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New industries for Alaska? High prices could give state competitive edge to process hydrocarbon feedstock Alan Bailey Petroleum News
At the current rate of change, two years is a long time in the oil and gas industry. And it’s just two years since SAIC prepared a report for the U.S. Department of Energy assessing future Alaska natural gas demand.
That report indicated that continued residential and commercial gas usage, and gas use for power generation, would remain viable in Alaska through 2025. But the report painted a less than rosy picture of future industrial gas demand. There was some economic potential for future petrochemical and propane industries, but other industries such as gas to liquids, liquefied natural gas and fertilizer did not appear competitive on future world markets.
The escalating prices of oil and gas have dramatically changed that 2006 analysis, Harold Heinze, CEO of the Alaska Natural Gas Development Authority, told the ANGDA board on April 9. In particular, the very high oil prices mean that on a price per British thermal unit basis, oil is much more expensive than gas.
“The major change … is the very high oil prices, including gas at a 60 percent parity Btu-wise,” Heinze said. “You end up with a large margin … when you are competing against oil.”
And the high price of natural gas across the Pacific Rim compared with elsewhere provides Alaska with a tremendous export opportunity, Heinze said.
Value-added debate Alaskans have long debated the possibility of locating industries such as petrochemical production in state, to add value to hydrocarbon products before those products cross the state boundaries. But to date, the only in-state value-added export industries that have come to fruition have been the LNG and fertilizer plants on the Kenai Peninsula. Those plants have used natural gas from Cook Inlet, but gas shortages in the region have caused the fertilizer plant to close.
With exception of relatively minor amounts of oil used for in-state refining, all North Slope crude oil and has been exported, unprocessed, along with some North Slope natural gas liquids.
Heinze said that in December Rep. Mark Neuman, chair of the Alaska House Special Committee on Economic Development, Trade and Tourism, had asked ANGDA a series of questions regarding the potential for value added gas industries in Alaska.
In response to Neuman’s request, ANGDA contracted with SAIC to update the 2006 DOE gas demand study using current commodity prices. All aspects of the analysis other than the pricing remained the same as in the original study.
“We got the same team. We got the same models. We got the same assumptions,” Heinze said. “… What we wanted to know was how does that (price change situation) change the basic result of value-added industry potential here in Alaska.”
Preliminary results Heinze said that on April 5 he presented some preliminary results of the new study to the House committee. He emphasized the results were still subject to revision, but that they at least pointed in the direction of answers to the committee’s questions.
The analysis assumed a world-class facility located in Alaska for each potential value-added industry, Heinze said. The SAIC analyst then stacked up the estimated gas demand for each facility in the order of the highest price that each facility could pay for its feedstock.
Then by overlaying an estimated range of future in-state Alaska natural gas prices, it became possible to assess which industries might in the future be viable, and how much gas demand those industries might generate.
The new pricing model has produced some startling results, with a potential petrochemical industry coming in strongly and even a world-class gas-to-liquids plant appearing viable (gas-to-liquids technology converts natural gas into a diesel-like liquid fuel). A propane industry would also appear to be very viable.
LNG prices in excess of $12 per thousand cubic feet in Japan result in a huge boost to the potential viability of an Alaska LNG industry.
Fertilizer viable? Of special interest is a finding that a fertilizer industry may even be viable in the future, although Heinze emphasized that the closure of the Kenai fertilizer plant may well have been an appropriate decision for the owner, Agrium.
“If you just look at it as a world plant, not necessarily an Agrium plant, it might even have an economic future right now,” Heinze said.
From the perspective of gas demand, the new analysis boosts the potential in-state industrial gas demand from the modest value of 100 million cubic feet per day of the 2006 study to volumes up to1 billion cubic feet per day, Heinze said. And there would be enough in-state gas and NGL to support that demand, he said.
A substantial piece of the high end of the demand range represents consumption by a GTL plant. Given that GTL does not have the industrial track record of more established industries such as petrochemicals and LNG, a conservative view of the future demand would remove GTL from the picture. But that results in a projected demand of around 500 million cubic feet per day, a significant figure in the equation of Alaska gas economics.
“Half-a-billion cubic feet per day is a pretty significant number all of a sudden,” Heinze said.
Potential scale This does not mean that someone will immediately build a new industrial facility, but the figures do provide an idea of the potential scale of an Alaska in-state industry, Heinze said.
“It does start to define what’s in play here from value-added industry, wherever you think it is in Alaska or whatever you think it is exactly,” he said. “… It doesn’t tell you that people are going to start lining up tomorrow and building plants. It doesn’t tell you that’s the best thing in the world to do. But it does at least start to answer the question of economic feasibility.”
Scott Heyworth, acting chairman of the ANGDA board, also commented that establishing a takeoff point from a North Slope gas line for the volumes of gas and NGLs that an Alaska value-added industry might require would be a major issue.
“It’s a big deal that we take a look at this,” Heyworth said.
And a world-class gas or NGL processing plant of any type would not come cheap — the SAIC analyst estimated a cost of around $5 billion for each plant, Heinze said. But the SAIC analyst also estimated annual gross revenues of $5 billion for each plant and the creation of perhaps 2,000 in-state jobs.
“In terms of local communities, the tax base, jobs, economic development … it’s a pretty potent thing,” Heinze said.
But do the numbers in the gas demand analysis represent reality?
“There’s no attempt to predict that these prices are necessarily the prices of the future, but the assumption is that if we have achieved those prices today it is reasonable that at least at some point in the future we will revisit this world,” Heinze said. “… The conclusion reached here as to industrial potential is huge.”
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