Market realities

north dakota

North Dakota natural gas going up in flames for lack of access to a market/Tim Evanson, Wikimedia Commons

News analysis

The hand-picked, natural-gas czar of former Alaska Gov. Bill Walker continues to tout his belief in a $43 billion liquified natural gas (LNG) project in the 49th state, but global markets appear to be conspiring against the plan.

“Projects worldwide totaling more than 100 million tonnes of annual capacity have completed front-end engineering and design and are now competing to take final investment decisions, intending to fill a shortfall of LNG that could amount to an estimated 30 million to 65 million tonnes by 2025,” Interfax Global Energy reported Monday. 

All of those new projects are cheaper than Alaska’s plan to build an 800-mile pipeline from the North Slope to tidewater on Cook Inlet along with a LNG plant on the Kenai Peninsula, and some are significantly cheaper.

“The huge resource bases underpinning projects such as Russia’s Arctic LNG-2 and the onshore plants in Mozambique could see those ventures expand their capacities over many years,” wrote Interfax’s Andrew Walker. “Building additional trains at the plants would be relatively cheap, pressuring other liquefied natural gas ventures trying to sign up customers.”

Industry experts who’ve watched developments over the course of the past year are increasingly skeptical of the project that Walker ripped out of the hands of oil giants ExxonMobil, BP and Conoco-Phillips because he believed the state of Alaska could do it better and get it built faster.

“The global LNG market has offered absolutely no good news for the Alaska LNG project the past year,” Larry Persily, the former chief of the Federal Office for Alaska Gas Line Projects, said Friday. “Between President Trump’s self-inflicted trade tensions with China and progress toward final investment decisions on LNG export projects in Canada, Russia, Mozambique, Papua New Guinea, Qatar and the U.S. Gulf Coast, I believe Alaska’s dream of a North Slope gas line is going to wait.”

Persily spent five years from 2010 to 2015 trying to help move Alaska gas from the North Slope to markets in the Lower 48 or oversees. He took the job just as U.S. gas production began to surge due to technological improvements in fracking.

As Christina Nunez writes at National Geographic, “fracking – the high-pressure injection of water, chemicals and sand into shale deposits to release the gas and oil trapped within the rock – in recent years has been combined with horizontal drilling and other improvements in technology to harvest stores of gas and oil that previously were thought commercially unfeasible to access.”

Gas production in the Lower 48 has reached the point that volumes in Texas and North Dakota have exceeded pipeline carrying capacity in those states. Both areas now face the same problem Alaska faces in trying to monetize its natural gas resources.

In the Permian Basin of Texas, “many operators are increasingly deciding to flare and vent a portion of their gross natural gas production, easing infrastructure bottlenecks so that they can keep producing oil,” Matt Hagerty wrote at BTU Analytics in September. “In fact, as natural gas pipelines have filled up in 2018, it has become fairly uncommon for flaring permits in Texas to be denied to producers.”

Flaring is the burning off of gas at the wellhead just to be rid of it. North Dakota has begun studying the possibility of storing the gas underground for future sale instead, the Bismark (N.D.) Tribune reported that same month.

“The alternative is more flaring or we really limit oil production growth. And we really don’t want to do either one of those,” Lynn Helms, the N.D.director of the Department of Mineral Resources, told the state’s Industrial Commission. “If we can innovate here, we may have a way to allow oil production growth and not flare gas.”

Market lost

The Lower 48 gas boom was in the process of killing Alaska’s hope for a gasline to America even as the state’s former governor, Sarah Palin, was taking the podium at the Republican National Convention in 2008 to declare she’d “fought to bring about the largest private-sector infrastructure project in North American history.

“And when that deal was struck, we began a nearly $40 billion natural gas pipeline to help lead America to energy independence. That pipeline, when the last section is laid and its valves are opened, will lead America one step farther away from dependence on dangerous foreign powers that do not have our interests at heart.”

Not long after, Alaska political leaders and the major producers with operations in the state began looking for a foreign power to buy the gas intended for Palin’s phantom pipeline.

