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Vol. 12, No. 43 Week of October 28, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

LNG good option

BG says increasing globalization of market bodes well for North Slope gas

Alan Bailey

Petroleum News

Would Alaska’s natural gas be best exported by LNG carrier or by pipeline through Canada to the Lower 48? The answer depends on which economic crystal ball you look in. And BG, one of the world’s largest natural gas companies, has taken its particular glimpse into the future and concluded that LNG looks a good bet.

The export of LNG from Alaska would be an effective way to monetize the state’s natural gas resource, David Keane, vice president policy and corporate affairs, BG North America, Caribbean and Global LNG, told the Arctic Energy Summit Technology Conference in Anchorage, Alaska, on Oct. 18.

“One way to monetize those (Alaska gas) reserves may be by developing another LNG or liquefied natural gas export facility,” Keane said. “LNG, I believe, is an industry that holds the key to the future evolution of gas markets worldwide and I believe that Alaska can be a critical part of that world market.”

According to Keane, BG supplied 49.8 percent of the LNG imported to the United States in 2006.

“Today BG is the largest supplier of LNG to the world’s largest gas market, the United States,” Keane said.

Partnering with Anadarko

BG entered the Alaska oil and gas industry in February 2006 when it partnered with Petro-Canada and Anadarko in 2.1 million Anadarko-operated acres in the gas-prone Brooks Range Foothills area of northern Alaska. In May 2006 the company acquired a 40 percent equity share in 208,000 acres leased by Anadarko in the eastern part of the North Slope. And in September 2007 BG’s partner Anadarko filed a plan of operations to drill the first natural gas exploration wells in northern Alaska, at the Gubik and Chandler prospects on Arctic Slope Regional Corp. land near Umiat in the Foothills.

But, although BG has clearly set its sights on gas production in northern Alaska, the company has not expressed any interest in involvement in the construction of a gas line from the North Slope — in March, as part of the debate on Gov. Sarah Palin’s Alaska Gasline Inducement Act, Keane told the Alaska Legislature that BG won’t be an applicant to build the line, but would sign up for capacity once it finds gas.

Following its entry into the Alaska oil and gas industry BG has become “very engaged with the State of Alaska in the formulation of strategies for gas monetization and has been a supporter of Gov. Palin’s Alaska Gasline Inducement Act ever since,” Keane told the Arctic Energy Summit. “AGIA is important for BG and the State of Alaska because this is the vehicle that will provide a means, whether through LNG or via a pipeline to the Lower 48, by which our gas, once discovered, will be monetized.”

Evolving global market

So, why is BG bullish on LNG as a means of monetizing Alaska’s gas?

Essentially, it’s a question of the way in which BG thinks that the global market in natural gas is evolving.

Traditionally, gas markets have operated on a regional basis, with the Asia-Pacific market, for example, remaining isolated from other markets such as the one that has operated in the Atlantic region, Keane explained. Each of these markets has been defined by politics and physical geography and each has danced to the tune of its own distinct supply, demand and price characteristics. The high cost of shipping LNG across the world created a natural barrier to any of these markets merging with each other.

“These regional gas markets had very limited influence on each other and this certainly made forecasting LNG prices very easy,” Keane said. “… It was at that time a very different world. Today this is not the case at all.”

The breakthrough for global markets came when the LNG trade started to become viable over long distances.

“In the early years of this decade the cost-price balance broke the so-called ‘tyranny of distance,’ making Middle Eastern LNG economically viable into the U.S. gas market,” Keane said. “This was really the big bang for the world gas industry, as some of the world’s largest reserves had the potential to be linked to the world’s largest gas market. As a result we’re now seeing multiple markets competing for the same LNG volumes, with price signals in one part of the world beginning to influence behaviors in prices in other parts of the world.”

At the same time, the increasing availability and interchangeability of gas supplies suggests that the gas market may be evolving into a truly global operation in which, as with crude oil, supplies would be freely shipped around the globe, with spot market pricing reflecting the balance of global supply and demand.

Secondary market

As evidence of the start of an evolution towards a global gas market, Keane cited the emergence of a secondary gas market alongside the traditional, regional contracted arrangements for gas supplies. In this secondary market, LNG cargoes may be diverted at short notice from one target destination to another. And the ways in which these diverted cargoes are negotiated bear the hallmarks of the type of spot market that would characterize a global gas market.

“In 2006, of the 182 (LNG) cargoes BG purchased, 78 were sold into markets other that the ones they were originally destined for,” Keane said. “That’s over 40 percent of our portfolio.”

