A massive new proposal to export natural gas from Alaska brings a major competitor into the race to carry North American gas to Asia, and adds pressure on Canadian export projects to build quickly or risk losing out.
The Alaska Southcentral LNG project would include construction of a 1,300-kilometre pipeline from Alaskan North Slope gas fields to southern waters, near Valdez or Anchorage, where a new terminal would load liquefied natural gas on to tankers.
It is notable for the stature of its backers – BP PLC, Exxon Mobil Corp., ConocoPhillips Co. and TransCanada Corp., which have now joined forces after duelling for years over separate gas pipeline projects – and for its scale.
With a price tag of $45-billion to $65-billion-plus (U.S.), the Alaska project is a study in superlatives. It would use 1.7 million tons of steel, take 15,000 people to build and load three billion to 3.5 billion cubic feet of natural gas a day on to ships bound for Asia. It would elbow itself into a market that has been the focus of a global scramble, with numerous LNG terminals either being proposed or built in Qatar, Australia and elsewhere.
Although it has already seen $700-million in planning expenditures, the Alaska project is just getting started. It will take eight to 10 years to design and build.
Its projected costs are so high, however, that some are already questioning how it could be profitable. Indeed, its backers make clear in a letter released this week that “additional commercial agreements as well as support from the State of Alaska will be required in order to progress this world-class opportunity.”
It nonetheless adds a significant wrinkle to plans to ship natural gas off Canada’s west coast. Some seven projects are under development or consideration there, contemplating, in total, several times the volume of daily exports that might flow out of Alaska. One, backed by British giant BG Group PLC for construction at Prince Rupert, also stands to be among the largest in the world at 4.2 billion cubic feet a day.
Alaska has advantages. It is located geographically nearer Asian markets, and would use gas supplies that could be considered more certain than B.C.’s shale gas, little of which is yet in production. And its timing makes clear that B.C. projects have an increasingly narrow window to construct, lest they find their opportunity seized by others, said Jihad Traya, Calgary-based associate director of North American natural gas for IHS CERA.
“It is a tight global market, meaning that there is more supply being proposed than potential markets,” he said. Canadian projects, he said, are already at a disadvantage relative to other parts of the world. “We’re somewhat behind the eight ball when it comes to getting the developments rolling, getting the contracts signed, getting the facilities built.”
From that perspective, the Alaska plan “”does add some element of pressure,” he said.
That is, if it can get built. According to a preliminary estimate by Roger Marks, an Anchorage-based petroleum economist, it would cost $8 to $9 per thousand cubic feet to load the gas on to the new pipe, carry it south and stuff it onto a tanker. That’s not including the cost of producing that gas – low, but not zero – or shipping it to market, which could add another $1 to $2. Add it up, and there’s not much left for profit relative to gas prices in Japan, which are now at $15 and are expected to settle in the $12-to-$15 range in future.
“This announcement would suggest that there’s big challenges to this project,” Mr. Marks said. “They’re not going to build a project they’re going to lose money on.”
Indeed, TransCanada made clear the project remains nascent. “We’re not even at pre-feed,” said Tony Palmer, TransCanada’s vice-president of major projects development, referring to early front-end engineering work. “We’re at concept selection.”
LNG pipelines have been a source of great new opportunity for TransCanada, but Mr. Palmer declined comment on whether the economics can work in Alaska, saying “customers are the ones that are going to determine if they can afford to contract for this type of a project.” Still, the fact that three major energy companies and TransCanada have sorted out how to work together is a sign of progress.
“We’ve always said you need alignment of five parties – the three producers, TransCanada and the state of Alaska. We think we have that at the moment,” Mr. Palmer said.
The Alaska plan brings other complications. Companies on the North Slope today are producing roughly the gas volume the pipe would take away, then reinjecting it underground, where it helps maintain the pressure needed to make oil flow. Alaskan oil volumes have already been declining – down to 517,000 barrels a day this September after averaging 600,000 last year – and if that gas is taken away, it “would create irrevocable losses” to the state’s oil supplies, said Cathy Foerster, a commissioner with the Alaska Oil and Gas Conservation Commission. The longer it takes to build, however, the less oil there is to leave behind.
“There will come a point where the right thing to do with that gas is to sell it,” she said.
Then there are the fiscal terms. The Alaska pipeline backers have made clear they won’t proceed without favourable treatment from the state of Alaska: BP spokeswoman Dawn Patience listed “improved tax policy” as a key requirement for the project.
“BP intends to continue advancing the gas project in the near term with the hope that future fiscal policy is established that will support the necessary investment,” she said in an e-mail.