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Exxon Mobil Corp
EOG Resources Inc
Alaska wants a $50 billion pipeline and export complex built to develop natural gas that’s stranded on its icy North Slope. The justification: Asia’s swelling appetite for the fuel.
Governor Sean Parnell gave Exxon Mobil Corp. (XOM), BP Plc (BP/) and ConocoPhillips to the end of this month to provide plans to pipe the gas south and condense it into a liquid, known as LNG, for export. Their joint venture would compete with growing global supplies of LNG coming into markets within two decades from Australia, East Africa, the U.S. Gulf Coast and Canada.
Energy explorers and Alaska’s government are trying for the first time to market a resource that may generate as much as $20 billion in annual gas sales. Asian gas buyers as of July paid almost six times the futures price in the U.S., where it has been driven low by the shale boom.
“It’s gas in search of a market,” Kevin Book, a managing director with Washington-based ClearView Energy Partners, an industry consulting group, said in an interview.
The explosion of output from U.S. shale squelched Alaska’s long-held hopes to build a pipeline to the Lower 48 U.S. states, Book said. “So the next most logical place to take it is to liquefy it and ship it at significant price premiums to Japan, China and throughout the Pacific Rim.”
Asian demand will lead a 17 percent global increase in gas demand by 2017 from 2011, the International Energy Agency forecast in June. China’s annual gas consumption will more than double to 273 billion cubic meters in the period, the IEA said. Chinese gas consumption in 2017 would equal about 28 percent of the reserves identified on Alaska’s North Slope.
The northernmost U.S. state is counting on oil for more than 90 percent of the $8.44 billion in unrestricted general fund revenue it expects to get in fiscal year 2013. Alaska may have to consider gas imports to supply its population centers in future years.
An 800-mile pipeline project from northern Alaska to a southern port may cost $20 billion to $26 billion -- or about three times as much as TransCanada Corp. (TRP)’s Keystone pipeline proposal to link Canada’s oil sands to the U.S. Gulf Coast, according to a 2010 estimate of the Alaska project.
Industry estimates have pegged Alaska’s LNG total project cost at $40 billion to $50 billion, factoring in a pipeline and liquefaction plant. A Kitimat LNG project on Canada’s western coast may cost about $15 billion, including a plant, pipeline and wells, according to an estimate from Apache Corp. (APA), which is working on the proposal with Encana Corp. (ECA) and EOG Resources Inc. (EOG)
Alaska, the only U.S. state operating an LNG export plant, is seeking to parlay its more than 40-year history of sending fuel to Asia from ConocoPhillips’s terminal near Kenai into an advantage for expanding shipments.
The state’s coast provides one of the closest routes to Asian markets, potentially giving it lower shipping costs than competing projects from western Canada, Robert Brooks, founder of RBAC Inc., an energy data company, said in an interview.
Alaska’s isolated location may help insulate it from discussions about whether the U.S. should be exporting gas pumped domestically, Larry Persily, federal coordinator for Alaska gas-transportation projects, said in a phone interview.
“Sending Alaska gas overseas would not deprive petrochemical companies or utilities in Milwaukee or Shreveport of gas,” he said. “I think generally Alaska gas is absent from those political debates.”
By 2025, the four largest consumers of LNG will be Japan, China, India and South Korea, according to a presentation by BG Group Plc. (BG/) In 2011, the top four countries were Japan, South Korea, U.K. and Spain, BG said. U.S. LNG imported by Japan fetched $17.58 per million British thermal units in a period ending in July, according to LNG Japan Corp. U.S. gas futures averaged $2.963 per million Btus during the same month in New York.
At the same time, North American LNG developers are seeking to escape a low-price U.S. gas market, where shale formations flooded the market with supplies. Gas futures touched a 10-year low in April of less than $2 per million British thermal units.
Exxon, ConocoPhillips (COP) and BP, three of Alaska’s biggest oil and gas producers, laid out plans to consider Alaska LNG in a March 30 letter to Governor Parnell. The North Slope holds more than 35 trillion cubic feet of discovered gas, the companies said. That’s nearly four times the U.K.’s estimated 9 trillion cubic feet of proved gas reserves, according to the U.S. Energy Information Administration.
Unlocking the fuel through “unprecedented” capital commitments for gas would require “competitive and stable fiscal terms,” Exxon, ConocoPhillips and BP said in the March letter. Exxon has outperformed its peers this year, gaining 8.4 percent in the period, while the Dow Jones Oil & Gas Titans 30 Index climbed 3.8 percent. ConocoPhillips rose 4.3 percent, and BP lost 3.8 percent, in the year through Sept. 24.
The existing ConocoPhillips plant near Kenai is small by today’s global standards, capable of processing 240 million cubic feet of gas a day. Its exports diminished in recent years as nearby gas fields played out, leaving the terminal’s future in question.
A new LNG site may have a capacity of about 3 billion cubic feet a day, said Kurt Gibson, director of the Alaska Gas Pipeline Project Office. That would generate about $20 billion in annual sales, based on prices Japan paid for LNG as of July.
Exxon, BP and ConocoPhillips have said their assessment will include potential pipeline capacities and routes, as well as LNG terminal sites. Proposals may look at expanding the Kenai facility or building a new terminal farther east at Valdez, which already has a port used by large oil tankers.
It remains “early days” for a project, Tony Palmer, a vice president for TransCanada, which is working with the producers on an export plan, said in a telephone interview.
“Advancing a project of this scale and complexity is extremely risky for the sponsors,” Palmer said. “It’s a lengthy process. It’s a costly process.”
TransCanada continues to evaluate the LNG project with producers, Palmer said. Exxon, ConocoPhillips and BP also said they are continuing the examination.
Reviewing global trends in LNG will be part of the assessment of a possible gas project, the companies told Parnell. The soonest a new export project would begin is probably post-2020, Asish Mohanty, a senior analyst of global LNG at Wood Mackenzie in Houston, said in an interview.
Persily, the federal coordinator for Alaska gas- transportation projects, has been watching the state’s efforts to export gas since 1976 and has seen those plans repeatedly frustrated.
“By the time Alaska gas could get there 10 years from now, would there still be that attractive market, or are we always coming up short, as we have for 40 years?”
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