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Vol. 17, No. 40 Week of September 30, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Sullivan plays hardball

Alaska LNG most competitive he tells Asians; also pushing upstream investment

Kay Cashman

Petroleum News

Using a combination of “diplomacy” and “hardball advocacy” on his recent trip to Japan and South Korea, Dan Sullivan was not afraid to criticize Alaska’s competition in the LNG market, while touting the state’s geographic proximity, political and legal stability, and cost competitiveness.

“My goal was to get out in front of potential buyers and essentially say, ‘look we know you are going to need gas as you look to fill supplies over the next decade. When the producers — BP, ExxonMobil and ConocoPhillips — come to you with their portfolios … of projects across the globe … we want you to ask for Alaska gas, not just any gas,” the commissioner of the Alaska Department of Natural Resources told both Japanese and South Korean buyers of liquefied natural gas and their government officials, who are influential in contract decisions.

Sullivan spoke at the Sept. 19 LNG Producers-Consumers Conference in Tokyo. With about 1,000 attendees, it was the world’s largest gathering of senior government officials from LNG producing and consuming countries, as well as senior business executives from the largest LNG producers and buyers, his office said. In addition to numerous meetings with individual companies and government offices, the U.S. Embassy of Japan put together an event in which Sullivan gave a presentation on Alaska gas and mineral opportunities that 70 people attended.

As well as pushing the benefits of buying Alaska gas, Sullivan took advantage of LNG buyers’ interest in getting in on the drilling and production part of the business.

“The downstream is always looking to have a piece of the upstream,” he said.

“‘You want upstream investment potential,’ I said, ‘here’s our lease sale information. And, by the way … you might find a lot of oil, too. If you are interested, see me afterwards,’” he said during presentations.

Several companies asked for information.

“We sent out six or seven CDs today,” offering to follow up with “a lot more information,” as well as meeting with companies.

“We can send our DNR’s resource team to meet with them,” Sullivan said. “Bill Barron and his team have been traveling a lot to give people the details.”

While declining to name the companies that asked him for more information about Alaska’s oil and gas resource, he did say, “they were all very respectable Korean and Japanese companies,” upstream and downstream.

“It’s kind of tight if they are looking at bidding in the November lease sale, though.”

Sullivan said DNR has been “making the pitch” to invest in Alaska “all over the country, all over world” and not just for oil and gas. At the U.S. Embassy function in Japan, his presentation included Alaska’s strategic and critical minerals.

“We do this very regularly,” he said. “Sometimes it doesn’t lead to anything; sometimes it leads to follow up with more detailed briefings; some ultimately participate in a lease sale.”

Main emphasis was LNG

Still, the main focus of the trip was to promote Alaska gas.

“The biggest thing I emphasized was the competitiveness of Alaska LNG. … And I certainly was not adverse as to what I saw as shortfalls in other potential suppliers, Alaska’s competitors,” Sullivan told Petroleum News in a Sept. 25 interview.

“I took the gloves off with Kitimat,” he said referring to the proposed LNG export terminal in British Columbia.

“They haven’t touched their Native claims issue. It can take years to resolve. … Alaska’s First Nation and Native land claims issues have already been resolved.”

Another challenge for Kitimat, he said, is that it’s a shale gas resource.

“It will take hundreds, if not thousands, of wells to develop,” noting that Prudhoe Bay alone “reinjects 8 billion cubic feet of gas per day,” which is enough to meet Canada’s daily gas needs.

Alaska low on risk

“A lot of these proposed LNG export projects, such as Cheniere (Energy Partners) in Louisiana, do not have the advantages we do — there’s no resource risk with a North Slope LNG project. It’s conventional gas. With shale gas, you don’t always know where it’s coming from. … Your source of supply is locked down with an Alaska LNG project. Even the Qataris can’t do it,” Sullivan said, noting Alaska gas is not part of the hydraulic fracturing debate that could potentially shut down much of the shale gas production in the Lower 48 states.

Alaska gets kudos

Sullivan also talked about the progress the State of Alaska has made on gas commercialization, including LNG, noting there were two state-backed projects.

He emphasized the reliability of Alaska’s gas supply, pointing out that Alaska is the only state in the U.S. currently exporting LNG.

In the 40-plus years that the Kenai Peninsula facility has been exporting LNG to Asia, mainly Japan, it has never missed a shipment, Sullivan told the audiences he addressed and the people he met with.

To his delight, he wasn’t the only official who praised Alaska’s reliability.

In the Sept. 19 LNG Producers-Consumers Conference, Hiroshi Okuda, governor of Japan Bank for International Cooperation, and one of the “most prominent speakers on the Japanese side, highlighted Alaska,” Sullivan said.

“In that culture it was a big deal. Mr. Okuda, formerly chairman and CEO of Toyota … first highlighted the Qataris, who were there in force, because after the 2011 Fukushima nuclear disaster, Qatar stepped up to help Japan.”

Then Okuda praised the state of Alaska’s “strong record of reliability in really pioneering LNG trade,” the commissioner said. “The head of Tokyo Gas was not as effusive, but he also acknowledged Alaska.”

Later, when Sullivan was introduced, he “acknowledged both their kind words and then repeated them.”

