BP is going big on liquified natural gas (LNG), only not in Alaska.
Less than a month after the London-based petroleum giant announced it had found a way to extricate itself from its 49th state oil and gas holdings, it revealed a $9.61 billion, 18-year deal to sell LNG to South Korea’s state-run Korea Gas Corp (KOGAS).
That gas is to ship from nearby LNG terminals in Freeport, Texas and Cameron Parish, LA, according to Natural Gas Insider. Freeport LNG Development, an independently owned company that contracts with producers to liquefy their gas, in 2013 signed a 20-year deal with BP to process 4.4 million tons per year.
“A decade ago, no one would have believed that natural gas would become an important U.S. export,” Oceaneering.com reported at the time. “But the shale revolution that began in earnest in 2008 changed that in a big way.
“Since then, analysts have estimated that the U.S. has enough natural gas supplies for at least the next 100 years.”
Booming discoveries of new gas not only in the Lower 48 but globally can be expected to further delay construction of a long-proposed, $40- to $50-billion-dollar, natural gas pipeline stretching more than 800 miles from Alaska’s North Slope to tidewater in Cook Inlet or Prince William Sound.
Larry Persily, the last director of the extinct Office of the Federal Coordinator for Alaska Gas Pipeline Projects, is now of the opinion it will be decades before construction begins on such a line – if construction ever begins.
LNG sea change
A decade ago, Alaska was expected to become the major gas supplier for the U.S. Midwest. As envisioned by the state and federal governments, and the major Alaska oil producers, a pipeline would snake south for 1,700-miles from the edge of the Arctic Ocean through Alaska across Canada’s Yukon Territory and the province of British Columbia to connect to Canadian pipelines in the southern portion of the province of Alberta.
Those Canadians pipelines are welded into a network that already supplies gas to the U.S. West and Midwest. Alaska Gov. Sarah Palin bragged about the coming Alaska connection in a 2008 speech to a Republican presidential convention about to nominate her as the party’s candidate for vice-president.
“I fought to bring about the largest private-sector infrastructure project in North American history,” she said. “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.”
By then, it was already obvious the proposed gasline was in trouble due to competition from the new gas discoveries all over the Lower 48. A gas glut began driving prices down, and they fell so low that oil producers in the Permian Basin of west Texas and southeast New Mexico this summer had “to resort to actually paying shippers to take their gas in some cases over the last year, and essentially all of whom have been flaring far more natural gas than they would prefer,” Forbes reported earlier this month.
Prices have since begun to move upward, but the U.S. Energy Information Administration (EIA) predicts only a modest increase in gas demand and price through 2050 as renewable energy sources provide ever more new electricity.
“Renewables (including hydropower) are the fastest-growing source of electricity generation during the 2018 to 2050 period, rising by an average of 3.6 percent per year,” says the agency’s September outlook with projections through 2050. “Natural gas generation grows by an average of 1.5 percent per year.”
Electric power plants are the largest consumers of natural gas in the country and the largest consumer of all fossil fuels. They annually burn 38.3 quadrillion Btus of energy, 10 quadrillion more than the transportation industry, according to the EIA.
Residential use of all energy sources – natural gas, fuel oil, wood, and more – accounts for only 6.9 quadrillion BTUs or less than 20 percent of the use by powerplants.
Neither national nor international markets look good for Alaska North Slope gas in the short term, though the Wall Street Journal noted some analysts are suggesting a growing future demand for gas if China “more aggressively turns to gas to fuel power plants in place of coal.”
Plagued by air pollution from coal-fired power plants, China would like to transition to gas and renewables, but that move is not a given in a country more worried about its economy than its air or increases in carbon dioxide emissions linked to global warming.
“China approved four coal mines in a single day on Tuesday as part of its effort to boost its ailing economy, with the combined output capacity equal to the United Kingdom’s entire coal consumption for 18 months,” the South China Morning Post reported in February.
“The four projects in the north of the country, two in inner Mongolia and one each in Xinjiang and Shaanxi, will cost 11.7 billion yuan (US$1.75 billion) and will have the combined annual output capacity of 26 million tonnes.”
