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What chance now for North Slope LNG? World market is growing fast but North Slope gas would need to compete on cost with massive new supplies close to tidewater Alan Bailey Petroleum News
Few subjects raise the temperature more in a room full of Alaskans on a cold winter night than the perennial debate about exporting North Slope gas in a pipeline through Canada versus exporting the gas as LNG from an Alaska port using an all-Alaska pipeline that generates income within the state.
But what are the realities of exporting North Slope gas as LNG?
The idea of converting the gas to LNG for export goes right back to the discovery of Prudhoe Bay and its massive gas cap, Bradford Keithley, a partner with Perkins Coie LLP, told the Law Seminars International Energy in Alaska conference on Dec. 8. In fact, following field discovery, the oil companies sought ways of exporting natural gas as well as oil from the field, he said.
LNG for California And, having discounted the possibility of shipping LNG direct from the Slope, given the lack of suitable ice-breaking LNG carriers, one of the first natural gas export concepts to emerge was the idea of building a gas line to Valdez, roughly along the route of the trans-Alaska oil pipeline. LNG produced at the Valdez terminus of the line would be shipped to an LNG terminal that would be constructed in California.
“That proposal, frankly, hung around for a long time, and was a fairly well-researched and fairly well-thought-through proposal,” Keithley said.
But there were some issues with the project economics and problems with obtaining permission to build the California LNG terminal.
Then, after Congress passed the Alaska Natural Gas Transportation Act in 1976, President Carter ordered that North Slope gas be exported overland through Canada, in preference to using the LNG option, thus putting North Slope LNG out of the running for several years.
TAGS But around 1984 a gas production boom in the Lower 48 killed the need for Alaska gas and put the overland pipeline concept out of play. The idea of exporting LNG through Valdez came back into the spotlight, this time in the form of the Trans-Alaska Gas System, or TAGS, championed by Walter Hickel, sometime Alaska governor.
“The TAGS project had legs,” Keithley said. “The proponents of it spent a considerable amount of money obtaining permits … spent a lot of time over on the Pacific Rim trying to market LNG to the Japanese and the Koreans.”
But TAGS eventually ran aground on two fundamental sandbars: the cost of bringing gas from the North Slope to Valdez and the economic impact of bringing large volumes of North Slope gas into what was then quite a small LNG market, Keithley explained. And in addition to transportation costs, North Slope gas would require the removal of carbon dioxide in an expensive treatment plant before it could be converted to LNG, he said.
“In order to cover that cost and make the LNG economic, you have to have big volumes,” Keithley said. “Well the problem that TAGS kept running into was that they had too big a volume. … It would swamp the market with too much LNG and drive the price down to the point where the project became uneconomic.”
In the late 1990s, by which time the TAGS project had ground to a halt, the North Slope producers, led by ARCO, investigated the TAGS concept, seeking ways to drive down costs but ultimately reaching the same conclusion that others had found: There would be too much LNG chasing a small market at high cost.
“And so the producers sort of bundled up what they had around LNG in the late 1990s and sort of put it on the shelf some place,” Keithley said.
The Port Authority But, at around the same time, the North Slope Borough, Fairbanks North Star Borough and City of Valdez formed the Alaska Gasline Port Authority, with the objective of pursuing the TAGS concept, but reducing the project costs through the use of tax exempt municipal bonds for project funding. The proposed pipeline would create a new tax base and jobs in its municipalities, the Port Authority hoped.
The Port Authority, with various partners at various times, has continued its efforts to promote its project, right up to the present day.
“That effort is continuing today and is now showing up in the form of the (gubernatorial) campaign of the general counsel, executive director of the Alaska Gas line Port Authority, Bill Walker,” Keithley said.
And the world LNG market has changed dramatically in the past five to 10 years, with climate change and ocean acidification concerns driving China, for example, to try to move away from coal-fired power stations and instead use natural gas. New LNG terminals are coming into operation for the import of LNG on the Pacific Rim.
But, although this surge in Pacific Rim LNG demand has effectively removed the issue of Alaska LNG swamping world LNG markets, the surge in demand has been accompanied by a corresponding surge in LNG supplies from places such as Qatar, Russia and Australia. And major gas producers like Qatar enjoy the benefit of huge natural gas resources, close to tidewater and without the same level of carbon dioxide content as North Slope gas.
“So the big issue that’s going to be driving LNG going forward is the distance from tidewater and the ability to bring down costs,” Keithley said.
North Slope gas line And the pendulum of interest in Alaska North Slope gas has swung back in recent years to the inland pipeline route through Canada, with TransCanada’s North Slope gas line project under AGIA, and the competing BP and ConocoPhillips’ Denali pipeline project.
But under the terms of AGIA, TransCanada must offer an option to deliver gas to Valdez for export as LNG through an offshoot from the main gas line. And if during the upcoming gas line open season TransCanada and its partner ExxonMobil accept bids for the delivery of gas to Valdez for LNG production, TransCanada would do some engineering work for the LNG option, Keithley said.
Denali has talked about an LNG option but has made no formal announcement on the topic, he said.
So, with the Port Authority still waiting in the wings, the possibility of eventually exporting North Slope gas through Valdez as LNG is still out there, a focus for those who see a gas line to Valdez as a vehicle to enable Alaskans to control the destiny of where Alaska gas is marketed.
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