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Gassed out?

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Alaska’s complicated path through the alder thicket to find the route to becoming the liquified natural gas (LNG) provider to the Pacific Rim appears to have run into a small cliff.

“Must Read Alaska” was today reporting ConocoPhillips has put the only LNG plant in the state up for sale as part of its move out of the natural gas business.  The plant is in Nikiski on the Kenai Peninsula.

Only months ago, Conoco was partners with ExxonMobil and BP in AK LNG, a company which was buying land around the Nikiski plant in preparation for expansion.

Over the course of two years, AK LNG bought 630 acres and even demolished some homes with eyes toward construction of a new, bigger, more efficient LNG plant that would process natural gas shipped south via an 800-mile pipeline from the North Slope and then export that gas to Asia.

Those plans changed significantly in October after the state announced it was taking over the LNG project in order to speed development. The move came after Exxon, the AK LNG project leader, said that because of market conditions and company financial issues, it would have to throttle back on the plan for the $45 to $65 billion gas line.

The global market is flooded with LNG at the moment and falling global oil prices have cut deep into Exxon profits.

Gov. Bill Walker jumped in to say the state would take over leadership of the project. Walker has been hot to build a gas pipeline since Valdez and Fairbanks created the  Alaska Gasline Port Authority (AGPA) at the end of the 1990s.

He ran for governor and eventually got elected with the goal of getting a gasline built. Since taking office, he has hired a $550,000 per year Texan to get ‘er done.

Keith Meyer, now the well-paid head of the Alaska Gasline Development Corporation, has turned into the chief cheerleader for a state-owned gasline. He earlier this year told a group of Anchorage business leaders that the biggest impediment to construction might just be the skepticism of Alaskans. 

Given the enthusiasm of Meyer and Walker, Suzanne Downing at “Must Read” speculated the state could be interested in buying the Nikiski plant, though there is no clear evidence of that. The Kenai plant was state of the art in its day, but it is now nearly 50 years old.

A consultant to the state’s Alaska Natural Gas Development Authority reported in 2006 that the facility would need significant upgrades just to keep it running. There was even talking of converting it to an import facility because of falling supplies of natural gas in and around Cook Inlet.

Cook Inlet gas provides for the electricity and home heating in nearly all of Anchorage, the state’s largest city; the Matanuska-Susitna Borough, filled with Anchorage bedroom communities to the north of the city; and the Kenai Peninsula to the south.  Inlet gas supplies fell in the 1990s as the Regulatory Commission for Alaska tried to hold Anchorage-area gas prices below market value. The result was oil and gas companies simply stopped looking for gas.

The state later created incentives to encourage exploration and the RCA relaxed the price cap. Since 2010, Inlet gas production has risen steadily, and known reserves are now said to be good for at least a decade. 

A Trump downer

While the regional gas situation has improved for most Alaskans – 60 percent of state residents reside in the Anchorage-Kenai-MatSu area – the global gas market remained a difficult one for the state even before the election of Donald Trump.

And it could become more difficult once he takes office. Trump has threatened to torpedo the planned Trans-Pacific Partnership, a free-trade agreement. Trump argues the act could threaten the jobs of U.S. workers in the lower 48.

Approval of the TPP, however,  had been seen as a boost for Alaska natural gas exports.

As to “the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP)…both these agreements would give the signatories free trade status when it comes to U.S. natural gas exports,” the Congressional Research Service noted last year. “TPP includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. Japan is the largest LNG importer in the world and would add significantly to potential markets for U.S. LNG exports. Of the four U.S. LNG export projects that have received approval to export to non-FTA countries, Japanese companies have signed contracts with two of the projects directly and one indirectly. Japan was a late participant in the TPP process; one of its motivations for joining was access to U.S. LNG exports.”

Walker has talked repeatedly about his hopes of a gas deal with Japan, although the country has been active on many fronts in trying to contract for long-term gas supplies. The Japanese are now in discussions with Russia about the feasibility of building a 870-mile-long, $7 billion offshore pipeline to deliver gas from Sakhalin Island to Tokyo.  The project would cost a fifth to a tenth of what the Alaska gasline project is estimated to cost.

The year-old Congressional report noted the very complicated global LNG picture in these times.

“U.S. LNG export contracts will still need to be long-term (usually 20 (years) or longer) to obtain financing,” it notes. For some facilities, this may be a difficult hurdle to overcome given market and financial conditions and recent price volatility. Providing LNG to countries that use oil for heating, industrial processes, or electricity generation could also decrease demand for petroleum products, putting further downward pressure on oil prices.”

The Alaska gas pipeline has long been pitched as providing the state $1 billion or more a year in tax revenue, but a contract locking the state into 20 years of gas sales at current low prices would provide nowhere near that sort of money. And if supplying natural gas helped further depress oil prices?

Well, the state that built its budget almost entirely around oil tax and royalty revenues is now facing about a $3.5 billion per year budgetary shortfall. Any downward movement in oil prices only makes that worse.

 

 

 

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3 replies »

  1. All these LNG projects could be renamed “Alaska Jenga” – a game which Alaskans cannot stop playing. Soon the last block in this current tower of blocks (this tower built by Gov. Walker) will be pulled away and the tower will once again collapse. Then, as sure as God created little green apples, another ” Alaska Jenga” tower (costing hundreds of million of dollars) will be rebuilt and the game will start over.

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  2. The best future for Alaska’s petro economy would be to invest in a “refinery” in Nome and admit that the Russians have beat us to the artic (They have been pumping out crude for years)
    With Rogoff’s deep water port in Nome and a state of the art refinery, we can have Trump and Palin broker the deal with Russia to purchase their crude and get Gas to our western villages….we could also justify the road to Fairbanks once the refinery in Nome is up and running.
    This is way better than the LNG line to China.

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    • Alaskan LNG, from a nearby source (Cook Inlet) and delivered through a network of existing pipelines, does not make financial sense for ConocoPhillips. That would imply that an 800 mile distant source of gas, with no existing pipeline, makes even less financial sense to ConocoPhilips, with regards to exporting LNG. Rational people can understand the message ConocoPhilips is sending Alaska. So it should be entertaining to see how Walker and Meyers spin this news to make it look like it is a sign that their LNG project will be the fiscal savior of Alaska. Walker will likely propose spending a chunk of the $700 million he siphoned off of the PFDs for this 50 year old plant.

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