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North Slope gas producers support switch to state-led Alaska LNG project

Anchorage, Alaska — Cost estimates for the Alaska LNG Project have been shaved 20% or more, but the project is still not economic, its managers told state legislators in hearings that ended late Thursday.

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Based on that, three North Slope producers who are now part of Alaska LNG -- BP, ConocoPhillips and ExxonMobil -- will not proceed further with the project as it is currently structured, all three companies told a combined meeting of the House and Senate Resources Committee on Thursday.

A fourth partner, the state of Alaska, is investigating alternative project structures, including state ownership, and will continue development.

The producers support that effort, they told legislators.

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"BP is not giving up on the project. Instead, we need to change gears and figure out how to reduce the cost of supply so that the project can be competitive," said Dave van Tuyl, BP's Alaska regional manager. "We believe that the best way to make that happen is with a state-led project and we support the state's efforts."

A new cost estimate puts the required capital investment at about $45 billion, which is in the lower range of a previous estimate of $45 billion to $65 billion, said Steve Butt, an ExxonMobil manager who is heading preliminary engineering for the project.

"We've made a lot of progress in driving down costs, but it isn't enough the make the project economic," he said.

Preliminary engineering for the project is 95% complete and will be finished in mid-September, but under its current ownership structure Alaska LNG will not proceed into more costly final engineering, which was scheduled for 2017, Butt said.

PROJECT HAS ADVANTAGES, DISADVANTAGES

As currently configured, Alaska LNG involves an 800-mile, 42-inch, high-pressure pipeline from northern to Southcentral Alaska; a large gas treatment plant on the North Slope that would mainly remove the 12.5% carbon dioxide in raw gas from the Prudhoe Bay field; and a large LNG plant at the southern terminus of the pipeline at Nikiski, on the Kenai Peninsula south of Anchorage.

The US Department of Energy has issued a license to the North Slope producers, currently the main owners of Alaska LNG, to export up to 20 million mt/year of LNG. It would be one of the world's largest LNG projects and also one of the most expensive.

The three producers and the state are spending about $600 million on preliminary engineering. Earlier, the three producing companies spent $106 million on conceptual engineering. Final engineering, or front-end engineering and design, is expected to cost $1 billion to 2 billion.

Butt said the Alaska project has its advantages and disadvantages.

"Its resource risk is low. We know the gas is there. There are structural advantages, mainly being close to the market [Asia] but also structural disadvantages," mainly the pipeline needed from the North Slope to the LNG plant at Nikiski in Southcentral Alaska.

"We're not there yet [on the economics] but we know how to get there,' Butt said.

ALTERNATIVE STRUCTURES UNDER STUDY

Keith Meyer, president of the state gas corporation, said his group is studying possible advantages of tax-exempt status for which a state-owned project might qualify as well as ownership by a third-party investor group that would ship gas and manufacture LNG under a "tolling," or contract, arrangement with slope producers and the state for its royalty gas.

Meyer told legislators that AGDC now aims for a decision to do final engineering in late 2018 and believes that could still allow for a construction decision and project completion near a 2025 target now envisioned.

How the project would be commercially reconfigured is still to be determined. Meyer said he hopes the producing companies will stay with the project in some form.

"They should be our best customers, as shippers of gas," he said. But if the companies decide to sell gas at the wellhead, "we'll work to bring in other customers [the buyers of the gas] to be shippers,' he said.

COMPETITIVENESS IN DOUBT UNDER CURRENT FORMAT

The current partnership has the three major slope producers and the state owning percentages of the project equal to each party's ownership of gas, about one-fourth for each. The state would take its royalty and tax share in kind, or as gas, under the current plan.

As currently configured the project would be the least competitive of major LNG projects now being planned, a Wood Mackenzie consultant told legislators.

Alternative ownership models might reduce the project's cost of supplying LNG to the point that the project might compete even at current energy prices, said David Barrowman, a Wood Mackenzie consultant who supervised the study.

BP, ExxonMobil and the state funded the study.

As currently structured, Alaska LNG would deliver LNG to Asia for about $12/MMBtu, assuming a project cost in the $45 billion range, according to the study.

"Not only will the project not make sufficient returns for investors at current LNG prices, but it may struggle to make returns even under a $70/b oil price," Barrowman said.

The state can do things to improve the economics, he said.

One option is ownership by a third-party investor group, such as pipeline company and eventually equity investors or pension funds, who might accept a lower return on investment in the range of 8% compared with a 12% return producer/investors would likely require, Barrowman said.

That could reduce the cost of LNG to as low as $7-$8/MMBtu, which might be competitive compete at oil prices of $45/b.

Another option, full state ownership and tax-exempt status, could reduce the cost of service to the $6/MMBtu, the study said.

It is not known whether the Internal Revenue Service would approve tax-exempt status for the project, but exemption from state property and corporate income taxes would be assured under a state-ownership model.

--Tim Bradner, newsdesk@platts

--Edited by Jason Lindquist, jason.lindquist@spglobal.com