As further evidence of the growing secondary market, the trade in LNG between the Atlantic and Pacific regions is growing, Keane said. In 2006 just over 3.5 million tonnes of LNG were shipped from the Atlantic region to Asian markets.

“These were largely diverted by portfolio players who have access to flexible markets and who have the depth of portfolio to accommodate the extensive impact on shipping and scheduling that such long-distance redeliveries require,” Keane said. “BG supplied around 30 percent of these cargoes.”

And, whereas several LNG terminals in the United States have seen relatively constant rates of LNG import, the secondary market has caused major import rate fluctuations at the Lake Charles terminal on the Gulf Coast, Keane said. This fluctuation provides evidence that the Lake Charles terminal acts as a “swing” market for LNG, with the huge U.S. gas market starting to drive the economics of world gas trading.

The secondary market also appears to be starting the convergence of world gas prices towards major price indexes, such as the price at the Henry Hub gas market in the United States.

“Many cargoes diverted into Asia are selling at prices reflective of Henry Hub and European price markers,” Keane said.

Alaska LNG

The significance of all of this for Alaska is that increasing globalization of the gas market and the burgeoning secondary market for Atlantic-region LNG sold into the Pacific-Asian market could provide a market opening in the Pacific arena for Alaska LNG. Alaska LNG would replace Atlantic-based LNG, which would subsequently be sold to the United States. This shift in trade would actually increase the efficiency of the global market as a whole, with gas becoming an interchangeable worldwide commodity. Gas molecules exported overseas from Alaska would in effect be replaced in the United States by other gas molecules imported into the Lower 48 from elsewhere.

“Therefore, gas being transported from the Atlantic basins to Japan, Korea or Taiwan would most likely find its home back in the United States,” Keane said. “This has become possible because of increasing spot cargo values, a growing number of portfolio players in the market, increasing destination flexibility in some contracts, the development of the United States as a swing market and abundant spare shipping capacity.”

At the same time a growing worldwide demand for natural gas will fuel the need for further supplies of the product.

“As ever more distant sources of supply are found, new importers, new trade routes and new facilities will develop and I hope this includes Alaska as an exporter to the world market,” Keane said. “We are already seeing this take place in Chile, where BG is building a regasification terminal that we will supply from our portfolio of contracts.”

Obstacles

But Keane cautioned that, if world gas markets are moving toward more of a global market, that process of market evolution is still in a relatively early stage.

“The traditional markets and the new markets are stitched together, but they’re not yet fully fused,” Keane said.

And several obstacles stand in the way of achieving a fully efficient global gas marketplace.

First of all, access to gas supplies remains tight, thus limiting easy gas availability in a spot market. And the Asian gas market is not generally accessible at present to third-party market players, Keane said.

“However, I believe that many buyers would very much like the political, economic and supply security that Alaska can offer,” he said. In addition, businesses wanting to participate in a global market need “a complete set of skills, capability and credit to play across a number of different supply locations,” Keane said. “… There’s also a raft of existing agreements, many of which put very significant commercial restrictions or constraints on flexibility.”

Cost has been a huge issue for the gas industry and still presents a major impediment to trade globalization, Keane said.

“Cost created the tyranny of distance, drove up utilization factors, meant that the industry has always had little spare capacity or storage,” he said.

But the market is changing.

“It’s an unequivocal fact that the breadth and depth of global trade is increasing across the industry,” Keane said. “We’re building up impressive connectivity between markets, with increasing flexibility within the system.”

Will those changes lead to complete globalization of the market?

“Whether this turns out to be the case is likely to be strongly influenced by a number of key factors including the resurgent industry cost pressures … plus the challenge of gaining access to resources, just like the resources you have here in Alaska, lack of liquidity in most traditional LNG markets and increasing focus on security of supply,” Keane said. “These factors are going to shape the way the market develops, and depending on some of these it could go in any number of ways.”

Alaska can compete

But if someone were to build a new Alaska LNG facility, to supply LNG into the world market, where might that terminal be located?

“I can’t answer that,” Keane told Petroleum News. “We’re viewing this (Alaska involvement) as an exploration and production operation opportunity for BG.”

Keane said that Alaska gas can compete with gas from elsewhere in the world and, given the amount of gas that people think Alaska has, there may be scope for both an LNG export facility and a gas pipeline to the Lower 48.

“The more options you provide explorers or producers, the better off you would be in the long run,” Keane said. “… Once a pipeline is constructed or announced or whatever, then I think you’ll see more explorers coming in and perhaps spending more money on exploration.”



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