Natural gas-hungry Japan is knocking on Alaska’s door, but the world’s third-largest economy won’t wait forever for liquefied North Slope gas — or pay dearly for it. The message to state lawmakers and the energy industry: hurry up with cost-competitive supply — or you’ll add even more years to the decades-long effort to commercialize those long-stymied gas reserves.
“The world has more than enough LNG supply options,” said Larry Persily, federal coordinator for Alaska gas pipeline projects. “We’re not the only ones out there. We have to be cost-competitive with Alaska gas if you’re going to get any project built in the state.”
Persily briefed a joint meeting of the Alaska House and Senate resources committees last Thursday on the state of liquefied natural gas (LNG) markets and how Alaska might fare in them. For the state, it would seem from Persily’s remarks, the glass is half empty and half full.
Also at the meeting was Mary Ann Pease, who heads the Alaska office of Japan’s Resources Energy Inc. (REI), a company that wants to develop a gas liquefaction and export facility in Alaska to serve Japan’s natural gas and power utilities as well as industrial users.
REI has struck several agreements to explore business arrangements in Alaska. It recently completed a feasibility study on siting an LNG facility in Valdez or Nikiski with an LNG production target of 2018-2019. The study targeted a cost, insurance and freight price for sending LNG to Japan of “around” $9-10/MMBtu. The Japanese want Alaska’s gas, Pease told committee members.
“The one thing that truly makes this project so different from some of the other projects that have been discussed over the years is that the market is standing at the front door of Alaska,” she said, adding that exports would lower the cost of domestically consumed gas for Alaskans.
However, timing is crucial, Pease said. The consortium’s time line envisions a project up and running by 2020, a year that “is really a dropping off point,” Pease said. “The bottom line is today, Japan is investing billions of dollars in projects around the world, and they need a diverse market basket of options…If it’s 2025, there will already be investment in so many other projects that I truly believe the opportunity for this group, for this consortium, will have closed.”
It wasn’t long ago that Alaska hoped to pipe its North Slope gas to Canada and then down to the Lower 48; however, low-priced shale gas bullied that idea to the back burner (see NGI, Oct. 8, 2012; May 7, 2012). Japan’s eagerness to secure supplies and burgeoning global LNG supply — first from Qatar, then Australia, and someday the United States, East Africa and others (see NGI, April 22) — raise the stakes for the 49th state.
“Whether Alaska ever sells any liquefied natural gas abroad from the North Slope is going to depend on the markets; it’s going to depend on the cost of our gas, getting it to market, and finding buyers willing to pay for it on a long-term basis,” Persily said. “There are a lot of sellers, and the buyers know it. And they’re going to play each other against each other, and that’s the world we’re moving into.”
That world includes Australia, Angola and Papua New Guinea, which are in and/or entering the LNG market with supply this decade, Persily said. Add to these LNG from Russia, where at least three LNG export terminals are being considered; Mozambique and Tanzania, with 120 Tcf of gas discoveries; potentially Israel and the Eastern Mediterranean, too, Persily said.
And, of course, multiple LNG export projects in Western Canada and the Lower 48 make for even more competition for Alaska. But that’s not reason enough for the state to give up. “They all have problems,” Persily said of Alaska’s LNG competitors. “All is not lost for Alaska; our competition has just as many problems as us.”
To wit, in Australia, costs are high in an overheated construction market, with projects under way experiencing overruns of 15-43%, and there are environmental concerns about coal seam gas while domestic end-users worry about exports driving up prices. In Canada, shale plays are undeveloped and remote, long pipelines are needed across difficult terrain, and project developers want oil-linked pricing in supply contracts, which is increasingly distasteful to Asian buyers. Russia’s Gazprom wants to keep its pricing power and the country wants to preserve Gazprom revenues, and neither is viewed as a particularly trustworthy counterparty.
Meanwhile, in East Africa, poverty and a lack of basic infrastructure are barriers to LNG development; Tanzania and Mozambique are viewed as very difficult places to conduct business. And in the Lower 48 states, the tanker trip from the Gulf of Mexico to Asia is a long one, even transiting a soon-to-be-expanded Panama Canal where higher tolls are expected to erode LNG netbacks. Six dollars at the Henry Hub could mean $14 in Asia, and rising domestic gas prices could limit LNG exports from the United States. Opposition to hydraulic fracturing and how much more non-free trade agreement export the Department of Energy (DOE) might authorize are still wildcards, Persily said.
Alaska has its obstacles, too, namely the need for an 800-mile multibillion-dollar pipeline buried in permafrost to carry North Slope gas southward to a liquefaction facility. But from there, sailing for Alaskan cargoes could be smoother than for others, Persily said. Alaskan cargoes would have a shorter trip to Asia and, unlike Lower 48 shipments, wouldn’t have to go near the Panama Canal. Trouble in Iran could turn the Strait of Hormuz into a pinch point for cargoes from Qatar.
Back home on the federal permitting front, Alaskan gas is stranded, so its export wouldn’t raise gas end-users’ costs in the state or in the Lower 48 states, Persily said.
“The good thing, though, for Alaska is we’re not part of the Lower 48; we’re not part of them on the maps and, thankfully, we’re not part of them with the export debate,” Persily said. “I think it would be a much cleaner [DOE export] application and approval process. I can’t predict what they would do, but the Department of Energy is certainly aware that export of Alaska of gas is detached from that economic debate that’s under way as to Lower 48 exports.”
Back in Alaska, Persily noted that Gov. Sean Parnell’s administration is preparing to discuss fiscal terms with producers and is working to gather information on royalty regimes around the world. While the state will want to strike the best deal it can for its gas, Persily said it’s important to remember that there are other benefits to commercializing North Slope gas besides the royalties.
“We’re not going to get stinking, filthy rich off of natural gas like we did off oil; the money is just not there, but you can make some money and you can get decades of affordable gas [for Alaskans] and help extend the life of the oil and gas industry [in the state],” he said. “You shouldn’t let the competition discourage you. It should just remind you that the state and the public have to work with the companies to see if we can put together a project that is cost-effective. Long term, when you look at the cumulative benefits for Alaska, you want to get a fair share on tax, on royalties, but you really need the project.”
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