Alaska LNG project seeks fit in dynamic global market

Photo/Michael Penn/Juneau Empire

The world LNG market is dynamic and changing. Will Alaska have a place in it?

For years, Alaskans have heard about all the competition in LNG, and that Alaska’s project will have to be big, and expensive, to achieve economies of scale needed to be competitive.

The 15 million to 18 million tons of LNG Alaska would have to produce annually would be one of the world’s largest LNG projects, and it would have to compete not only against a lot of plants now in construction, but a lot of a of new entrants with access to cheap gas and no need to build an 800-mile pipeline.

But all of these projects face challenges too, says Larry Persily, the federal natural gas coordinator.

“Alaska LNG could be the victor of circumstances,” Persily told the House Resources Committee in March 17 in Juneau, in a briefing on global LNG outlook.

The LNG market is growing fast, Persily said.

Global LNG trade has quadrupled since 1995 and exceeded 11 trillion cubic feet per year, he said.

“Twelve LNG export projects are now under construction and about 10 to 12 will be needed in the next decade,” Persily told the legislators. “This will require several hundred billions of dollars of investment, and cost competitiveness will decide the winners.”

“A lot of the world’s LNG now is coming from older projects. Egypt, for example, is seeing declining production as is Indonesia, historically a large supplier which has not only declining production but rising domestic needs.”

Europe is looking for alternatives to Russian gas, and there are worldwide concerns over coal and nuclear plants.

Asian LNG demand is driving a lot of the new growth. Demand for LNG in that region could double by 2025. China’s LNG demand alone is growing at double-digit rates and was up 20 percent in 2013 over 2012, Persily said.

China imported 4.6 billion cubic feet of gas per day last year, up from 3.5 billion cubic feet per day in 2012. Half of this was LNG. While the other half of China’s gas needs were supplied by pipelines from Central Asia, that gas wasn’t cheap, Persily said.

Turkmenistan was selling its gas for $10 per million BTUs and Myanmar for $12, but that was delivered just to the border, Persily said, requiring other expense to get it to China’s population and industrial areas in the east.

“Pipeline gas is no bargain for China,” he said.

While China has potential shale gas resources, they are located in the arid western parts of the nation, and supplying water for hydraulic fracturing would be a major challenge.

Alaska advantages

Alaska’s proximity to the Asia market is an advantage because it means shorter voyages for LNG tankers.

“A round trip can be made in three weeks instead of two months,” from the U.S. Gulf of Mexico, which translates into real cost-savings, Persily said.

The LNG plant’s location in a cold climate, in Alaska, creates an efficiency advantage compared with LNG plants in warm climates, as much as 15 percent, the companies engaged in the project say.

Alaska’s proven gas reserves on the North Slope, and the existing infrastructure, are an advantage.

“In Australia, some of the projects based on coal-seam gas reserves are coming up short,” and are having to buy gas from other sources to meet contract commitments, Persily said. “Alaska is a proven producer. ConocoPhillips has been reliably served the Asia market with Alaska LNG since 1969. Russia certainly isn’t this stable.”

Alaska’s producers also have 40 years of experience on the North Slope, so there is no risk with gas reserves.

Also, the energy content of Alaska gas makes it attractive. Japan’s power plants are designed to operate with a “richer” LNG with a higher energy content, and Alaska’s gas, which will contain quantities of natural gas liquids, mostly ethane, would fit this need.

In contrast, LNG from Australia made from coal-bed gas is more lean, and gas liquids have to be added so that utilities in Japan can use it.

The question is whether these advantages can overcome the cost of an 800-mile pipeline.

“Clearly it will cost more to liquefy gas from the Slope,” Persily said. “On the U.S. Gulf, the gas price is close to $5 per million British Thermal Units (mmbtu). For the Sabine Pass (La.) plant, which will be the first U.S. Gulf facility to export LNG, the cost of shipping the LNG and the Panama Canal transit fee will make for a delivered cost to Japan of about $12 per mmbtu.”

Just what the new transit fee will be for the Panama Canal after its expansion is an unknown.

“The expansion is seeing a $1.6 billion cost overrun and is a year behind schedule, so no one knows what the toll will be. This is the key to signing long-term LNG contracts,” with Gulf of Mexico suppliers, Persily said.

Also, gas prices in the Lower 48 will always be volatile because of weather and seasonal spikes, which could see prices swing up to $8 per mmbtu at times.

Because of this, Persily doesn’t see a rush to the U.S. Gulf for Asian importers.

“They will be wary of too much reliance on a gas supply that could be volatile,” in terms of pricing, he said.

Buyers will want a diversified portfolio of supply, and not too much dependence on one pricing formula, he said.

Persily doesn’t believe the current national debate over allowing LNG exports from the U.S. will be extended to Alaska.

