Low oil prices heighten uncertainty — Governor, producers light on details about AK LNG changes

Redoubt Reporter file photo, Contractors for the AK LNG project conduct fieldwork taking ground samples in Nikiski in October 2014. The project hasn’t yet started up its expected fieldwork this season.

Redoubt Reporter file photo, Contractors for the AK LNG project conduct fieldwork taking ground samples in Nikiski in October 2014. The project hasn’t yet started up its expected fieldwork this season.

By Jenny Neyman

Redoubt Reporter

Gov. Walker’s announcement last week that changes are coming to state plans for a liquefied natural gas pipeline leaves the curious speculating how substantial a shift might be in the works.

The governor held a press conference with representatives of BP, ConocoPhillips and ExxonMobil on Feb. 17 to announce that the partners will be “looking at different options” for how to advance the project given the economic challenges posed by persisting low oil and gas prices.

Gov. Walker did not give any further information on what the changes might be, saying discussions are currently being held and those details would come in a month or so. But he and the producers did speak about the need to reduce costs and make the project as economical and competitive as possible.

With the gas line terminus and LNG export plant planned for Nikiski, that means a big part of the project’s construction budget would be spent on the Kenai Peninsula. But Larry Persily, the Kenai Peninsula Borough’s oil and gas specialist, doesn’t think the announcement means any substantive changes in the scope of the project, or the peninsula’s role in it.

“I don’t believe any of the vague, squishy description of changes in structure affects the footprint, the route, the fact that Nikiski is the site,” he said.

Persily said the issues seem to be more about financial wrangling, partnership negotiations and finding efficiencies than modifying any large component of the plan.

“Is there a different way to finance this? Have we really figured out the most cost-effective way to move 115,000, 40-foot sections of steel pipe to the state and around the state? If you can shave 10 percent off the construction cost, that’s $5 billion,” he said.

The producers have been stalled on hashing out the Gas Balancing Agreement, which would provide a framework for how the companies pull their gas from the North Slope gas fields. Gov. Walker has been hoping to get the agreement to the Legislature for consideration before the end of the regular session. That timeline now seems unlikely, but it isn’t yet known what that will mean for the overall timeline of the project.

Walker said the prefront-end engineering and design phase is still expected to be complete next fall. AK LNG has budgeted about $200 million to finish the pre-FEED phase this year, including continued testing and engineering work on the Kenai Peninsula. Persily said last week that the work hasn’t yet started this year.

“AK LNG hasn’t issued the contracts, set their work plans, what needs to be done to fill in the gaps in their reports for federal regulators,” Persily said. “So they haven’t started work yet. They’re still planning on doing work, some onshore, some offshore, some on the Kenai Peninsula, some elsewhere along the route. They have not yet publicly said, ‘Here’s our work list and our sites.’”

Redoubt Reporter file photo. Contractors for AK LNG drill core samples in Nikiski in 2014. This year is supposed to be the last of the prefront-end engineering and design phase.

Redoubt Reporter file photo. Contractors for AK LNG drill core samples in Nikiski in 2014. This year is supposed to be the last of the prefront-end engineering and design phase.

The decision whether to go on to the FEED stage is still expected for mid-next year, but Walker and the producers were mum on what that decision might be, much less what the final investment decision following the FEED stage might be, saying only that all options are on the table. Persily thinks that if negotiations over the Gas Balancing Agreement continue to drag on, the timeline on further decisions could also be pushed back.

“If the FEED decision gets delayed then the investment decision gets delayed, then the order for the first pipe gets delayed,” he said. “You’ve always got a little wiggle room but it certainly calls into question, will this project be ready for an investment decision in 2019 as we’ve all hoped? After today, you’d have to say, ‘Well, I probably shouldn’t be betting on 2019. It’s still possible but a little less likely.’”

That could also mean delays on decisions that would have major impacts to the Kenai Peninsula, including rerouting the Kenai Spur Highway to accommodate the new plant and associated traffic increase. The highway reroute is currently penciled in to be completed by the end of 2018, with construction of the LNG plant estimated to begin in 2019.

It could also have ramifications for property owners in the target plant area. AK LNG estimates needing 800 to 900 acres in Nikiski and has been negotiating sales with property owners. So far they have about 600 acres, Persily said, and are continuing to negotiate for more. Owners who are considering selling might want to factor in the increased uncertainty that comes from Wednesday’s announcement.

“Not to give advice to property owners out there, but I guess you’ve got to figure out, if you have a reasonable offer and you want to sell and you think you’re holding out for more, the increased risk of possible delays in the project should make you think, ‘Maybe that last offer is not so bad?’ Or take a chance and try to get more. But you may find yourself, if the project is delayed several years, with nothing because then they don’t need your property as soon as you thought, so it’s a tough balancing act,” Persily said.

Walker and the three producers all commented on continued commitment to making the gas line project happen. The question is how to do that if low oil and gas prices persist.

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