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An uncertain LNG future for Alaska The export of North Slope gas as LNG faces uncertainty over future market conditions and over competition from other producers Alan Bailey Petroleum News
In a talk during the Law Seminars International’s annual Energy in Alaska conference in 2011, Paul Carpenter, chairman and principal of The Brattle Group, said that major uncertainty over future gas market conditions has for many years formed a road block to moving forward with a major project to build a gas line from the North Slope to the Lower 48.
On Dec. 3, during this year’s conference, Carpenter turned his attention to the prospect of exporting Alaska gas as liquefied natural gas, or LNG.
The shale gas revolution and low gas prices in North America have driven an interest in exporting LNG to the Pacific Rim, where LNG currently commands relatively high prices. Exxon, ConocoPhillips, BP and TransCanada, with encouragement from the State of Alaska, have turned their attention to a potential LNG export project, involving a gas line to an LNG facility at tidewater in Southcentral Alaska. The producers have estimated the total project cost, including the liquefaction plant and a gas treatment plant on the North Slope, to be somewhere in the range $45 billion to $65 billion, and possibly more, Carpenter said.
High cost Although it might be tempting to think that the fact that the North Slope gas is currently stranded makes an LNG export project a “no brainer,” this is far from the case, given the high cost of the project, Carpenter cautioned.
“While the gas may be cheap at the source, the infrastructure that’s required to bring it to market is not,” Carpenter said. And, given the lead time required to bring an LNG export project to fruition, exports would not begin until after 2020, he said.
So, what are the uncertainties that might give a would-be LNG exporter from Alaska pause for thought before parting with multiple billions of dollars in capital investment?
Two scenarios The International Energy Agency’s most recent World Energy Outlook report put forward two gas market scenarios that represent two end points of a spectrum of future market possibilities, Carpenter said. One scenario, referred to as “the golden rules case” posits that the shale gas revolution will continue, with the use of shale gas technology spreading widely around the world. The other scenario, “the low unconventional case,” assumes that the spread of shale gas development would be stunted as a consequence of issues such as environmental concerns or development problems.
“I would tend to think that the golden rules case would be the kind of thing that might be more likely to occur, in the sense that it’s hard to stop technology from spreading around the world,” Carpenter said, observing that the low unconventional case might bode better for the prospects of Alaska LNG exports.
On the other hand, there have been reported problems with the international spread of shale gas technology: In China, for example, much of the shale gas resource is in populated areas, or in desert areas that lack the water needed for shale gas production.
India and China The International Energy Agency’s forecasts of future LNG import needs point to India and China as dictating future demand growth, Carpenter said. The agency forecasts about 10 billion cubic feet per day of incremental demand from these countries between 2010 and 2020, an incremental demand that roughly matches the incremental LNG exports that Australia has committed to between now and 2017, he said. Australia has several LNG projects in progress.
That leaves about another 11 billion cubic feet per day of potential demand from China and India between 2020 and 2035, according to the International Energy Agency. A Brookings Institution study found that new LNG supplies will meet incremental demand increases between 2010 and 2020, with about 5 billion cubic feet per day of unmet demand after that. However, China will have opportunities to import pipeline gas from Russia and Eastern Europe, Carpenter said.
China is going to be the important uncertainty in the market, he said.
Supply competition On the supply side of the demand and supply market equation, the potential Alaska project would deliver 3 billion to 3.5 billion cubic feet of gas per day as LNG. The Australian projects coming on line by 2017 would in total be equivalent to about three times the Alaska production, and worldwide there are many other LNG export projects that have been proposed, including exports from the U.S. Gulf Coast and from British Columbia. In total there is the equivalent of about 13 Alaska-sized projects potentially coming on line ahead of Alaska, with consultancy firm Wood Mackenzie suggesting that the sweet spot for the timing of new LNG exports will be around 2016 to 2018.
“Basically the timing of this competition doesn’t favor Alaska,” Carpenter said.
And long-term contracts, many of them 15 to 20 years in duration, have been signed for LNG projects already under way.
“That’s one of the advantages of being a first mover,” Carpenter said. “Unfortunately this is not available to the Alaska project at the moment.”
LNG prices Then there is the question of the future price of LNG in world markets.
“This is a very difficult thing to predict,” Carpenter said.
A supply glut by 2020, perhaps from shale gas production in target market areas or from the export of shale gas from North America, could depress Asian prices. On the other hand it is unclear to what extent the U.S. Department of Energy will approve LNG exports from the Lower 48, given the pressure to restrict U.S. exports. And the Australian projects are facing significant cost pressures because of a shortage of skilled staff for multiple projects being conducted simultaneously, Carpenter said.
The export to Asia of U.S. LNG from the Gulf Coast may be impeded by high tariffs on the Panama Canal, even although the canal is being widened to handle LNG carriers, Carpenter said.
Current high LNG prices in Asia result from a tradition of linking LNG prices to the price of oil in LNG supply contracts. But LNG buyers, seeing the multitude of shale gas projects being developed in North America, are questioning that oil price linkage. North American developers, on the other hand, want a continuation of the linkage and producers in western Canada say that oil-linked Asian prices are driving their LNG projects.
“Where this comes out obviously will be very important to the prospects for a post-2020 Alaska LNG project,” Carpenter said.
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