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Trump, China and an LNG deal

The US president's trip to China yielded the promise of a new gas supply partnership. But the deal was heavy on fanfare and light on details

Among the headline announcements from President Donald Trump's first state visit to China was a non-binding memorandum of understanding for state-owned Sinopec, the Bank of China and China Investment Corporation, the sovereign wealth fund, to join the Alaska LNG megaproject.

Details of the agreement were scant, probably because there aren't many details to share at this point. In a press release, Alaska Gasline Development Corporation (AGDC), the state government-backed company now leading the project, said "the parties have agreed to work cooperatively on liquefied natural gas marketing, financing, investment model and China content in Alaska LNG, and get a periodic result by 2018."

The China deal is the latest twist in the long effort to get Alaska LNG built. The project envisages linking the North Slope's stranded gasfields to a 20 million tonnes per year export plant in Nikiski via a massive 800-mile gas pipeline. Cost estimates for the project have ranged from $45bn on the low end to $60bn on the high end, making it one of the most expensive and most complex LNG export projects ever proposed.

A consortium of BP, ConocoPhillips and ExxonMobil, all major North Slope producers, spent years trying to make the economics of Alaska LNG work. There is a commercial logic to the proposal. The producers are sitting on huge trapped reserves, and Alaska is relatively nearby. But the price tag proved insurmountable. They finally pulled out of the project last year, partly because a definitive study on Alaska LNG by the consultancy Wood Mackenzie laid out the dire road ahead.

The Wood Mackenzie study showed Alaska LNG would need a gas price of between $12 and $16 per million British thermal units to breakeven, or more than $70 a barrel. Gas is currently selling in Northeast Asia for around $8/m Btu amid a global LNG glut. Even if prices were to recover, the Wood Mackenzie report found that the project would be costlier than every other emerging LNG region—from US Gulf Coast projects to East Africa to Canada's West Coast to new floating LNG proposals. That was before Qatar lifted its moratorium on new LNG developments and promised a slug of additional low-cost supply in the 2020s.

Long and winding road to LNG

So, does the China deal bring Alaska LNG any closer to fruition? Almost certainly not. The economics of Alaska LNG haven't improved since BP, ConocoPhillips and ExxonMobil abandoned the project. It's true that Sinopec, and China more broadly, will be scouring the globe for new gas supplies in the years ahead, but it will have many more attractive options. It is also worth noting that Sinopec has never led the development of a liquefaction plant anywhere in the world, let alone one as costly and complex as Alaska LNG would be.

Rather, the deal looks more like an exercise in political expediency. One of Trump's primary objectives in going to China was to bring back headline grabbing deals to buttress his self-image as the businessman-in-chief. For Alaska governor Bill Walker, it also made a lot of political sense. He has touted Alaska LNG as an economically transformative project for the state in the same way the Trans-Alaska pipeline was. When the deep-pocketed majors walked away it was a severe blow to the project, and Walker's economic agenda. He has had to fight with lawmakers just to keep cash flowing to AGDC and the project on life support. The China deal, even if unlikely to lead to anything substantive, keeps Alaska LNG afloat to potentially bring more investors onboard.

China's president Xi Jinping was happy to help deliver, especially since the early-stage agreement doesn't carry any real cost and could help fend off harsh trade action from the Trump administration. Sinopec was far more circumspect. In the joint statement the state-owned oil company said it was "interested in the possibility of LNG purchases," from Alaska LNG.

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