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US LNG exports — where does Alaska fit Oil and gas conference panel reviews liquefied natural gas market, says many projects — like Alaska’s export line — won’t go soon Kristen Nelson Petroleum News
A proposal to liquefy and export Alaska North Slope natural gas as LNG has advantages and disadvantages over competitors. That was the general consensus of a panel at the K&L Gates Second Annual Alaska Oil and Gas Conference in Anchorage July 10. Panel members included: Steven Sparling, the panel moderator, and David Wochner, both partners in K&L Gates Washington, D.C., office; Christopher Goncalves, director of the Berkeley Research Group’s global gas and LNG advisory practice, also based in D.C.; and Larry Persily, federal coordinator in the Office of the Federal Coordinator for Alaska Natural Gas Transportation Projects.
The panel provided a D.C.-perspective on Alaska’s efforts to export its North Slope gas as liquefied natural gas.
Alaska, because it isn’t connected to the Lower 48 gas distribution system, isn’t expected to face concerns about exporting natural gas that could be used domestically, but it will face federal agency approval for the project.
Federal approvals required That approval comes from two major agencies, Wochner said: The Federal Energy Regulatory Commission, which has jurisdiction over facilities for importing and exporting LNG, and the U.S. Department of Energy, which has authority over the import and export of the gas.
FERC has a “very well-established process,” Wochner said, which is similar for environmental reviews to what the agency does for Lower 48 gas pipelines, so the agency has “a robust staff in place” with environmental and hearing experience. Even with an experienced staff it’s a lengthy process, taking 18 to 24 months. But because it’s a regular process project developers know what to expect from FERC, he said, unlike the Department of Energy which he characterized as “anything but predictable.”
“And this is where all of the uncertainty right now here in the U.S. lies,” Wochner said.
Other than the Kenai LNG facility, the U.S. has not been an LNG exporter — in fact the Lower 48 was for decades short of natural gas, he said.
With the natural gas surplus in the Lower 48 the Department of Energy has 20 applications pending for export. While a license is automatic for countries with which the U.S. has a Free Trade Agreement, the only big importer among those 19 nations is South Korea, and Wochner described the DOE process for exports to other countries as “robust” with logistics complicated by the very small staff, four to five, in DOE’s Office of Fossil Energy which handles import-export licenses.
He said that office went from an office which occasionally got an application for import “to an agency that is at the forefront of a major political debate in Washington right now. They don’t have the staff to be able to handle that,” Wochner said.
The result is a holding pattern, he said, with one license issued a couple of months ago, although “the hope is that they’re going to begin to move through these fairly quickly.”
The competition Persily described the competition — countries that want to get into the LNG export business.
Last year there were 16 countries exporting LNG and “half again as many” that want to get into the business in the next decade, he said.
Persily said Alaskans tell him they are concerned about the competition, but he said those competitors also have challenges.
Among existing producers, for example, Egypt is already running short of gas; Yemen has political problems; Norway has had technical issues; and Angola, which just came on line, was 18 months behind schedule.
There is space in the market, Persily said: Papua New Guinea — coming on line soon — and Australia, with seven projects under construction, have most of their LNG already sold.
“They’re not our competitors as we look ahead to the 2020s and beyond,” Persily said. While Russia, the Lower 48 and British Columbia are all working to get into the market (or to get more gas into the market in Russia’s case), most of those projects won’t be built in the next decade, he said: “The world just doesn’t need that much LNG.”
So who will get into the market? Persily said “the winners are going to be the ones where the project developers can get together with government and de-risk the project so that they can sell gas at a competitive price and win customers.” Alaska isn’t out of the running, he said.
The market of the future The impact of exports on the domestic natural gas price has been a concern, but Goncalves said “so far we haven’t seen that it’s slowing any permits down,” though it may become more of an issue with the next wave of export terminals.
Even if the Department of Energy is comfortable with the price impact, there are the issues of whether prices are sustainable and global impacts, and whether the banks will “take the risk on multibillion-dollar investments.”
The price spread between North American traded hub prices “primarily driven by abundant — I won’t say cheap — but economic, affordable shale gas production” and Asian LNG prices makes export LNG projects attractive, Goncalves said. He said shale gas production represents more than 35 percent of Lower 48 production and will represent 50 to 60 percent within a few years.
The price spread relates to the fact that in most places, particularly Asia, LNG is indexed to oil, and the focus is on chasing those high LNG prices, in the $17 to $18 range, compared to the U.S. hub-traded price of about $4.
Is that spread sustainable? It’s a “short-term phenomenon — it’s really only been a factor for the last several years,” he said.
There wasn’t much of a spread as recently as 2006 but with more “tightening of the market” following the Fukushima nuclear disaster in Japan the spread has grown.
The current spread comes from two factors, Goncalves said: tightening of the LNG market and the Lower 48 production boom.
And while U.S. concern has been about exports driving up domestic prices, Goncalves said work done by his firm doesn’t find any major impact on U.S. prices over the next 10 to 15 years from LNG exports. The impact is expected to be 90 cents to a dollar, he said, which isn’t “major insofar as most of the people who are thinking about burning more gas for power plants, for industrial, petrochemical facilities or transportation infrastructure, shipping, rail, LNG trucking and so forth.”
And as shale production catches up with an expected level of exports the domestic price impact of exports is expected to drop to 40 to 50 cents.
The price angle which hasn’t received much attention is the possible impact of increasing U.S. production on the Asian or European prices for natural gas, he said.
Then there is the impact of U.S. exports on projects worldwide.
Looking at proposed export projects “terminal by terminal, project by project,” Goncalves said “on balance about half” of the proposed projects out of Australia and some from East Africa “could be impacted or delayed by the North American supply.”
Which projects will go forward? He said it will be “the projects that are the best designed, that have the critical path variables put in place sooner, and have good economics, supply chain logistical solutions to offer the customers that are going to go forward faster” while other projects won’t go away, but will “keep their powder dry for another day.”
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