sinopec is considered the largest oil and gas company in the world by revenue, which in 2016 was estimated at almost $455.5 billion. CIC is China’s direct investment arm, while Bank of China is a state-owned commercial bank.

“Because Alaskans need well paying jobs and affordable energy to power our homes, schools and businesses, this Alaska LNG project is critical,” Walker said. “The gasline is key to building a stronger Alaska.”

The agreement “brings the United States one step closer to energy dominance,” Walker said. The governor also thanked the Alaska legislature “for staying the course” in continuing to fund the AGDC.

Alaska’s congressional delegation hailed the agreement with China, the state’s largest trading partner.

In a joint statement, Sens. Lisa Murkowski (R-AK) and Dan Sullivan (R-AK), as well as Rep. Don Young (R-AK), said responsibly developing Alaska’s natural resources “offers a great opportunity to create good jobs and new wealth in our state and across the country, while paying down both state and federal deficits, improving our balance of trade, and strengthening our national security.”

 

Alaska gas exports long have been a goal for the state’s major gas producers BP plc, ConocoPhillips and ExxonMobil Corp., but the trio and TransCanada Corp. last year threw cold water on the project, indicating it was unlikely to work without more financial backing.

Hurdles remain, as the AGDA indicated the JDA is an “expression of interest,” rather than a binding contract. Under the JDA, the parties agreed to work cooperatively on LNG marketing, financing, the investment model and China content in Alaska LNG, with a “periodic result” in 2018, according to AGDC.

The agreement “brings the potential customer, lender, equity investor and developer together with a common objective of crafting mutually beneficial agreements leading to increased LNG trade between Alaska and China,” said AGDC President Keith Meyer.

Sinopec officials added that the Chinese producer was “interested in the possibility of LNG purchase on a stable basis from Alaska LNG.” Meyer said Sinopec could take part in project construction in return for up to 75% of capacity on the pipeline and liquefaction plant.

“The price of the LNG is going to be tied to the cost of finance,” Meyer said. “It’s going to result in a low cost of LNG, depending on the creativity and the largess of the Chinese banks.”

The project developers also would have to make separate purchase agreements for LNG from the state producers, according to Walker.

“This is an agreement that will provide Alaska with an economic boom comparable to the development of the Trans-Alaska Pipeline System in the 1970s,” Walker said.

China is natural gas-thirsty, as the government has a plan to replace coal and petroleum to reduce pollution. During July alone, China imported 7.2 Bcf of U.S. LNG, according to the U.S. Energy Information Administration. The country also is tracking to take over as the world’s largest gas consumer, surpassing the United States, in the next few decades, according to forecasts.

Analysts weighing in the potential blockbuster deal noted that the project’s startup could be at a minimum five years away.

Wood Mackenzie’s Kerry-Anne Shanks, head of Asia gas and LNG research, noted that the project remains in its early stages.

“Wood Mackenzie classifies it as speculative, which means the commercial structure and marketing plan are not yet clear,” Shanks said. “It is likely to take a few years” before a final investment decision is made, and LNG projects “generally take at least four years to construct from project sanction.”

Alaska has in the past exported gas via ConocoPhillips’ Kenai LNG plant, but volumes were small and costs relatively low.

“The main issue for the Alaska LNG project is its high cost,” Shanks said. “It's a large project at 20 mmty of capacity, with an 800-mile pipeline. Sinopec may be able to secure cheaper LNG supply elsewhere.” However, “Alaska LNG has the advantage of being closer to China than U.S. LNG projects located on the Gulf Coast.”

Verisk Maplecroft analyst Hugo Brennan said the commercial agreement “allows Trump to portray himself as a master dealmaker, while distracting from a lack of progress on structural reforms to the bilateral trade relationship.

“The deal is politically expedient, yet its nonbinding nature gives Sinopec the flexibility to quietly back away from the deal down the line. Beijing is mindful of the need to maintain varied commodity import routes.”

Alaska LNG exports would “align with strategic objectives cloaked within China’s Belt and Road Initiative” Brennan said. “Alaskan LNG would help reduce China’s reliance on energy trade that must transit maritime chokepoints vulnerable to potential disruption. Its strategic advantage over LNG supply from the East Coast is that it would not have to transit the Panama Canal.” 

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