The latest scheme calls for China to not only buy the gas but to get heavily involved in the financing.

“As the Alaska LNG Project funding is currently envisioned,” wrote Elwood Brehmer at the Alaska Journal of Commerce in November, “75 percent of the estimated $43 billion construction cost, which includes $9 billion in contingencies, would be debt-financed through the Bank of China in exchange for selling Chinese oil and gas giant Sinopec Corp. rights to three-quarters of the project’s 20 million tons per year of LNG production capacity. The remaining roughly $11 billion would be raised through equity investments going to 8-Star (a new, state-owned company) and Alaska LNG LLC.”

“This nested structure does give us a little bit of a leverage advantage in that because of the way this is contemplated 8-Star would own a controlling interest in the project — 51 percent let’s say — by providing 51 percent of the $11 billion,” Keith Meyer, Walker’s gas czar, told Brehmer. “But then we, Alaska Gasline Development Corp., could have a controlling interesting in 8-Star, which could be a little more than half of 8-Star. So, if you do that math you could actually control the project company for about $3 billion.”

Control is an important issue. The Committee on Foreign Investment in the United States (CFIUS), which could block the project, does not like the idea of the Chinese holding controlling interest in an Alaska gas line, according to sources in the former Walker administration.

“CFIUS has taken a tough stance against Chinese or other foreign investment in sensitive industries ranging from high-end semiconductors to real estate,” Reuters reported in October.

“In August, for example, it ordered Chinese conglomerate HNA Group Co Ltd to sell its majority stake in a Manhattan building whose tenants include a police precinct tasked with protecting Trump Tower.”

Whether Meyer’s “nested structure” would satisfy CFIUS is an unknown.

Newly elected Gov. Mike Dunleavy now has former Gov. Sean Parnell – Palin’s successor – examining the Walker-Meyer gasline plan. As governor, Parnell helped broker an Exxon-led plan for the major oil companies to develop Alaska’s gas.

After Walker took over from Exxon, the globe’s largest, privately held oil and gas company turned its attention elsewhere. Exxon is expanding operations in Mozambique, Papua New Guinea, and Russia. And it is entrenched in Indonesia and Qatar, the tiny Mideast country that is a global leader in LNG.

Meanwhile, Royal Dutch Shell – once Alaska’s great Chukchi Sea hope for new oil production – has gone all in on a British Columbia LNG operation, having abandoned the Chukchi. 

Shell, Malaysia’s Petroliam Nasional Bhd, Japan’s Mitsubishi Corp., PetroChina Co. and Korea Gas Corp. plan to invest $31 million in a Kittimatt, British Columbia, LNG terminal and a 420-mile pipeline from gas fields near Dawson Creek, B.C. to the coast.

Construction is to start immediately, the CNBC reported in October. The first gas is scheduled for shipment in 2025. Most of it is expected to be sold to China.

Alaska’s project is still in the permitting phase. The Federal Energy Regulatory Commission has said it is hopeful it can complete the project’s environmental impact statement (EIS) by Feb. 2020.

Despite his skepticism about the gasline’s near-term prospects, Persily said he believes AGDC “should finish its work with the Federal Energy Regulatory Commission, get the final environmental statement and commission authorization for the project and then wait. That FERC authorization and final EIS have value and would help any effort in the future to resurrect the project.”

Alaska has dreamed of a gasline since the 1970s and Walker was obsessed with the idea. Before becoming governor, he headed the Alaska Gasline Port Authority – a gas pipeline plan backed by the communities of Fairbanks and Valdez at the terminus of the Alaska oil pipeline.

Walker ran for office mainly to try to ensure the gasline got built. On his way out of office, he offered this rosy report on the progress:

“Previous governors waited for someone else to bring our vast amounts of natural gas to market. We are done waiting. We took charge, and in four years have brought the gasline project to the cusp of construction. Every step of the way, skeptics have said ‘impossible.’ Every step of the way, we have proven them wrong. We will build the natural gas pipeline. We are on track to begin construction before 2020.”

