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Vol. 16, No. 32 Week of August 07, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Wood Mac: LNG could pay at $75 oil with state-owned pipeline

The Alaska Gasline Port Authority LNG project looks economic, according to a study done for AGPA by Wood Mackenzie.

The study compared AGPA’s All-Alaska Gasline Project with other projects proposing to ship to Asian markets.

“The economics for LNG from Valdez are superior to the comparable projects,” AGPA’s general counsel, Bill Walker, said in a July 28 press release.

The Wood Mackenzie study compared the economics of a project with a line to Valdez paralleling the trans-Alaska oil pipeline with nine other liquefied natural gas projects being advanced or under construction in Australia, Western Canada and the Lower 48.

Walker said AGPA’s All-Alaska Gasline Project is predicated on state ownership of the gas pipeline, which would be built and operated by the private sector. There would be a spur line to Southcentral Alaska.

“The real benefit of the LNG project, paid for by long-term contracts in the Asian markets, is that all Alaskans can benefit from our resources,” Walker said.

AGPA said it sought the analysis by Wood Mackenzie to help Alaskans, the administration and the Legislature, “understand the difference between the rising demand for LNG in the world marketplace as opposed to the oversaturation of the natural gas markets in Canada and the Lower 48 in light of abundant supplies of shale gas.”

Liquefaction in Valdez

Wood Mackenzie described the project as a large-volume pipeline from the North Slope to a 2.7 billion cubic feet per day liquefaction facility in Valdez, and said AGPA contracted for an evaluation of “the economic competitiveness of Alaskan LNG exports relative to other proposed liquefactions projects at various stages of development.”

The report said that with oil prices at about $100 a barrel, and expected to remain at that level for an extended period of time, “the Alaskan LNG export opportunity appears today to make economic sense.” With Asian oil-indexed LNG pricing delivering product to regasification terminals at more than $15 per million Btu, and Canadian and Lower 48 LNG potentially deliverable to Asia at a cost of about $10 per million Btu, Wood Mackenzie estimated that Alaska LNG could be delivered at below $10 per million Btu.

North of $75

Wood Mackenzie said the numbers generally work for an Alaska LNG project with a global oil price north of $75 per barrel and Asian firm contract pricing at 13 percent or more oil indexation. Firm contracts today are indexed at approximately 14.85 percent, the report said.

The proposed Alaska LNG export would have a substantial cost advantage relative to possible competing projects because Alaska LNG would use gas currently used for re-injection.

With a startup in 2021 and a project life of 30 years, royalties of 12.5 percent and state taxes starting at 25 percent post-royalties, the project could yield state revenues totaling between $220 billion and $419 billion over the project life.

Wood Mackenzie did point out that good numbers are not the only requirement for a successful LNG project.

“While we do not address them, there are a number of commercial challenges associated with all liquefaction projects,” the firm said in the report. “Economics are important, but commercial issues such as the scale of value chain requirements (pipes, storage, etc.), buyer risk tolerance, financing arrangements, etc. are critical.”

Long-term supply

But projects are needed.

Wood Mackenzie said there is a shortage of “proximate LNG” in the Pacific basin and a number of projects, including Alaska LNG, will complete to supply those long-term requirements, with U.S. LNG export potential expected to come online in 2016 and Canada LNG export potential in 2018.

Demand for LNG is trending upward, the report said, as new supply is drifting out in time. The market could be tightened further by operational uncertainty. A graph of demand in the report shows uncontracted demand opening up in 2012-13, with potential Pacific projects which don’t yet have a final investment decision starting to come online in 2016.

Australia has the potential to meet 36 percent of world demand through 2025, Wood Mackenzie said, with more than 7 bcf per day of capacity onstream or under construction, another project probable for investment approval within 12 months and almost a dozen more projects proposed.

May be room

But Australian projects face rising costs, pressuring project economics, which might make room for a few North American export projects. In addition to the AGPA project, there are four export projects proposed from western Canada and as many from the U.S. Gulf and East coasts.

Wood Mackenzie said it used data from the Valdez LNG case from TransCanada’s 2010 open season notice, with the exception of liquefaction capital expenses estimated at $1,200 per ton, Alaska LNG losses of 9.65 percent, ship cost estimated at $200 million each, ship operating costs at $15,000 per day. LNG processing losses were estimated from the Alaska Gasline Inducement Act net present value report and liquids credit determined using $80 per barrel netback price for LPG and volumes provided by AGPA.

The greenfield Alaska LNG cost shown in the report is $8.50 per million Btu in 2011 dollars.

The report notes that currently re-injected gas offsets higher pipeline costs for an Alaska project.

Based on an estimate of $8.50, Wood Mackenzie said Alaska “competes favorably with both proposed Australian and other North American export facilities” which haven’t yet reached final investment decisions.

The report said economics of an Alaska LNG project were based on a Nymex forward strip from July 5; Wood Mackenzie data from its April 2011 outlook; and tested against a worst case scenario with an inflation-adjusted oil price of $75 throughout the projection period.

The Nymex strip scenario, Wood Mackenzie’s base case, yielded annual state tax and royalty revenues of $2 billion to $16 billion per year, a total of $220 billion over the 30-year life of the project. Based on the Wood Mackenzie price scenario the project would yield annual tax and royalty revenues of $3 billion to $24 billion to the state, a total of $419 billion over the project’s life.

The worst case scenario, based on inflation-adjusted $75 oil, yields tax and royalty revenues to the state of $400 million to $6 billion for a total of $75 billion over project life.

—Kristen Nelson

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