“If we export LNG it won’t deny gas to Detroit,” he said.

Global projects

British Columbia represents another competitive threat for Alaska, but LNG projects there face challenges, too. Pipeline from shale gas producing areas, which are undeveloped, must cross two mountain ranges.

“BG Group says a 525-mile gas pipeline to Prince Rupert, B.C. could cost up to $10 billion,” Persily said.

There is also a debate underway in B.C. on an LNG export tax, although the proposed tax of 7 percent on net revenues would be paid after capital recovery. First Nations groups in Canada also want consultations on air quality, pipeline routing, economic and job issues.

“No project has it easy. At Australia’s Wheatstone LNG project the harbor dredging and berthing costs are expected to add $1.5 billion,” Persily said. “Cost overruns on seven Australian projects now under construction are also worrying investors, and there is a new debate in Australia that exports of LNG will drive up prices for gas in domestic markets.”

In Russia, the politics are out ahead of the economics of its projects, that would serve Pacific markets. Some of Russia’s projects are also challenged by distances from the market.

One project, on the Yamal Peninsula in the Arctic, LNG tankers will be able to travel east to the Bering Sea, with icebreaker assistance, during summer, but in winter the tankers will have to go west to Europe through regions where ice is less difficult, again assisted by icebreakers.

Meanwhile, what price can Alaskans expect for LNG?

“Buyers are holding back now, waiting to see the LNG pricing trend,” Persily said. “We can’t assume prices of $17 to $18 per million Btus (in Japan) will continue. Most analysts expect prices to continue to be somewhat linked to crude oil.”

Meanwhile, Japan is leading the charge for new suppliers, more competition and a lower LNG pricing regime.

“Japan paid $70 billion-plus for LNG in 2013, and energy was a big reason for the $112 billion trade gap. It was the third year in a row of trade deficits in Japan after 30 years of trade surplus,” Persily said.

“The days of $17 to $18 (per mmbtu) may be limited, but we won’t see LNG prices in the single-digits either. They will be somewhere in the middle. However, prices must be high enough to justify investment,” in new LNG projects.

Concerns heard

Legislators outlined concerns to Persily in the briefing. Rep. Alan Austerman, R-Kodiak, expressed concern that the price of oil is trending down, and this could bring LNG prices down.

“A lot of people believe we could see oil at $90 per barrel, or even $80,” Persily said. “But on a Btu (British Thermal Unit) equivalent basis that still translates to LNG at $12 or $13 (per million btus, or mmbtu).”

Rep. Les Gara, D-Anchorage, said his worry was whether a gas pipeline mostly owned by the major North Slope producers would welcome new gas found by independent companies.

“As this project starts off Alaskans will get more affordable gas and some export revenue, but the big prize is if the project can be expanded with new gas that is discovered,” Gara said. “What assurances are there that the industry-led project can be expanded to take gas from independent companies?”

Persily said there are reserves sufficient to fill the pipeline for some years but these are not enough for the long term. There will be eventually be spare capacity in the pipeline, most likely after the second decade, he said.

Even before that the project can be expanded, however. The part of the pipeline than is owned by the state, and possibly TransCanada if that partnership is pursued, can be expanded under the principles favorable to expansion in the state’s deal with TransCanada, such as rolled-in tariffs for expansion.

“One question is how much of an expansion could be done by adding compression, which is relatively inexpensive. I really don’t think there will be a problem in accommodating new gas,” Persily said.

Rep. David Guttenberg, D-Fairbanks, asked about the loss of sovereignty if the state enters a business partnership with industry.

“We’ll still be a sovereign,” Persily said. “We’re not giving up any rights or responsibilities in wage and hour laws or environmental rules.” 

There will be tensions, however, between the state’s role as a regulator and an owner.

“Is this perfect? No, it isn’t,” Persily said. “There could be situations where two people on the third floor (of the capitol, in the governor’s office) are making opposing arguments. They’ll have to just work it out.”

It is an unusual situation, Persily acknowledged. In other states there is public ownership of infrastructure, usually in ports and airports, “but nothing like this,” pipeline proposal, Persily said.

“There are risks. This is a departure from the norm, and we will have to be competitive. But I don’t see a better plan,” to advance the gas project, he said.

Alaskans will have to learn patience, however.

“There will be several years of writing checks (during construction) but once the project begins the LNG project can provide a long-term, stable cash flow,” to the state treasury, Persily said.

“Norway invested billions in oil and gas and then waited years for any return. It took a decade before real investment payback started to roll in,” he said.

Patience may be part of that nation’s culture, however.

“Norwegians are stoic and disciplined. They don’t mess with what has worked for them,” Persily said.

03/26/2014 - 12:12pm