Alaska LNG hinges on Chinese funding, FID planned in 2019

Friday, 02 November 2018

Regardless of the trade war between the United States and China, state-controlled Sinopec has reaffirmed plans to reserve 75% of the project's LNG production capacity. Sinopec wants to become the project’s main offtake customer, allowing CIC Capital to be an equity investor, while the Bank of China will help refine the financing structure. Financial close is targeted for late 2019, or in early 2020. 

Chinese funding will be instrumental to get the huge Alaska LNG venture off the ground. The Bank of China and CIC Capital, part of China Investment Corp, are firmly standing behind Sinopec’s aim to conclude definite offake agreements for LNG shipments from Alaska. 

Costs of realizing the 20 mpta Alaska LNG project are estimated to come in at $43.4 billion, and the project developer Alaska Gasline Development Corp. (AGDC) is open to almost any form of foreign financing, combined with firm offtake accords.

Sinopec in early October signed a supplemental agreement with Alaska Gasline Development Corporation (AGDC) to reserve 75% of the LNG production capacity in the 20 mtpa Alaska LNG venture. To sell the remaining 5 mpta, not booked by China, Alaska LNG developers are in negotiations with Tokyo Gas, Korea Gas and PetroVietnam, but other Chinese buyers may also snap up some volumes.

AGDC President Keith Meyer said the latest agreement with Sinopec “reaffirms the willingness to establish LNG trade between Alaska and China for the mutual benefit of all parties.”

The second offtake accord with Sinopec came shortly after AGDC arranged feed-gas deals from the prolific North slope resources in Alaska. ExxonMobil signed a preliminary accord to sell its 13.8 Tcf of natural gas resources in the Prudhoe Bay and Point Thomson fields, and BP is also looking to divest some of its North Slope resources. The two agreements with Exxon and BB committed 22.7 Tcf of natural gas to the Alaska LNG venture, with the supply sourced mostly from the 32 Tcf of easily recoverable feed-gas resource on the North Slope.

Tit-for-Tat Tariffs

Geopolitically speaking, the new agreement comes at a sub-optimal time given that the U.S. President Trump is the driving force behind an escalating trade war with China.

In September, the Trump administration enacted a 10% tariff on $200 billion worth of Chinese products that is scheduled to rise to 25% after January 1.

Beijing hit back with tariffs of 5-10% on more than 5,000 products imported from the United States, including LNG at 10%. Both sides have vowed to enact additional tariffs if the other side retaliates.

Analysts cautioned that Sino-U.S. trade tensions could be exacerbated by a the new United States-Mexico-Canada Agreement (USMCA), and it is also unclear whether Shell’s move to take FID on the 14 mtpa LNG Canada project could undermine progress on the LNG Alaska venture.

FID planned for late 2019

Seeking to disperse concerns, an AGDC spokesman said FID on LNG Canada "does not affect" plans to issue an FID in late 2019 or early 2020, which would put Alaska LNG on track to export its first cargoes in 2025.

On the contrary, the financial close on LNG Canada showcases the attractiveness of exporting LNG from the Pacific Coast of North America, with shorter sea voyages for shipping cargoes to Asian markets.

Traders and portfolio players in the global gas market have already accounted for the volume of gas LNG Canada will export. “This supply is already factored into the conversations AGDC is having with potential customers,” the spokes-man said, suggesting: “Demand for LNG in Asia is greater than both of these projects' combined capacities, so there's still plenty of room for Alaska LNG's 20 mtpa.”

Shell estimated LNG Canada cargoes would take about 10 days to reach Asian ports, while cargoes from the U.S. Gulf Coast can take 24 days to reach Asian ports, as they have to traverse the Panama Canal.

Costs for Alaska LNG amount to $45 million

To realize ambitious plans for exporting LNG from Alaska, project partners need to build an 800-mile gas pipeline from the North Slope in northern Alaska to a planned liquefaction plant in Nikiski on the Kenai Peninsula, south of Anchorage. Total cost of this project is estimated to come in at up to $45 billion.

State-owned AGDC estimated the wellhead price the state of Alaska itself would receive for its royalty share of gas would likely range between $1.00/MMBtu and $2/MMBtu.

A federal record of decision, which would clear the way for the FERC approval, is expected in February 2020. That would allow for a final investment decision in 202020. Construction would then be underway in 2021 and completion and commercial operations could be expected by 2025.