Providing coverage of Alaska and northern Canada's oil and gas industry
March 2014

Vol. 19, No. 12 Week of March 23, 2014

Return on natural gas long time coming

Persily cites differences, similarities to state’s 2002 efforts; sees value of TransCanada in letting state use cash elsewhere

Kristen Nelson

Petroleum News

In 2002, the year the Alaska Department of Revenue put out a report on potential state participation in an Alaska natural gas pipeline, Larry Persily was a deputy commissioner in the department.

Today, he’s the federal coordinator for Alaska gas line projects.

On March 10 he discussed with the Alaska Senate Finance Committee the differences between the state participation proposed in a natural gas project in 2002 and the participation the Alaska Legislature is considering today.

Persily told the committee that what has really changed since 2002 is the world market for natural gas, with growing demand in Asia and double-digit growth in China’s demand.

Alaska, he said, could be a “victor of circumstances” where things work out in the state’s interest after a 40-year wait to commercialize North Slope natural gas.

The price issue

Persily said divergence in prices is also a change, demonstrating with a chart from the BP Statistical Review of World Energy showing the difference between gas prices in Japan, the United Kingdom and the United States between 1996 — when the range was between $2 per million Btu in the U.K. and just under $4 in Japan — to 2013 when the price in Japan was above $17 per million Btu, compared to $11 in the U.K. and $4 in the U.S.

He cautioned against an assumption that the gap in prices will continue to grow or to be as wide as it has been. Supply and demand doesn’t work that way, Persily said, adding that the price won’t come down enough so that LNG will be uneconomic, because prices accommodate the high cost of LNG production. Alaska will have to be competitive in the world market — and the economics for an Alaska LNG project are “much more attractive” at the lower end of the $45 billion to $65 billion estimated cost.

He also said there won’t be cheap gas from new projects, because they cost too much to build.

‘Patience’ the key word

Changes Persily cited include a transition on the North Slope from oil to oil and gas, especially with Point Thomson coming online.

And producers and the state are willing to put up serious money to see if the project will work — there’s never been a willingness to spend that much, he said.

But, Persily cautioned, Alaskans need to keep reciting the word “patience.”

He said he’s not aware of any LNG project which has lost money. You may not make as much money as projected because costs may turn out to be higher, but you still make money, Persily said.

There is, however, a long payback period on projects like this. He compared it to investments the Norwegian government made in oil and gas projects where it had to wait years for any money to come back — a decade before profits really came back in.

Persily said the 2002 Revenue report looked at a pipeline to the Lower 48 and at a time when the state was down to $2 billion in the constitutional budget reserve. That was not a time when there was money to invest, he said, compared to today when the state has $17 billion in the CBR.

What hasn’t changed?

The 2002 report recommended that the state take royalty in kind and match up royalty share with gas pipeline ownership, Persily said.

And there was the conflict of owning something you also regulate, although a state-owned entity minimizes those conflicts, he said.

Persily urged Alaskans to keep politics out of business and said it would take money to get answers and the information needed to make a decision, hence the cost to the state for pre-FEED (front-end engineering and development) and FEED work.

He said that looking back over the 2002 report as an Alaskan, the state needs to be careful not to fall too much in love before we know more about each other. The project could produce revenues, but there are also risks, and while oil is like dating, gas is like getting married, Persily said.

As to the expense of pre-FEED and FEED, he said it’s what you have to do to get to a decision.

TransCanada issue

Asked about TransCanada, Persily said he wanted to be careful not to be a federal official telling the state what to do.

He said the state has unfunded needs and by taking on TransCanada as a partner the state reduces the money it has to come up with in pre-FEED and FEED.

If the state takes 25 percent, Persily said, that’s probably more than the state can afford and having someone else put up the money is an advantage.

He said that as an Alaskan he recommended that the committee not chart out the project at high prices, but rather look at the lowest possible gas price, because while there won’t be loses long term in LNG, projects have made less than they expected.

If the state looks at the worst case, then it can make a risk decision, Persily said.

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