What about price?

Although LNG pricing was a “hot topic” at the conference and elsewhere, Sullivan said he refused to engage in the debate.

Most LNG suppliers want to see the price they get for LNG continue to be tied to an oil index versus to lower natural gas prices.

For example, recently Mark Papa, top executive at EOG Resources, which has a 30 percent slice of Kitimat, said that “project is not going to go anywhere” until it gets “an oil index contract with a Far East buyer for a majority of the off-take,” calling the project “kind of a long putt.”

“It was certainly one of the Japanese …goals to start that conversation. … (But) I am not dipping into that debate,” Sullivan said, admitting it was a “pretty raging debate at the conference.”

What he would tell people was that Alaskans “are working on the most capital efficient competitive project possible. The details on all these price regimes in different parts of the world and how they are going to come together I did not focus on; I did not answer questions on that topic.”

Sullivan’s dialogue and supporting materials concentrated on the competitiveness of Alaska LNG, emphasizing the state’s reliability of supply, and pointing to the Brookings Institution’s 2012 policy brief that discussed the strong competitive position of a potential, large-scale Alaska LNG to Asia project, and Wood Mackenzie’s 2011 study for the State of Alaska that evaluated the economic competitiveness of Alaska LNG in comparison to other projects competing for the same customers.

Wood Mackenzie concluded Alaska LNG would be competitive and could generate between $220 and $419 billion, delivering a cost structure below $10 per million Btu. Most competing Australian projects and proposed North American LNG exports, it noted, had yet to secure final investment decisions and were expected to deliver LNG to Asia at a cost of $10-$12 per million Btu.

Paving the way for Parnell

Sullivan’s trip to Japan and South Korea, which began Sept. 17 and concluded Sept. 21, was partly paving the way for Alaska Gov. Sean Parnell’s visit to the same counties Sept. 24-Oct. 1.

Whereas the commissioner met mainly with company and government officials on his level — “deputy ministers, senior vice presidents, chief operating officers” — the governor would meet with fewer officials, but the “next level up,” Sullivan said.

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Parnell in Asia seeking support for Alaska natural gas

Gov. Sean Parnell went to Japan and South Korea, seeking to drum up support for Alaska natural gas. The trip, which is expected to concentrate on Japan, began Sept. 24 and was expected to conclude Oct. 1.

It is Parnell’s second state-sponsored overseas trip as governor.

In an interview just prior to his departure, he said he plans to make a “compelling case” for Alaska gas in meetings with government officials, and utility company and business leaders in South Korea and Japan. He said he will explain the progress that’s been made toward commercializing Alaska’s North Slope gas and emphasize the comparative advantage Alaska holds over others, noting a more-than-40-year history of liquefied natural gas exports to Japan from a plant in Nikiski on the Kenai Peninsula.

Having that trust with a trading partner can lead to increased sales of Alaska gas, which can also help meet the recipient country’s needs, Parnell said.

“This is a trading relationship that has been fostered and maintained for decades, and I’m working to grow it across the years to come,” Parnell said in an interview Sept. 21. “I’m not going over there with an MOU (memorandum of understanding) to sign or anything. That’s not my goal. My goal is simply to work to grow demand for Alaska gas in Japan by opening their eyes to the opportunity that can come with LNG from Alaska.”

Parnell said he remains convinced that the market for Alaska gas exists in Asia, rather than overland to the Lower 48.

TransCanada holds an exclusive license with the state to advance a line, and Parnell last year called on the North Slope’s three major producers — ExxonMobil, BP and ConocoPhillips — to get behind a project that would allow for liquefied natural gas exports to the Pacific Rim if the market had shifted from the Lower 48.

State officials have said Alaska is closer than ever to its dream of a major gas pipeline, but significant challenges remain.

For example, there’s no firm project yet, though the CEOs of the three major producers have agreed to focus on a large-scale LNG project and to work with TransCanada so efforts toward a pipeline will be coordinated. (ExxonMobil had already partnered with TransCanada.) Parnell has set an end of September deadline for the companies to identify a project and associated work schedule and said he expects the benchmark to be met.

Any project will easily cost in the tens of billions of dollars, and the CEOs have already said that “unprecedented commitments of capital” for gas development by the companies will first require “competitive and stable” terms on taxes from the state — a simmering, contentious issue in the Legislature.

Still, Larry Persily, federal coordinator for Alaska natural gas pipeline projects, said the administration is doing the right thing by sending officials to Asia.

While there’s no definitive project yet, “everyone else in the world is over in Asia and Japan and China and South Korea touting their proposed, tentative, plausible, theoretical projects, so it behooves us to be there, too, making sales calls,” Persily said.

Parnell’s natural resource commissioner, Dan Sullivan, just returned from Japan and South Korea (see adjacent article), where he addressed a major conference of LNG producers and consumers in Tokyo, and met with utility and government officials. Parnell is to build on that, meeting with higher-level officials.

Sullivan said Sept. 24 that while Alaska isn’t as far ahead as other gas-producing regions, it has clear advantages, including a stable government and vast resource that can help diversify the global supply chain. He said there is “a lot of interest” in having Alaska as another large-scale source of supply.

—Becky Bohrer, Associated Press