Providing coverage of Alaska and northern Canada's oil and gas industry
March 2002

Vol. 7, No. 12 Week of March 24, 2002

Yukon Pacific downsizes gas project

New plan would cost $9.5 billion; company looking to producers, pipeline companies or state development authority to build project

Kristen Nelson

PNA Editor-in-Chief

Yukon Pacific Corp. has downsized its proposed gas export project — to 1.4 billion cubic feet a day and a project cost of $9.5 billion. But, Paul Fuhs told the House Special Committee on Oil and Gas March 14, Yukon Pacific doesn’t plan to build the project, and looks to either the producers or a group of pipeline companies or the state development authority.

Yukon Pacific has developed a new plan for a natural gas export project from Alaska, Fuhs said.

“While other projects have gotten larger and larger, we’re actually looking at a smaller project.” Yukon Pacific holds the major permits for the project, he said, and has also been working on pipeline design and economic models.

Yukon Pacific’s previous design was a 36-inch pipeline, he said: the company is now proposing a 30-inch diameter pipeline. The plan is for 7 million tons a year of liquefied natural gas plus ethane and propane as separate products for a total of 11 million tons a year. Fuhs said the project can be expanded to 16 million tons with additional compressor stations.

The small case Yukon Pacific is presenting is 1.4 billion cubic feet a day.

Differences in project

“The concept behind it is to market the most valuable gas — propane and ethane. Previous projects have only focused on the methane portion,” he said.

Fuhs also said that no economic analysis has been done which considered the U.S. market for LNG. Yukon Pacific’s plan would sell LNG to Asia and to North America. Gas would also be sold within Alaska and the project includes ethane for a petrochemical industry in Fairbanks or Valdez, propane in Valdez, LPG to Asia and propane for coastal communities in Alaska.

There is also the potential of a spur line to Southcentral.

The project’s 11 million tons a year would include: 2 million tons a year to North America; 5 million tons to Asia; 1.25 million tons of ethane; and 2.2 million tons of propane.

The methane price would be $2.50 a thousand cubic feet in Alaska. LNG would go for $2.75 an Mcf to the U.S. West Coast and $3.50 an Mcf to Asia.

Fuhs said this small gas project would assist oil recovery because methane, ethane and propane would be pulled out on the North Slope, leaving 90 percent of the miscible injectant on the North Slope for oil recovery with butanes and carbon dioxide.

The impact on oil recovery would be small or none, he said.

Project cost

The $9.5 billion project cost is based on the 30-inch diameter pipeline, seven LNG tankers, two tankers for liquid propane and the liquefaction facility, Fuhs said. The pipeline cost was developed by Willbros, and the estimate included laying two sections of pipe in Fairbanks and using costs from the Alliance project from Canada to Chicago.

Liquefaction plant costs were done Kellogg Brown and Root, who “designed and built 95 percent of the liquefaction plants in the world over the past few years,” he said.

Yukon Pacific used economic modeling software from Credit Suisse First Boston for capital costs, financing costs and material balancing for the energy stream. The assumption was a 25 percent equity and 75 percent debt ratio, similar to the trans-Alaska oil pipeline.

The project used 2.5 percent inflation and an 8 percent debt service.

The gas purchase price used in the modeling was 50 cents per million Btu, which roughly equates, Fuhs said, to a thousand cubic feet. He said Yukon Pacific has heard costs of 68 cents for the Alcan route, with an 18-cent conditioning cost, which would be 50 cents at the wellhead.

“If the other projects don’t go,” he said, “this is definitely stranded gas. I would think there would be a substantial revenue stream to the producers even at this 50-cent level.”

The rates of return for this project would be roughly 12 percent. Fuhs said.

Other projects compatible

The volume this project requires doesn’t preclude other projects later, he said, and while it would be helpful to have a Canadian pipeline route, that’s not essential.

“If it were built there would be economics of scale for both,” Fuhs said, but Yukon Pacific believes “this project is viable as a standalone project. There’s plenty of methane left and no impact on a gas-to-liquids project, which has also been forecast for the North Slope. We think there’s another alternative, and that’s a gas-to-liquids project at tidewater, either in Kenai or Valdez…”

Gas would be accessible for instate use from this project, Fuhs said: It would take just a heat exchanger to pull off the methane and a pump to put everything back into the pipeline. Providing natural gas anywhere alone the pipeline would be very simple, he said.

Fuhs said the only thing Yukon Pacific is asking is that the Legislature and Congress not preclude an LNG option. He said Yukon Pacific was pleased to see Sen. Frank Murkowski’s action in Washington, D.C., to make sure proposed federal legislation included a provision for selling Alaska gas as LNG to the United States.

Gas purchases

Asked by House Special Oil and Gas Committee Chairman Scott Ogan how Yukon Pacific proposes to get the producers to sell gas for 50 cents, Fuhs said the producers have testified before various committees of the Legislature “that if someone makes them an offer for the gas, that they would sell it. I think that they might be hard pressed to say why they weren’t selling the gas when the terms of their leases say that they have to develop the gas if somebody’s willing to buy it from them, with expanded gas on the North Slope, and has no other market.

“What we did, is we looked at a market-viable project, and at 50 cents we believe that this is viable.”

Fuhs said that the offer to buy the gas has not been made to the producers. “Whoever does this project would have to do that, but we’re giving you the numbers here of what would work.”

Ogan asked, since Yukon Pacific has an economic project, when would the company start negotiating with the producers?

“The big deal is that you don’t have the gas, right?” Ogan asked.

Integrator needed

Fuhs said that what is needed is “an integrator to pull this project together. Which could either be the producers themselves to say that they’d like to take this project on — any one or all of them. … or a group of pipeline companies… or for this state development authority to really bring those together.”

Fuhs said that as he reads House Bill 410, which would establish a state gas pipeline authority, is “that within a year this development authority would arrange to get access to the permits, which we’re willing to negotiate on, offer a price for the gas and have an economic model ready to take to the market…

“When you’re going to know whether you’ve got a project here or not,” he said, “is when you go to the market and they say ‘we like your numbers and we’ll buy your gas at $3.50’ and the other one is that when you go to sell the bonds for this project that the financial community says, ‘your numbers are strong enough to do it.’

“That’s the ultimate decision on this,” Fuhs said.

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