Bloomberg News

Exxon, BP Estimate Alaska LNG Export Project at $65 Billion

October 04, 2012

Exxon Mobil Corp. (XOM:US), ConocoPhillips, BP Plc (BP/) and TransCanada Corp. said a project to liquefy and export natural gas from Alaska will cost as much as $65 billion and take more than 10 years to construct.

The venture includes an 800-mile (1,300-kilometer) pipeline from the North Slope to Alaska’s southern coast as well as a liquefaction plant and storage tanks, the companies said in an Oct. 1 letter received by Alaskan Governor Sean Parnell’s office yesterday. The governor had asked the companies to “harden the numbers” on the project by the end of September, Parnell said in a statement.

As oil output from the North Slope has dropped, energy companies and Alaska’s government are seeking ways to sell the area’s gas, which may generate as much as $20 billion in annual revenue as demand from Asia increases. The North Slope may hold 35 trillion cubic feet of reserves and more than 200 trillion cubic feet of undiscovered, technically recoverable gas, making it one of the largest sources in the world, according to the governor.

“This will be a game-changer for global LNG trade because it will be one of the largest projects ever,” Dan Sullivan, Alaska’s natural resources commissioner, said today in a telephone interview. Plans call for exports of 3.5 billion cubic feet of natural gas per day, he said. “Knowing this project has to compete globally, we’ll be working with these companies to make this the most cost-competitive project there is.”

‘Mega-Project’

The pipeline and liquefaction facility would be “a mega- project of unprecedented scale and challenge,” executives of Exxon Mobil, ConocoPhillips (COP:US), BP and TransCanada said in the letter to Parnell. “The opportunity is challenged by its cost, scale, long project lead times and reliance upon independent oil and gas operations with declining production.”

BP and ConocoPhillips joined with TransCanada and Exxon after deciding last year to halt a competing $35 billion pipeline proposal known as Denali. The companies are cooperating with a smaller state-backed pipeline project which would deliver North Slope gas to Alaska customers.

The bigger project, which will also include a plant to remove carbon dioxide from the gas and marine facilities, would require 1.7 million metric tons of steel and as many as 15,000 people at peak construction, the companies said. The venture would compete with global supplies of liquefied natural gas, or LNG, coming into the market in the next 20 years from Australia, East Africa, the U.S. Gulf Coast and Canada.

TransCanada’s Role

TransCanada (TRP) will build the North Slope pipeline to carry gas to the export terminals.

“I’m encouraged that the companies have made significant progress in advancing a project and an associated schedule,” Parnell said in the statement. “They have fully shifted their efforts to an Alaska LNG project.”

The companies have yet to make a final decision on whether to proceed with the project. Design, engineering and construction may take 10-and-a-half years, barring permitting and financing delays, the companies said.

Alaska agreed to incentives should the final decision to build the project be completed in 2016, Sullivan said in today’s interview. Based on the timeline submitted yesterday, that would peg first shipments in 2021 or 2022, he said.

Reimbursing TransCanada

The state has agreed to reimburse TransCanada $500 million for development costs, he said. Other incentives might include expedited permitting, tax breaks or state-backed low-interest financing, Sullivan added.

“This is good progress,” Sullivan said. “Alaska is fully motivated to keep the pedal to the metal on it.”

The companies made clear in their letter that they want signed LNG sales and shipping agreements before making a final decision to proceed with the project, Sullivan said. The arrangement would be similar to other global LNG works.

The initial cost estimate is $45 billion to $65 billion. Estimated cost by Chevron Corp. (CVX:US) for the Gorgon liquefied natural gas project off Australia, scheduled for first shipments in 2014, is $45 billion. Deutsche Bank AG estimated Sept. 14 Gorgon may cost A$50 billion ($51.3 billion).

Plans to export gas from the North Slope come as companies are proposing to build LNG facilities on Canada’s West Coast to send the fuel to Asia. Apache Corp. (APA:US)’s Kitimat LNG project, which has Encana Corp. (ECA) and EOG Resources Inc. (EOG:US) as partners, is estimated to cost $15 billion for the plant, pipeline and wells.

Increased production from shale-gas resources in the U.S. has also led to proposals to export LNG from facilities on the Gulf Coast.

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 before yesterday’s announcement.

Asian Demand

Asian demand will lead a 17 percent increase in global 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.

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, the U.K. and Spain, BG said.

To contact the reporters on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net


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