The Walker statement sent to newspapers around the state echoed the words of former governor Palin, who had a slightly better speech writer.













18 replies »

  1. “The U.S. Geological Survey has revised the technically recoverable reserves in the Wolfcamp Basin, in the Permian shale play, to 46.3 billion barrels of crude and 281 trillion cu ft of natural gas. That’s up from 20 billion barrels of crude and 16 trillion cu ft of gas in recoverable reserves in late 2016.”

    North Slope gas isn’t needed anywhere in the world for the next 50+ years. Peak oil has been blown off the map, the naysayers and end-is-nigh type need to wait another 50 years and by then who knows how many more discoveries will be made.

    The Permian just screwed Alaska, but so will the next discovery, just like the last 5-10 did. We are a part player…a small part at that, best we understand that fact than get high and mighty and kill the golden goose!

    • Report by Persily says we (Alaska) are getting a premium of about $10/barrel due to the surplus oil that exists in US is limited in its ability to get to the West Coast. No doubt there are plans for additional pipelines to correct that situation, but for some reason they’ve not materialized. I don’t see Permian has screwed Alaska anywhere near than say “cheap oil” that may be delivered to West Coast. So far its not looking that good for any cheap oil source in the near term. We’ll see, of course, as $10/barrel is a lot of money.

      • It’s supply and demand, Bill. The more supply the lower the price. There are plentiful proven reserves closer to the market that cost less to produce. The doubling of this field regarding oil is huge, and while the current $10 per barrel premium is nice for now it won’t last. The gas reserves going from 16 trillion to 281 trillion cubic feet is the final nail in the AKLNG gas pipeline, it is done for our lifetime and probably our children’s children’s lifetimes.

        The real story is that peak oil isn’t going to happen anytime soon, this used to be a major talking point of the sky is falling crowd with many saying we have already passed peak oil.

      • You say it won’t last ($10 premium) but you don’t back up your comment, Steve-O. As I said before, $10/barrel is a lot of money but West Coast is where the oil is needed and additional oil reserves elsewhere really hasn’t a thing to do with that premium IMO.
        What’s going to change that premium? Doesn’t seem to be from foreign imports.

      • Read what you wrote about building pipelines to the westcoast Bill, that backs up my comment about the $10 premium and how long it will last. It’s math and easy to figure out, like you said $10 a barrel is a lot of money…they aren’t going to pay that forever, in fact historically they haven’t. Oil is a global commodity and it’s price reflects that. More than doubling the Permian reserves adds about 2/3 of the amount of reserves in the US before this announcement, that is huge news and will have an impact on the state of Alaska.

      • You could be right, Steve-O. However the fact of the matter is that there is no way to get that oil where it’s needed now, and nothing on the horizon, either. The cheap oil is from Alberta but that oil is going nowhere fast. A few oil tanker cars of it are shipped to West Coast but no pipeline is now being proposed and Keystone doesn’t solve the problem, either.
        It’s not “math” but most likely politics and Tariff-man is very likely part of the problem IMO.

  2. As Trump’s EPA moves to undo all of Obama’s Methane and CO2 environmental protections from Oil and Gas well operations in the U.S. we will see more “flaring” in the years to come.
    “Flaring converts methane  to carbon dioxide, but venting directly emits methane into the atmosphere.”
    And both gases further exacerbate global warming and climate change of which AK appears to be the new “ground zero” as rivers are open and rain continues to fall during ridiculous warm spells this winter.
    “In the United States, more than 20,000 flares in the oil and natural gas supply chains emit an estimated 20–21 million metric tons in CO2equivalents (CO2e) of greenhouse gases per year, accounting for 9% of the greenhouse gas emissions from the oil and gas sector.”

    • And how much carbon does Al Gore’s and Leo Dicaprio’s G-5’s emit? Since you believe in NASA data. Forgive me for “stalking” you Steve but, you just put out so much nonsense I feel the need to open your eyes. Saw that is is snowing over a foot of snow in North Carolina. Possibly 2 feet in areas. NORTH CAROLINA!!!

