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The deal of last resort Harold Heinze of Alaska Natural Gas Development Authority says the group’s liquefied natural gas proposal keeps alive a number of different project options Kristen Nelson Petroleum News Editor-in-Chief
The Alaska Natural Gas Development Authority is the only entity actively working on a liquefied natural gas project, the authority’s chief executive officer, Harold Heinze, told Petroleum News in a May 3 interview. While the Alaska Gasline Port Authority has LNG as part of their proposal — along with a highway pipeline to the Lower 48 — the port authority’s study is done, Heinze said, leaving the development authority the only group actively working an LNG option. The North Slope oil producers studied an LNG option in the late 1990s, but abandoned it in favor of taking gas to the Midwest by pipeline. LNG project offers different options The LNG project, he said, offers a number of different options: It is 2 billion cubic feet of gas a day, which only requires a life-time supply of a little more than 20 trillion cubic feet, an amount available at Prudhoe Bay — without gas from Point Thomson or any other field.
“We calculate you only need one producer and the state of Alaska to do it. If two people sat it out, you’re still okay.”
The other difference, he said, is that with LNG projects, customers historically have invested “back into the system,” where with gas pipelines historically they have not.
So with an LNG project there could be “a major source of equity investment” that would never think of investing in a gas pipeline.
“So, again, even if it’s third on the list in terms of rewards to Alaska or economics or whatever — it’s worth keeping your options open as long as it’s feasible.”
And that, said Heinze, is what the report at the end of summer will say: that basically the project is feasible.
“It won’t claim it’s the best project. It will say there’s a lot more work to do before you’d actually spend big money on this, but it’s still there, keep it moving forward.”
As for a bullet line to Cook Inlet, a 30-inch line to bring North Slope natural gas to Cook Inlet, if nothing else works out, “maybe we ought to take a hard look at that — maybe that’s like building a highway.” The only state corporation in the game As for what benefit the development authority could bring to a project, it is “the only guy in the game who is the state’s public corporation. And if at the end of the day, that’s not worth anything, we’re done.”
The development authority is unique among the wannabes, and its work is to figure out what that could mean in a project.
They have received preliminary advice from the tax attorney on the utility idea, confirming that “as a utility of the state of Alaska performing a transmission function of gas” to Southcentral, “you’re part of government, you’re just a government utility, of course you’re tax exempt and tax free.”
As a utility, Heinze said, the development authority could act as an aggregator, procuring large supplies on the North Slope and selling that gas to multiple buyers at the other end.
It would have to be economic, he said, but it wouldn’t have to make a profit. It would be “like building a highway,” it would just be “part of the gas infrastructure.”
It’s what Enstar does: buy at one end, sell at the other.
But the development authority, as a state entity, would guarantee the lowest cost of service.
“Whatever margin, whatever advantage, whatever thing I can bring to the party, I can spend it for the benefit of Alaskans. If I get gas here cheaper, that’s good. If I get gas to Chicago cheaper, that’s not necessarily good.
“I don’t get points for Chicago. I get points for here,” Heinze said. Has to be market tested The Legislature is covering the costs of work the authority is doing on its feasibility report.
But, he said, if it comes to spending hundreds of millions of dollars to build a line — those aren’t hundreds of millions of dollars the state should spend.
“The only way we see to avoid making a mistake is to treat it as a commercial transaction. In other words, we’re not going to build something because the state thinks it’s a good idea. The market needs to think that — the commercial entities need to think that.”
If, someday down the road, a state project is ready for financing, investors have to believe the project is worth doing. The state won’t be asked to build a project.
“We’re going to bond this. No matter how you think about this, you can’t sell bonds to folks unless they believe in the project,” he said.
“If we can’t make this work on commercial terms, even though we’re part of the state, it’s not worth doing.” Relative cost of projects Heinze said one thing he’s concerned about as the state considers different projects is that it is given good numbers and that it can compare apples to apples for different projects.
“The line I used — and I mean it — is we don’t want the biggest liar to win. We have to be able to see enough that we can compare these things, apple-apple, and we have to at least be aware if there’s a range of opinion, what that range is,” he said.
