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Vol. 13, No. 27 Week of July 06, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

LNG or natural gas project?

Econ One: Pipeline along Alaska Highway probably trumps LNG plan

Eric Lidji

Petroleum News

A liquefied natural gas project can earn more on less, more or less. But more and more, a big pipeline through Canada can earn more on more, according to a legislative consultant testifying during an on-going special session on natural gas issues in Alaska.

Broken down: an LNG project sending North Slope natural gas to Asia could likely earn higher netbacks on each unit sold. But the lower volumes of an LNG project mean that over the long term, an overland pipeline along the Alaska Highway would probably produce higher overall values over the life of the project.

“In the end, it’s not just about the per-unit value that you get. It’s about maximizing the total pie,” Barry Pulliam, senior economist with the consulting firm Econ One Research, told state lawmakers June 20 in Anchorage. “You can have a high per-unit netback, but on a low volume it doesn’t necessarily get you the same economic value as if you have a little bit lower per-unit netback on a much greater volume.”

Pulliam’s opinion threads the gap between two contrasting takes on an LNG project: a negative view from the Palin administration and a positive one from the Alaska Gasline Port Authority. Looking for another opinion, the Legislature charged Pulliam with comparing the netbacks of a potential LNG project with an Alaska Highway pipeline.

Using data from the state and modeling work from the Port Authority, Pulliam compared four configurations for marketing North Slope natural gas: two potential LNG projects and two potential highway lines.

Pulliam broke each down by volume, using the 2.7 billion-cubic-foot-per-day project proposed by the Port Authority and the 4.5 bcf project proposed by Sinopec for LNG, while using the 3.5 bcf pipeline that TransCanada proposed as the minimum viable option and the 4.5 bcf pipeline that TransCanada prefers for a highway route.

LNG wins with expensive oil

Looking at those four options, the benefits of an LNG project compared with an overland pipeline depend on which crystal ball you rub.

A vision of the future featuring high worldwide oil prices, a strong gas-to-oil price ratio in Asia paired with a weak price ratio in the United States and a delay that pushes the start of a highway pipeline to 2026 favors a project that can ship a lot of LNG to Asia.

But that scenario requires an export license, and no one is entirely sure whether the license secured by Yukon Pacific Corp. nearly 20 years ago will be any good today.

In light of the troubled history of exporting Alaska oil and recent political winds touting energy independence, Pulliam remains “skeptical” that the federal government would allow large shipments of American LNG to Asia unless the price fell considerably.

“You need to focus on this particular risk issue pretty hard,” Pulliam said.

Without an export license, the next most likely market for Alaska LNG would be the West Coast of the United States, which means losing the price advantage of shipping to those hungry markets in East Asia, Pulliam said.

“There’s virtually no reasonable price scenario that would make that attractive relative to a pipeline project,” Pulliam said about shipping to the West Coast.

But uncertainty shouldn’t be a deal-breaker, according to Bill Walker, project manager with the Alaska Gasline Port Authority, because every project contains risks.

“Let’s not stop trying to build an all-Alaska line because we think we might not be able to keep what has already been awarded,” Walker told lawmakers. “That doesn’t seem to make sense to us.”

Walker pointed to potential permitting challenges facing any company that proceeds with a highway line through Canada.

High volume means competition

Even with an export license to ship to Asia, though, the most productive LNG option faces challenges as it steps into the forecasted future, Pulliam said.

Today, Japan, South Korea and Taiwan use around 60 percent of the 21.8 bcf of LNG consumed globally every day, but that region of East Asian has little to no gas production, Pulliam said, quoting the 2008 BP Statistical Review of World Energy.

Gauging the rising demand through 2020, the estimated start of an Alaska pipeline, those three countries alone are expected to use around 19 bcf per day. At that rate, a smaller 2.7 bcf LNG project from Alaska would cover around 14 percent of East Asian demand, while the 4.5 bcf project would cover around 24 percent.

But, Pulliam said, the large volume that makes the project more productive in the long run might be too large: Alaska would have to compete for demand.

“If prices remain high, suppliers are going to fight for that,” Pulliam said. “If you try to put that kind of volume into that market, I would suspect you would weaken the price considerably.”

Price guesses favor highway

Looking more cautiously into the crystal ball, the “more likely” price forecasts give a big overland pipeline higher netbacks than LNG over the long run.

In a world where oil prices remain eight times higher than gas prices, Pulliam found that a 3.5 bcf highway pipeline would earn netbacks of $6.11 per million British thermal units in 2008 dollars and total netbacks of $229.5 billion in 2008 dollars.

By comparison, under the Port Authority model, Pulliam found that a 2.7 bcf LNG project would earn netbacks of $5.22 per million Btu in 2008 dollars and total netbacks of $145.1 billion in 2008 dollars.

Looking at the other end of the volume spectrum shows a similar outcome.

Keeping the eight-to-one oil-to-gas ratio, Pulliam found that a 4.5 bcf highway pipeline would earn netbacks of $6.31 per million Btu in 2008 dollars and total netbacks of $304.6 billion in 2008 dollars.

By comparison, Pulliam found that using the Port Authority pricing data for a 4.5 bcf LNG project would earn netbacks of $5.63 per million Btu in 2008 dollars and total netbacks of $271.8 billion in 2008 dollars.

Keep LNG option available

Although the Econ One report contained a mix of sobering and upbeat news about an LNG project, Walker praised it as a collaborative success.

“He didn’t agree with everything we presented, and we didn’t agree with everything he presented, but we had an opportunity to communicate,” Walker said, referring to the modeling information Port Authority gave to Econ One for the report.

Walker pointed out that LNG does provide the highest netbacks under several scenarios, and used the hearing as an opportunity to announce a one-year deal between the Port Authority and Mitsubishi Corp. to develop a “Y-line,” which would combine a highway route with an LNG spur.

But Walker said the Port Authority’s primary concern is timing. Walker still believes the Port Authority can get gas to market and to Alaskans quicker than any other option.

Walker asked lawmakers not to “close the door on the LNG option.”

Offering similar advice from the other side, Pulliam told lawmakers to “Ask the question: Is there a reason the state has to choose between (a highway line and an LNG project)? In the end, a market-based outcome is the most favorable. ... I don’t see any reason to preclude one or another, but I don’t see a reason in the economics to try and intervene to make LNG happen at the expense of the pipeline.”

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