A proposed Alaska Arctic LNG project holds an unusual place in US-China trade relations

ANALYSIS: The Trump administration has presented a deal to build and Alaska Arctic LNG project with Chinese financial backing as a fait accompli. But the reality is more complicated.

By Dermot Cole - May 28, 2018
Alaska Gov. Bill Walker (Center) meets with Chinese President Xi Jinping in the Captain Cook Hotel in Anchorage. Walker’s efforts to court Chinese investment in an Arctic gasline could fall victim to a larger U.S.-China trade war. (Office of Alaska Gov. Bill Walker)

The Trump administration would love nothing better than to claim an Alaska gas pipeline project as a major victory in its on-again, off-again trade fight with China.

In fact, Treasury Secretary Steve Mnuchin has already made exaggerated claims along those lines about the Alaska plan.

Just after the U.S. and China released a statement May 11 with vague promises for increased cooperation and more U.S. agriculture and energy exports, Mnuchin acted as if the plan to develop natural gas on Alaska’s Arctic coast is a done deal.

“Alaska has signed an MOU (memorandum of understanding). It’s being turned into a binding commitment right away for about $10 billion a year for a very, very long term,” Mnuchin told CNBC.

He was getting ahead of himself and the difficult negotiations between Alaska and China that still lie in the future.

It is true that the state corporation representing Alaska has signed paperwork with potential Chinese investors containing vague pledges to work on a gas pipeline project.

The state-owned Alaska Gasline Development Corp. is working with Sinopec, the Bank of China and China Investment Corp. Sinopec is one of the world’s largest oil and gas companies, while the other two government-controlled firms are financial giants.

But there is nothing binding so far.

It’s also not clear what the finances will be for Alaska and whether $10 billion is a number anyone can take to the bank.

The state timetable now predicts that if talks go well, the project could win authorization from the Federal Energy Regulatory Commission in two years.

One of the oddities of gas pipeline politics is that the federal cheerleading for the Alaska project comes at a time when many Alaska Republicans are complaining about the gas pipeline — mainly because it is backed by independent Gov. Bill Walker, a man they hope to defeat in November.

So much remains unknown about pipeline finances — the details of which have remained secret — that it is impossible to say whether the project with its thousands of construction jobs will benefit the state treasury in the long run, given the reality that China will push for every imaginable concession.

The project could cost $43 billion or more, with much of that coming from government-backed institutions in China.

The goal is to tap into the Chinese gas market by 2025, a period that is expected to coincide with an increase in global demand, which will improve the economics of LNG projects.

The agreement signed with prospective Chinese backers last November by Alaska called for the two sides to reach agreement on defining key issues by the end of May.

But binding agreements would not happen until later in the year, by which time the essential financial details would have to be worked out.

The Trump administration clearly sees the Alaska gas deal as one with the potential to create an attractive option for Chinese investment. But if the larger trade battle between the U.S. and China opens doors for Alaska, it will do the same for competing projects in the Lower 48, many of which are less expensive.

“Despite trade war concerns, U.S.-Chinese energy ties may well strengthen,” Platt’s concluded in a recent report. “The U.S. is ramping up its LNG exports as China emerges as the world’s second largest importer of LNG.”

China’s growing deficit in gas supplies can only be met by imports, with the nation surpassing Korea in 2017 to become the second largest LNG importing nation.

In the last two years, two projects to export liquefied natural gas from the United States have started operations, one in Louisiana and one in Maryland.

The new facilities gives the U.S. the capacity to ship up to 3.6 billion cubic feet per day to a couple of dozen nations.

Four other projects are under construction and several more are in the planning stages, including the Alaska project.

The proposed Alaska natural gas pipeline would transport 3.5 billion cubic feet a day, but it will not be built unless there are binding agreements to purchase the gas.

Mnuchin told interviewers there is a “massive opportunity for the U.S. to become a major supplier of energy to China.”

“They have incredible amounts of demand at these prices for our shale and our LNG,” Mnuchin told CNBC.

The boost of U.S. gas supplies has led to proposals for more than two dozen LNG plants in the U.S. and the promoters of various projects see China as the most important buyer for years to come. There are also foreign suppliers looking to sell their resources to China.

This competition with other projects is the single greatest hurdle for Alaska to overcome as China looks to diversify its energy supplies.

Alaska has an advantage in that it is closer to China than the U.S. Gulf Coast. Its big disadvantage is that Alaska is a high-cost area and the project requires the building of an expensive 42-inch pipeline across the state.

Under the proposed Alaska deal,  the Chinese financial firms would provide most of the funding to build the project. In return, China would receive most of the natural gas.

About one-quarter of the cost, $11 billion, would be raised from other investors.

The Alaska project is timed so that it would come on-line in the mid 2020s, a period at which growing demand may create a market for Alaska gas in Asia. If China accelerates the move away from coal-fired power plants, the estimates of future needs may be too conservative.

One of the big uncertainties is whether China will agree to make long-term sales agreements that will provide the basis on which the pipeline from the North Slope to Nikiski could be financed.

The trend in recent years has been for shorter-term contracts, which benefit buyers at the expense of sellers.

Only when the details of the agreements with China become public will Alaskans be able to ascertain whether the state is being asked to give away too much to make the pipeline dream a reality.

Dermot Cole can be reached at [email protected].

The views expressed here are the writer’s and are not necessarily endorsed by ArcticToday, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary (at) arctictoday.com.