China was the hoped-for golden market for Alaska LNG after the gasline to the Lower 48 officially died five years ago with Congress’s decision to end funding for the Office of the Federal Coordinator. Exxon/Mobil, BP, ConocoPhillips and the state of Alaska had by then already shifted their attention to a different idea – a pipeline from the North Slope to tidewater at an ice-free Alaska port.
Along with TransCanada, the company which had originally hoped to build the 1,700 mile continental pipeline, the state and the companies in 2013 announced they were considering “large-scale liquefied natural gas exports from Southcentral Alaska…as an alternative to a natural gas pipeline through Alberta.”
“Commercializing Alaska natural gas resources will not be easy,” the companies said in a media statement at the time. “There are many challenges and issues that must be resolved, and we cannot do it alone. Unprecedented commitments of capital for gas development will require competitive and stable fiscal terms with the State of Alaska first be established….
“The producing companies support meaningful Alaska tax reform, such as the legislation introduced by Gov. (Sean) Parnell, which will encourage increased investment and establish an economic foundation for further commercialization of North Slope resources.”
Exxon/Mobil was eventually agreed upon as the company to head the project. The third-largest gas producer in the world, Exxon is respected by its competitors for its technical expertise if not exactly well liked.
It was leading efforts to lay the groundwork for a pipeline to Nikiski on the Kenai Peninsula when newly elected Gov. Bill Walker, Parnell’s replacement, ordered a state takeover of the project.
Walker had previously been involved in an effort by the North Slope Borough, the Fairbanks North Star Borough and the City of Valdez to build a gas pipeline paralleling the oil pipeline from the North Slope south to the Port of Valdez.
The Alaska Gasline Port Authority never gained any traction, and Walker believed it was because Exxon was sabotaging Alaska gas plans. Why was never clear, but he loved to tell a story about how when he went to visit Exxon headquarters in Houston he was taken to a meeting “in the basement” of the Exxon tower.
The state takeover of the gasline project was considered a mistake by the producers, but ConocoPhillips and BP did their best to play along with Walker despite the latter’s increasing frustration with its 60-year-old Alaska investment.
A global company valued at $298.75 billion with Alaska offices in a towering high-rise in Midtown Anchorage, BP was a big target for Alaskans regularly pushing for higher taxes on oil, and environmentalists looking to portray the oil business as a dirty industry.
Dealing with an aging oil field on the North Slope, which means falling production and increased risks of oil spills as pipes corrode from the inside out, it was a toss up as to which issue was more of a problem for the company. Any sort of BP-related spill on the North Slope became an international story in the wake of the Deepwater oil rig disaster in the Gulf of Mexico.
The Deepwater explosion and oil rig collapse in 2010 led to the death of 11 people and the largest ever release of oil into the world’s oceans. After an estimated 2.5- to 4.2-million gallons of oil gushed into the Gulf, BP lost its taste for pushing the technological edge of oil production.
Plans for the company’s Liberty Project on the North Slope were subsequently shelved. Liberty had been viewed as breakthrough technology in directional drilling. It was designed to drill down from an island just offshore in the Arctic Ocean and then turn and run horizontally for more than 8 miles to an offshore oil deposit.
The rig would have set a new record for the distance covered by horizontal drilling, but there were risks. Massive amounts of torque were required to twist the bent pipe to make it go such a distance horizontally.
“All wells for this project will be outside current industry performance for this depth,” the BP plan submitted to the U.S. Minerals Management Service at the time conceded. “As a result, the state-of-the-art of ultra-extended-reach drilling (uERD) must be advanced. BPXA first plans to drill a single well in order to assure that such drilling is feasible. If that well is successful and the technology is proven, then BPXA will proceed with drilling additional wells and installing new facilities to complete the project as described in this
In expectation of its success, however, Sen. Lisa Murkowski, R-Alaska, and then-Sen. Mark Begich, D-Alaska, introduced legislation to allow directional drilling to tap the hotly debated Arctic National Wildlife Refuge (ANWR).
