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Alaska gas opts for huge LNG export plant

US North Slope natural gas producers have set aside differences and come to agreement on an Alaska pipeline. The problem is, the deal isn’t the one most were expecting, or even proposing, five years ago

Instead of an overland route from Prudhoe Bay in northern Alaska to Chicago via Canada, BP and ConocoPhillips have agreed to team up with ExxonMobil on a huge liquefied natural gas (LNG) export terminal at Valdez on the Alaskan south coast an estimated cost of $40-50bn.

Prudhoe Bay alone is estimated to hold stranded gas reserves of about 35 trillion cubic feet (cf) and could supply enough gas for up to 20 million tonnes a year of LNG.  The proposed export terminal would take at least a decade to develop.  

As well as being shorter than a pipeline through the Yukon, the companies said the LNG option would allow them to satisfy the state’s Alaska Gasline Inducement Act (AGIA) which requires them to commercialise gas reserves associated with oil production.

“Commercialising Alaskan natural gas resources will not be easy. There are many challenges and issues that must be resolved, and we cannot do it alone”, the chief executives of the three supermajors said in a joint letter to state governor Sean Parnell.

And while the producers are obligated to produce those reserves, the AGIA doesn’t spell out how.

Shale gas shatters assumptions

For more than 40 years it was assumed that a pipeline would be needed to carry the gas from the North Slope to the Alberta border, in Canada.

In fact, a pipeline proposal, which conformed to AGIA rules, put forward by ExxonMobil and TransCanada was approved by the state legislature during Sarah Palin’s tenure as governor. ConocoPhillips and BP countered with the proposed Denali pipeline, which was essentially the same thing - a $35bn, 2,700 km line.

The growth in shale-gas production in the lower 48 states has, however, effectively killed off both pipeline plans. After factoring in shipping and construction costs, and depressed North American gas prices, there is absolutely no way to turn a profit at current US gas prices of under $2.5/million British thermal unit (Btu). But, as they are required by law to develop the gas, producers are now looking to LNG which sell for prices up to six times as much in Asia.

And they are also looking for more state support. In their letter to Parnell, the three supermajors said “unprecedented commitments of capital for gas development will require competitive and stable fiscal terms” to be established before they open the purse strings.

Managing expectations

Although it solves the problem of what to do with the gas, Energy Intelligence research director Ian Nathan at a conference in Calgary recently said the LNG option is a “consolation prize” for Alaska and pipeline company TransCanada.

Alaska would much prefer the jobs and revenues that come with a major pipeline. The LNG route is only half as long - 1,305 km versus 2,762 km and would ship about half as much gas - 3 billion cubic feet a day (cf/d) versus a maximum of 5.9 billion cf/d under full expansion.

TransCanada wanted the gas shipped to Alberta to keep its Canadian mainline system full. So even though it is proposing to build and operate the line, Alaskan LNG is not in the company’s larger interests.

But the Alaska LNG proposal also has challenges at it competes in a global market.  There are a number of proposed LNG export terminals along the Pacific Rim, with Australia up to ten in the works and Canada with at least four in early planning stages.

But the elephant in the room is the US’s own export plans. This week, Dallas-based Energy Transfer partners announced plans to work with BG Group on reconfiguring a 2 billion cf/d import facility in Louisiana to liquefaction for LNG exports. If approved, it will be the second US LNG export project to get the go ahead, after Cheniere Energy’s Sabine Pass. 

After 2014 the Pacific basin LNG market will be open to the Gulf of Mexico when the Panama Canal expansion is complete, giving east coast North America’s onshore shale basins direct access Asian buyers – the target market for Alaska LNG exports.

In return, Asian buyers opting for US exports are going to get access to Henry Hub pricing and cheap Nymex futures, which closed at $2.15/million Btu on 3 April. With consumers such as Japan willing to pay $17/million Btu for landed cargoes, it’s easy to do the maths.

This means Alaska LNG will be competing with Texas and Louisiana, the undisputed bare-knuckle champions of unconventional gas, who are racing to start LNG exports themselves.

Alaska is already losing the battle against Lower 48 shales, there is no assurance it can win against Lower 48 LNG. 

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