There’s enough information public now, he said, to do some rough comparisons for different projects, based on calculating the cost for inch-diameter-mile, the pipeline cost divided by the diameter and the number of miles.
Heinze said he would expect the numbers for a fairly good range of pipe sizes to be about the same, but “in this case we’ve got a range of about five or six — and that seems like a wide range to me.”
MidAmerican, now out of the running, came in at the most expensive, $177,000 per inch-diameter-mile, compared to the latest producer numbers for the highway at $114,000 per inch-diameter-mile and the actual cost of the Lower 48 Alliance Pipeline at $34,000 per inch-diameter-mile. This, Heinze said, is “the last big major large-diameter pipeline built by the industry.”
The state has been using $140,000 per inch-diameter-mile, a number arrived at separately by Purvin & Gertz in 2000 and by Yukon Pacific. Enstar, which builds pipelines in Alaska, estimates $66,000.
The producers’ most recent number calculates out to $114,000, Heinze said, a 20 percent drop from the $140,000 everyone’s been using.
“I corrected my estimates instantly for that — I don’t get many 20 percenters,” he said. Heinze using producers’ pipeline cost estimate Heinze said he’s not suggesting that there is anything wrong with any of the numbers.
“There may be different conditions behind each of the numbers.”
But, he asked, if MidAmerican hadn’t withdraw its application, how could the state compare projects with costs varying from $177,000 to $114,000 “for doing the same exact thing?”
Heinze said he’s using the $114,000 and scaling it down for his smaller pipe because the companies spent $125 million studying the project, and “I presume some large portion of that was on this issue.”
And so much of the project is the same.
“There’s no difference in pipelining from Prudhoe Bay to the border than there is from Prudhoe Bay to Valdez… The first 530 miles is identical; the last 200 miles ain’t that different.”
But, he said, he wants to know how much “give” there is in the producers’ estimate, because the state needs to understand the range of what’s in the numbers. Costs change — as a recent increase in the price of steel — and without knowing specifics about how the producers got to the $114,000 it isn’t possible to know how the estimate will change as individual costs change, he said. BP says liquefaction costs coming down Another cost Heinze has factored into his project cost is recent numbers from BP which show dramatic decreases in the cost to build liquefaction facilities, with costs dropping almost in half just in the last few years.
If the numbers are right, and if they apply to Alaska, Heinze said, “it dramatically affects the economics.”
The five mega-majors are now all involved in LNG, he said: “You bring to bear that amount of smart money and they’re going to figure out how to do some things better.” It may be, he said, that with bigger LNG trains with bigger turbines the cost per ton of capacity drops.
“If it’s bigger trains, bigger turbines, then we can use that” in Alaska, he said.
There are a number of trends, things changing dramatically, and we need to understand them, he said.
“I don’t want to design an LNG plant. I just want to know if it’s going to cost $2 billion, $3 billion or $4! And I just want to know which of those numbers has the higher probability of being right.”
Pipelining is another area where the cost has come down dramatically, he said, probably due to improved trenching techniques.
In addition to the rising cost of steel — which may be temporary or permanent — Heinze said the metallurgy of the pipe will be new. “The pipe they’re using is the most advanced metallurgy there is. It has never been used on a major pipeline. This could be the first time.”
With larger pipe, he said, you need stronger steel to hold the pressure. You can’t just go to thicker steel because it’s hard to weld properly.
“So it’s a tradeoff of the actual metallurgy of the steel vs. the welding.”
It’s very advanced metallurgy, he said, “and you have to weld it under field conditions.” And, of course, the welds have to be perfect — it’s either 100 percent or basically it fails. Looking at the technical issues “There’s lots of legitimate reasons all of us ought to try to think about some of this stupid technical detail,” he said.
How do you look at technical issues?
You use the people banks use, Heinze said, the kind of firms bank hire when they look at plans for an LNG plant and have been asked to loan $2 billion and want to know, can they build it for that amount?
It’s a service provided by high-expertise firms who do everything but design and build, and Heinze said he’s identified two such firms, one a spin-off of Brown and Root, the other part of the old Stone Webster organization.
“If you’re Qatar, and Exxon wants to cut a deal with you, you hire one of these guys to look at the deal from a technical point of view,” he said.
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