Resources Energy Inc., a Japanese company that has been pursuing the potential exporting of liquefied natural gas from the Cook Inlet basin, is closing its Alaska operations. Mary Ann Pease, the company’s Alaska vice president, told Petroleum News on March 28 that the company has been unable to secure a supply of gas at a price that would enable Cook Inlet LNG to be competitive in today’s global LNG market.
“Resources Energy has been funded by a family-owned private business in Japan and they have made the decision that, given current market conditions, they did not want to continue with sponsorship of this,” Pease said.
REI, a business formed with the primary intention of supplying Alaska LNG to Japanese gas and power utilities, has also been supported by a consortium of Japanese businesses that have provided technical expertise and in-kind services. But, with the company’s prime investor pulling from the project, the project has come to an end.
As one possible means of achieving a workable gas price, REI had considered taking an equity position in a Cook Inlet gas field, but the investor in the company had opted not to go down that route, Pease said. And the company has been impacted by low global LNG prices, given the current glut in LNG supplies.
“You can bring down the cost of your plant. You can make all these different changes. But if you don’t have a reliable, stable feedstock at under $5 (per thousand cubic feet) you don’t have project,” Pease said.
Recent contract prices negotiated for Cook Inlet gas for local use have been running well in excess of $6 for firm supplies.
Still optimistic
But despite the company closure, Pease remains optimistic about Alaska’s ultimate ability to export resources to Japan.
“REI is closing its offices but I believe that is vastly different from the Alaska-Japan opportunity going away, because I believe that (opportunity) still exists and it may take another form, another shape, over the years, and that’s what I think is important,” Pease said.
The deregulation of the Japanese utility industry has resulted in the operation of many utility companies in Japan and those utilities need natural gas. Ports with LNG receiving terminals are being built out on Japan’s west coast in a trend that signals a different LNG market than has been seen in the past, Pease said.
“I believe that this opportunity is still very strong,” Pease said.
And Pease does not see LNG from Cook Inlet as competing with the potential of LNG from the North Slope, where the larger proven gas basin can create an attractive project for the Asian market, provided it is possible to pencil out the costs of the required gas treatment plant, the pipeline from the Slope and the LNG plant. Alaska’s main competitor is Canada, a country that is still resolving issues relating to its First Nations when it comes to LNG export facilities, Pease said. And Alaska enjoys the benefit of a relatively short sea route to Japan and a cold climate for LNG production.
Larger Cook Inlet market needed
In the Cook Inlet region the gas production is at tidewater, a situation that should place the region in a strong position for LNG exporting. But Pease sees the region as in a Catch-22 situation, in which companies have made new gas discoveries but where there needs to be a functional gas export plant to provide an appetite for gas demand.
“We have new discoveries but we do not have new production at the scale we need to have,” Pease said.
REI’s concept had been to build a 1 million ton-per-year LNG plant near the existing port at Point MacKenzie, across Knik Arm from Anchorage, to process about 160 million cubic feet per day of Cook Inlet gas. The company had selected the type of liquefaction technology to use and had negotiated the availability of two ice-class LNG carriers for shipping LNG to Japan. And in the fall of last year the company had been on the verge of deciding whether to proceed to the front-end engineering and design phase of the project. The capital cost of the project was estimated at around $1 billion.
But, although the company had identified adequate sources of Cook Inlet natural gas for the LNG plant and had conducted discussions with several gas producers about establishing gas supplies, it ultimately proved impossible to settle on a gas pricing formula that would render the LNG project economically viable.
Existing LNG plant
At this point, Pease sees the continued operation of an existing LNG plant operated by ConocoPhillips at Nikiski on the west coast of the Kenai Peninsula as being critical to the future of the Cook Inlet gas industry. ConocoPhillips is currently trying to sell the plant. The plant has not been in operation recently because of the low global price of LNG. But that plant can provide a market outlet for gas, as a step towards moving the Cook Inlet gas industry to a more viable scale, Pease thinks.
As a believer in starting small and then building volume, Pease thinks that new LNG trains could be added to the plant as necessary. And the plant enjoys the advantages of having an existing permitted location and facility, she said.
The key issue comes back to the price of the gas supply, and making a project more competitive by being nimble in responding to what the market is demanding, Pease said. With the days of 20- to 25-year supply contracts over, gas buyers in Japan are interested in the price of the gas, and in the terms and conditions of the deal.
“It’s got to be competitive, and it’s got to be competitive globally,” Pease said.
