Short-term contracts challenge gas pipeline

The Associated Press

The proposed natural gas pipeline project in Alaska may face a new hurdle — how Far East Asian countries buy liquefied natural gas.

Recently, some short-term LNG contracts — ranging from one cargo load to a three-year agreement — have been signed, a departure from past long-term supply agreements.

Asian markets are “traditionally long-term, and there’s no commodity trading,” said David Lawrence, gas commercialization and marketing manager for ARCO Alaska Inc. “But every other market is gravitating toward commodity trading, so we’re monitoring these trends so we can quickly react.”

As chairman of the ARCO-led sponsor group that has pledged up to $100 million to study a gas pipeline across Alaska, Lawrence is keenly concerned about the project’s sales side.

Short-term contracts alone would not provide the economic stability to spend the huge amount needed for an Alaska gas project.

“Quite frankly … I cannot imagine that anyone would be prepared to spend $12 to $15 billion on an LNG project and not know who you are going to sell it to,” said David Brooks, Alaska gas manager for BP Exploration (Alaska) Inc.

Brooks thinks some of the more recent changes are isolated events. A few LNG ships became available after their projects slowed down or were depleted, Brooks said, and at the same time, new gas projects began producing more than had been presold in supply contracts.

“Put together the spare capacity in those projects with the noncommittal ships, and people have effectively sold on the short term,” Brooks said. “It’s trading at the margin — the little bit of cream on the top.”

The Asian financial crisis also caused demand for LNG and other fuel sources to fall off.

“Because of the downward flexibility in contracts, people are trying to place that spare capacity where they can,” Brooks said.