Alaska LNG Project Cost Could Rise from $44B to $88B... Cost Risks for Korean Investment

U.S. Legislature-Commissioned Report: "Cost Increases Biggest Hurdle"
Project Cost Estimate Has a Margin of Error of -50% to +100%... FEED Still Pending
Government: "No Decision Yet on Whether to Invest or on Scale... Discussing Commercial Viability and Investment Terms"

The cost of the project, taxes and financing terms have emerged as key variables in the proposed Alaska liquefied natural gas (LNG) development project, which the South Korean government is considering as a candidate for strategic investment in the United States. Analysts say the cost estimate is still at an early stage, infrastructure expenses account for most of the delivered price of LNG, and it is uncertain whether tax incentives intended to attract investment will remain in place over the long term. They say that before investing, the parties should examine in detail not only profitability but also how costs and risks will be shared.

U.S. Legislature-Commissioned Report: "Cost Estimate at Early Stage... Risk of Cost Increases"

According to a report titled "Key Issues in Alaska LNG: Legislative and Policy Options," submitted on Oct. 21 by global energy consultancy GaffneyCline to the Alaska Legislature's Budget and Audit Committee, the project's biggest risks are its high capital costs and the possibility of cost increases.

The report, prepared in December last year, assessed that the Alaska LNG cost estimate remains at the early "Class V (Class 5)" level. Class 5 estimates are rough calculations based on limited information, with a typical margin of error ranging from -50% to +100%. The project's baseline cost is approximately $44 billion, as estimated by Wood Mackenzie in 2022. Applying the upper end of the margin of error would put the cost at as much as $88 billion, but this is not a prediction that the actual project cost will reach that level; rather, it illustrates the uncertainty in the preliminary estimate.

A full front-end engineering design (FEED), which specifies equipment, construction methods and costs in detail, must be completed before the project cost can be accurately estimated. Alaska LNG would require the construction of gas processing facilities, approximately 800 miles (1,287 km) of pipeline and liquefaction facilities. The report noted that previous work on the project did not progress to the FEED stage, and that changes in material and labor costs have added to cost uncertainty. It said FEED, LNG sales contracts and financing terms should be firmed up before the final investment decision (FID).

Infrastructure Costs Account for 84% of Delivered LNG Price... Trillions of Won in Property Tax Relief Also Uncertain

Infrastructure costs are another factor that will determine the project's economic viability. In the report's pricing model, gas processing, pipeline transportation and liquefaction account for about 84% of the delivered price of LNG in Asia. If South Korea participates as an investor as well as a buyer, it could also face a direct increase in the burden of rising project costs. Higher upfront investment costs would affect additional funding requirements and investment returns, as well as long-term LNG supply prices. The report said cost uncertainty could persist even after FEED and emphasized the importance of allocating cost risks among participants, including engineering, procurement and construction (EPC) contractors.

Taxes are also a key factor in investment decisions. Under current Alaska law, property tax is levied annually at 2% of the assessed value of gas pipelines and processing facilities. The state's Department of Revenue estimated that annual property taxes from the LNG project would reach $740 million in 2033 once it is operational. Tax relief or a freeze on tax rates could reduce the operator's long-term operating costs, but could also lower tax revenues for state and local governments.

The sustainability of tax incentives is also in question. The report noted that Alaska cannot permanently surrender its taxing authority under the state constitution. Even if the legislature signs an agreement with investors to freeze taxes, it would be difficult to rule out the possibility that a future legislature could amend the relevant laws. Since tax benefits expected by investors may be difficult to guarantee over the long term through a contract alone, whether a predictable tax environment can be secured will be crucial to investment decisions.

Assess Project Financing and the Impact of Government Guarantees

The financing structure will also affect the project's viability. The report stated that, in a typical LNG project, 60-70% of total investment costs can be financed through borrowing. According to Wood Mackenzie, U.S. federal government loan guarantees can lower borrowing rates by 1-2 percentage points compared with financing without a guarantee. While this could reduce financing costs and improve price competitiveness, the terms of the guarantees and who bears the risks must be examined.

The report did not conclude that Alaska LNG is economically unviable. Its preliminary economic analysis found that the project could potentially compete with LNG from the U.S. Gulf Coast in Asian markets. However, it warned that the project's economic viability could be threatened if construction costs for gas processing facilities, pipelines and liquefaction facilities rise significantly more than expected.

A government official said, "No specific decisions have been made yet on Alaska LNG, including whether to invest or the scale of any investment. We are in discussions with the U.S. side about the project's commercial viability and specific investment terms." The official added, "We will decide whether to invest after comprehensively reviewing the project cost and other relevant conditions."

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