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LNG not cost competitive for ConocoPhillips Company reviews sponsor group study for new Alaska Natural Gas Development Authority Kristen Nelson Petroleum News Editor-in-Chief
Joe Marushack and Gary Endorf of ConocoPhillips Alaska struggled for most of the afternoon July 7 to convince members of the Alaska Natural Gas Development Authority board that liquefied natural gas is not economic for Alaska. They reviewed results of the 30-month, $14 million engineering effort by the Alaska North Slope LNG Sponsor Group (ConocoPhillips, BP Exploration (Alaska), Foothills Pipelines and Marubeni Corp.) completed in 2001 which concluded an Alaska North Slope LNG project was not cost competitive with other LNG projects.
Endorf compared estimated costs of LNG service to Japan: projects on the Pacific Rim averaged less than a $2 per million Btu while Alaska LNG had a cost of service of $2.94 per million Btu. The costs were closer for delivery to the West Coast: Alaska LNG averaged $2.80 per million Btu, while Pacific Rim projects averaged less than $2.50 per million Btu.
The numbers for cost of service are estimated from external sources, Endorf said, and do not include upstream costs and the cost for re-gasification of the LNG. The cost of service numbers illustrate the burden of the 800-mile Alaska pipeline, he said, estimated to add 97 cents per million Btu.
The sponsor group did a significant amount of work to evaluate an LNG project, he said, “and at the end of the day it was concluded that the investment was just not cost competitive.”
One issue the board raised was voiced by Dan Sullivan, who asked if the Alaska LNG project was not cost competitive because ConocoPhillips needed to meet a certain rate of return on the project.
“It’s a good question. And that’s truly not how it works,” Marushack said. The company looks at the cost, and what it takes to be competitive. As for hurdle rates, those vary with the level of risk in a project, he said.
“In order to do a project,” Marushack said, “you’ve got to be very cost competitive. If you’re not amongst the most cost-competitive projects, you’re not ultimately going to be the one that’s able to get the deal done.” Costs for LNG projects dropping Another way to compare projects is by what it costs per million tons per annum, said Endorf. First there is a difference between expansion projects and greenfield or new projects. Projects with published costs ranged from $200 million per MTPA, cited for Malaysia III, an expansion project, to $330 million per MTPA for Qatar Ras Laffan, a grassroots project. These numbers compare with $610 million per MTPA for an Alaska LNG project at Nikiski and $730 million per MTPA for an Alaska LNG project at Anderson Bay, with the Alaska projects burdened by some $300 million per MTPA for the 800-mile pipeline.
Recently, he said, projects costs are dropping, with grassroots projects beginning to approach $200 million per MTPA. Endorf said expansion projects like Malaysia III, which cost $200 million per MTPA, “nowadays are going for more like $150 million (per MTPA).” Board wants to verify Board member John Kelsey asked if ConocoPhillips would provide the authority with copies of the study, and Marushack said it is owned by four companies, and the authority would have to negotiate with all four to buy it.
Board Chairman Andy Warwick told Marushack that various groups are telling the authority “that one project is more viable than the others,” and asked how the board could analyze ConocoPhillips’ results “without the underlying data?”
Jack Griffin, head of external affairs for ConocoPhillips Alaska’s, said the company was not asking the authority to accept its numbers as correct, and was not trying to dissuade the state from going forward with the project.
“That’s the state’s decision. We’re just trying to explain why we’re not going forward with the project.”
Harold Heinze, who did background work for the authority on a contract from the governor’s office, told ConocoPhillips he thought “the authority may want to look at these numbers with a different perspective than you have.” If the state looks at the project as building infrastructure, he said, it may be looking at a very different rate or return than the company.
Griffin said the Department of Revenue already had the ability to compare numbers, and Warwick asked if ConocoPhillips would be willing to “work with the Department of Revenue t help them back into your numbers?” Marushack said they would work with Revenue, “describe some of the numbers that we’ve got and help them to get a number.”
Marushack said some of the market data could be pulled from publications, but “there’s almost no substitute for actually negotiating deals on that one and that takes a staff of people. … (and) actually working the market.
“And you don’t work the market in two or three meetings,” he said. “You work the market over two or three years…”
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