Japanese consortium drops Cook Inlet LNG effort

  • Japanese government officials from the Kyoto Prefecture and Maizuru City toured Port MacKenzie May 30, 2016, and on the same day Resources Energy Inc. Vice President Brian Murkowski announced that the company is moving forward with full front-end engineering and design for an LNG export project sourced with gas from Cook Inlet. Ten months later REI will close its doors in Anchorage, citing poor market conditions caused by low prices. (Photo/Courtesy/Resources Energy Inc.)

A global buyer’s market for liquefied natural gas has doomed a Southcentral gas export project.

Resources Energy Inc., a consortium of Japanese companies and municipal governments interested in Alaska’s natural gas, is stopping its work to develop a small Cook Inlet LNG plant and will close its Anchorage office on March 30.

Depressed LNG prices stemming from a global oversupply forced the venture’s hand, according to REI President Eiji Hoshio in a letter provided to the Journal.

Just last May REI announced it would be entering the front-end engineering and design, or FEED, stage of the project with a focus on lowering its overall cost.

REI, which first began exploring Alaska LNG opportunities in 2012, had planned to build a 1 million tons per year LNG plant at Port MacKenzie in the Matanuska-Susitna Borough in 2020 or 2021.

The plant would have been roughly the size of ConocoPhillips’ longstanding LNG plant in Nikiski, which the major producer is hoping to sell as it continues to divest its Inlet-area holdings.

By comparison, the up to $45 billion Alaska LNG Project to export North Slope natural gas through a very large LNG plant at Nikiski is planned as a 20 million tons per year project.

REI’s project was originally estimated to cost about $1.2 billion to $1.8 billion, but the group’s Alaska leaders said when the FEED announcement was made the capital cost would have to be less than $1 billion to be competitive in the current world LNG market.

Securing a long-term gas supply would have cost about another $1 billion, REI Alaska General Manager Mary Ann Pease said at the time.

Early feasibility work on the project began in late 2012.

REI had been viewed as a possible “anchor tenant” for Inlet gas producers that need buyers to spur development of the natural gas, which also supplies heat and electricity to the most populated area of the state.

The oversupplied LNG market has pushed buyers to demand shorter contracts at lower prices.

“A large supply of natural gas around the world has created continuing expectations for low prices from buyers,” Hoshio wrote. “It also has made investors and commercial users reluctant to sign long term gas purchase contracts. Long term contracts are the starting point for securing a gas supply and the financing for plant construction. ERI in Japan simply could not secure the gas purchase commitments needed to advance our project in Alaska.”

ERI is Energy Resources Inc., the consortium’s Japanese operating arm.

Pease said in an interview that the firm’s financial backer, which she described as a privately held Japanese family business and industrial gas customer, ultimately made the decision to stop the project because of market conditions and other reasons.

She added, though, that some of the Japanese participants in REI are trying to secure another partner to restart the venture under a different name.

The spot price for LNG delivered to Asian customers has rebounded somewhat from a bottom of about $4 per million British thermal units a year ago to about $7.50 per mmBtu today.

However, the current Asian LNG spot price is roughly on par with the equivalent wholesale price of Cook Inlet natural gas, before liquefaction and transport costs are considered.

Pease said any prospective LNG project today needs feedstock gas “well under $5” per thousand cubic feet, or mcf.

When REI began investigating Alaska as the location for a potential project the spot price for Asia LNG was nearly four times what it is today.

Because it is a uniquely isolated gas market and for other factors, Cook Inlet natural gas is currently one of the highest-priced natural gas markets in the world.

The fact that the small LNG project didn’t pan out shouldn’t discourage Alaskans about the Alaska LNG Project, which Gov. Bill Walker’s administration is now pursuing with help from the major North Slope producers that were equity partners in the project until last year, according to Pease.

The massive scale of the Alaska LNG Project makes it a different animal, she said, targeting larger customers with longer contracts.

If the large project can be competitive on price, Alaska’s relative close proximity to Japan, its direct shipping route, strong business ties to the country and even cold climate — allowing LNG plants that chill natural gas to operate much more efficiently — could still make it a winner, she said.

“I believe the Japan markets are energy hungry and if Alaska plays its hand right there is a future for Alaska LNG,” Pease said.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Updated: 
03/29/2017 - 11:29am

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