“Everybody wins with this bill – America improves its energy security and the conservation community is ensured that there will be no visible impact on the refuge,” Murkowski raved in a press release. “I urge those previously opposed to oil and gas exploration in ANWR to take a fresh look at this issue and show a willingness to compromise.”
A new path forward on ANWR died with Liberty, and the failure of the project might have been the beginning of the end for BP in Alaska. The company was left with its aging oil field, high-operating costs, and a new governor threatening to shutdown Prudhoe Bay oil operations altogether if companies didn’t cooperate on his natural gas scheme.
Some at BP thought the company that helped build Alaska’s economy and support state charities with millions of dollars per year in donations had become unwelcome in the 49th state. That just added to the other problems that failed to go away with a change in state administrations.
Walker lasted only one term as governor. His campaign for re-election fell apart after he essentially fired his running mate, 75-year-old lieutenant governor Byron Mallott, for propositioning a young woman at the Alaska Federation of Natives convention.
Walker’s independent campaign stuttered and then crashed after removal of Mallott, a once-respected Alaska Native leader and leader in the Alaska Democrat Party. The Associated Press later revealed documents obtained under a freedom of information request indicate Mallot invited the young woman to his room and possibly more.
Emails from first lady Donna Walker to her husband cautioned that Mallott’s misbehavior went beyond “inappropriate comments”; “it was the conduct as well of inviting her to his room, and it sounds like there was some discrepancy as to how he greeted/touched her.”
Walker’s successor, Gov. Mike Dunleavy promised to be friendlier to the oil industry and continued the state’s Alaska Gasline Development Corporation with hopes of obtaining needed permits for pipeline construction from the Federal Energy Regulatory Commission (FERC) next year.
But there remains little hope of gasline construction any time soon. The line is simply too long and the costs too much to make the numbers pencil in today’s LNG market.
Alaska gas producers and others are now quietly talking about the possibility of direct shipment of LNG off the North Slope as ice in the Arctic Ocean continues to shrink.
Almost the entire route is north of the Arctic Circle. If necessary, nuclear-powered Russian icebreakers would be used to keep a shipping lane clear for a fleet of Korean-built, ice-breaking LNG tankers. One of the first of those tankers successfully barged its way through the ice from Norway to South Korea in 2017, however, without the help of an icebreaker.
During Walker’s term, the Chinese were actively courting the state as potential investors in the Alaska gasline, but in June Chinese leader Xi Jinping signed a $20 billion trade and energy deal with “best friend” Vladimir Putin, the Russian strongman.
“The Chinese commerce ministry said that the two sides aimed to increase the volume of trade between the two countries to US$200 billion a year following last year’s 24.5 percent rise to a record level of US$108 billion,” the South China Morning Post reported.
Some have suggested the Chinese might have played Walker to get a better deal on more Russian LNG.
BP’s sale of its Alaska assets to Houston-based Hilcorp for $5.6 billion eliminated BP as a player in the Alaska gas game and relieved the global energy giant of responsibility for an aging, Arctic oil field with less production and more production problems.
Oil industry analyst David Blackmon, writing for Forbes, described the deal as one “that will no doubt be characterized as surprising by some, but really should come as no surprise to anyone.” He summed it a “win for everyone,” noting that BP has better opportunities elsewhere and Hilcorp specializes in “maximizing profits by boosting production and reducing overhead” in fading fields.
The only real surprise for those familiar with BP’s Alaska operations was that it was able to untangle itself from its Alyeska Pipeline responsibilities and concoct a way to coordinate its oil shipping business with a new oilfield operator. Most of the oil for BP’s Cherry Point refinery near Bellingham, Wash., is shipped there from Valdez on BP tankers.
Details as to what sort of deal BP worked out with Hilcorp to keep that oil flowing are unknown.
Hilcorp is a privately held company and thus its annual revenues are unreported, but it does a fraction of the $298.75 billion in business BP was reported to have done last year. Because of that, it lacks the sort of influence BP had in trying to organize financing for a $40 billion gas pipeline.
But its size also allows for more efficient and more nimble operations. Think U.S. Army special forces as opposed to armor.
libtyty the spruce goose of the oil indstry