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North Slope partners unveil ambitious LNG plans

Alaska’s North Slope producers have outlined plans for what would be one of the largest and most ambitious liquefied natural gas (LNG) projects in the world

In a letter to state governor Sean Parnell dated 1 October, ExxonMobil, ConocoPhillips and BP, in conjunction with pipeline operator TransCanada Corporation, are proposing “a mega-project of unprecedented scale and challenge” at an estimated cost of $45 billion to $65bn.

The project includes a three-train liquefaction facility capable of processing 15 million to18m tonnes per year (t/y), in addition to storage and loading terminals capable of servicing 15-20 tankers. The gas would be supplied by an 800 mile pipeline that would feed 3.5bn cubic feet per day (cf/d) from Prudhoe Bay to Valdez, following the route of the existing Trans-Alaska pipeline system.

Finally, one of the world’s largest gas treatment facilities would strip carbon dioxide and other impurities.

Individually, “each of these components would represent a world-class project”, the letter states. “Combined, they result in a mega-project of unprecedented scale and challenge.”

If built, the completed project would consume up to 1.7m tonnes of steel, employing a peak construction workforce of up to 15,000, and requiring a permanent workforce of over 1,000 in Alaska alone.

The plans were disclosed in accordance with the state’s Alaska Gas Inducement Act (AGIA), which was enacted by former governor Sarah Palin. The legislation required the North Slope producers to monetise some 35 trillion cf of associated gas at Prudhoe Bay and Point Thomson or risk losing their leases.

About 8bn cf/d of associated gas is re-injected into the Prudhoe field to maintain reservoir pressure, even as oil production dwindles. The US Geological Survey estimates another 200 trillion cf of technically recoverable, non-associated reserves lie in the state.

The announcement is the latest in several steps within the broader AGIA process.

On 29 March, the state government and the companies resolved the Point Thomson litigation. The following day, the companies partnered with the aim to commercialise North Slope gas within the AGIA framework. Governor Sean Parnell had set a deadline of 31 September to detail progress.

Since joining forces, the partners have spent about $700m to execute early lead work and refine possible development concepts.

It follows a non-binding open season by TransCanada that determined that LNG exports were preferable to an overland pipeline from the Beaufort Sea to the Lower 48 states through Canada.

The onshore pipeline has been the favoured option for more than four decades, since then-president Jimmy Carter adopted the Alaska Natural Gas Transportation Act of 1977.

But the rise of shale gas output has made the 1,700 mile line less necessary. With US proved gas reserves of more than 300 trillion cubic feet, according to the Energy Information Administration (EIA), Alaskan gas is effectively stranded in the broader North American market.

The cost of shipping gas such a long distance, estimated to be on the order of $3-4 per million British thermal units (Btu), is higher than the average wellhead price of $2.28/m Btu recorded so far in 2012, according to the EIA. By contrast, exports to Japan are fetching as much as $16/m Btu.

Though LNG shipments to Asia make more economic sense, the sheer size and scope of the project will cast doubts over whether it will ever be built. Aside from the huge capital costs, the logistics of supplying so much steel and manpower is daunting, even for three of the world’s largest supermajors.

If all goes to plan, gas could start flowing by 2018. But that timeline could be extended by “external factors including resolution of fiscal terms, regulatory and permitting delays, and legal challenges”, the producers warn.

It’s also likely that the producers will want more favourable fiscal terms from the state and federal governments before moving ahead with such a large outlay of cash.

Parnell, a Republican, promised to re-examine the issue of gas taxes if his demands were met. But efforts to reduce oil taxes have been met with stiff resistance from his Democratic opposition.

In that sense, the latest proposal can rightly be seen as the opening gambit of a long and protracted negotiation, with no guarantees of success.

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