      • You have been stalking me since day one on this site, it is just too bad you are not man enough to use your real name.
        Are you a gov’t handler?
        As for the real elephants in the room, look to your Milatary Industrial Complex when you want to see who is burning up our resources and leading us into a “Gasland” state of pollution and uncontrolled greenhouse gases.
        “F-16 Fighting Falcon burns 5,290 pounds per hour and cruises at 480 knots, giving it a fuel economy of 0.7 mpg.”
        “This means that, for example, an F-22 Raptor that isn’t used within the US government costs a cool $34k/per flight hour.”
        “Nimitz Class carriers are capable of carrying Aprox. 3.5 Million Gallons of JP-5 Jet fuel. As it’s used, Underway Replenishments (Unreps) usually transfer up to a million gallons per event.”
        Do not point to one individual weather event to change the course of the discussion.
        As GM lays off 15,000 workers and Ford announced another 25,000 scheduled to get fired, we are seeing the U.S. economy failing as all Empires eventually do.
        The “Fossil Fuel Fiasco” will be the last attempt at maintaining world milatary dominance.
        Grab every gallon of fuel!
        The stock market is over inflated by Globalist Dreams, but continues to swallow up the American Dream of early retirement and a secure future one money market account at a time.
        “The stock market sell-off on Wall Street intensified Wednesday, knocking the Dow down more than 600 points and wiping out the gains for the year for the blue-chip average and the broad Standard & Poor’s 500 index.”

      • The Stock Market is selling off because of something the USA should have done long ago but, Trump was the only one with the balls to do it and that is deal with China. Hell, look at McConnell and Chow and their Chinese blood money. As for the military, well, money well spent. Rather invest in the military then some Democrat Social Program or illegals or the “poor”.

  3. “Market realities”. Good title. Because Walker never had a grasp of market reality. He was a pompous ass that thought he knew more about the economics of pipelines than the big oil corporations that have built millions of miles of pipelines around the world. He neglected being a governor and spent 4 years masturbating with other peoples’ money and pretending to be a gas line entrepreneur. Worst governor ever.

  4. The true test of Alaska’s new governor is whether he has the wisdom and the will to shut down the Great One-Term Willie Pipeline and fire the millions of dollars (annually) of the minions who spend their days – and your money – fantasizing about that which will never be built.

  5. All those options will mean mostly good short term jobs(except the slope refinery, which won’t happen anywhere close to todays market prices.
    Alyeska used to produce there own diesel years ago.Its all trucked in from Valdez now.)
    There will be good full-time operations jobs for the qualified at all the new fields and maintenance facilities.
    Its important to understand the lease structures of the fields east and west of prudhoe bay,before getting all giddy about state take. Heres a good link

    Dave Mc

  6. “In contrast, once a wind farm is built, electricity generation is only dependent on the wind (which won’t stop blowing any time soon) and there is no continuous need for neodymium for the magnets or copper for the generator windings. In other words solar, wind and wave power require a one-off purchase in order to ensure long-term secure energy generation.”

  7. Palin spent taxpayer dollars on promoting a losing proposition. Walker has done the same. ANWR is the only hope of more oil revenues for AK. The current price for a barrel of ANS, will not help us pull out of the state budget deficit, with our current production.
    The Trump Fed admin is pro oil. Sell those leased oil rights. Working with Murkowski & others to drill new wells in ANWR, is the only solution for the oil industry in AK. The gas line, has always been a pipe dream.
    Drill Baby Drill!

    • ANWR is not the only option for revenues. As I understand it, there is about as much oil in NPR-A and offshore individually as the Prudhoe fields. Add ANWR to that, and we have perhaps 3x as much new oil available as we thought.

      Your other option is Gas to Liquids, conversion of natural gas into synthetic diesel (for example) and batch shipping it down the existing TAPS. That way you don’t need a new pipeline. Start up costs are a bit high, perhaps $12 b or so for a million bbl/day operation. Target market is the Pacific Rim. Your competitors are the refineries. Recycle the CO2 back underground to pressurize the producing wells. And you can do it for a VERY long time. Cheers –

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