Phantom project

alaska lng

Behind the natural gas “window” to the fiscal promised land that former Alaska Gov. Bill Walker and his half-million-dollar, Texan hired-hand spent four years trying to sell Alaskans, it now appears there was hiding a brick wall.

Gas prices that were low and trending lower while Walker was governor are now on the verge of freefall, dooming any chance of a near term start to construction on one of the globe’s costliest and most complicated natural gas projects.

S&P Global Platts is predicting liquified natural gas (LNG) spots prices in northern Asia will hit record lows below $3/MMBtu this year. That compares to a spot price above $20/MMBtu in 2014 when global gas supplies were tight.

LNG is the commodity that Walker and sidekick Keith Meyer, Walker’s natural gas czar, repeatedly claimed the Chinese were on the verge of committing to buy. Such a purchase agreement would be the first and necessary step toward the state trying to finance a pipeline from the North Slope to an LNG plant on Cook Inlet costing $43 billion or more.

Much was made of a nothing agreement to work toward a pipeline that Walker signed along with Chinese officials in 2017.

“The state of Alaska took a major step toward realizing a long-sought pipeline to move natural gas from the North Slope to Asia, siding with interests from China after major oil companies stepped back from the project,” wrote the Associated Press’s Mark Thiessen reported at the time.

“‘This is the market responding, and we’re very, very pleased with that,’ Walker told reporters in a teleconference from Beijing.”

Only it wasn’t any market responding. It was Walker mistaking window shoppers for customers.

Alaska warned

A state-commissioned study conducted at mid-decade by Wood-McKenzie, a respected consultant on energy projects, had previously concluded the proposed, $43- to $65-billion Alaska plan to pipe gas from the North Slope to the Kenai Peninsula, liquefy it, and then ship it to Asia was “one of the least competitive” in the world.

Long possessed by a dream of becoming the Alaska governor who oversaw the construction of a long-talked-about natural gas pipeline, Walker didn’t let that get in his way.

His response was to abandon an agreement with the major oil producers that had been working on a plan for a gas pipeline at some indefinite time in the future, have the state take over the project and fast track it.

Meyer’s response, meanwhile, was to blame Alaskans for being too negative about his boss’s scheme. 

“There’s a window out there,” he told Commonwealth North, a state business promotion group in 2016. All Alaska had to do was to put itself into a position to pump gas through the window..

The Wood-McKenzie report, Meyer offered, indicated there was a possibility and instead Alaskans turned their focus to that summation about the state’s lack of competitiveness.

All the state had to, in Meyer’s view, was get crackin’ to be ready to hit the magic window in 2023-2025 when the markets would be clamoring for gas. Gas industry experts scoffed at the idea as did officials of Exxon-Mobil, the company that had been leading the gas consortium before the state took over.

It now looks like they were right. The Chinese look to have played Walker like a big fish in order to improve their bargaining position with the Russians.

Russian-Chinese gas

A 2014 deal between the two countries had resulted in an agreement on a gas pipeline that finally began moving gas from Siberian fields to the Chinese border city of Heihe in December. What the Russians have dubbed the “Power of Siberia” pipeline is eventually planned to stretch 5,000 miles from Siberia to Shanghai.

“The pipeline is scheduled to provide China with 5 billion cubic meters of Russian gas in 2020 and the amount is expected to increase to 38 billion cubic meters annually from 2024, under a 30-year contract worth $400 billion signed between the China National Petroleum Corp and Russian gas giant Gazprom,” reported Xinhua, the Chinese state council news organization.

As the Power of Siberia was being built, with Walker and Meyer enjoying their junkets to Asia and hoping for a gas deal for Alaska, China was also in negotiations with Russia on several big LNG projects, and appears to have gotten terms it liked.

In August, two Chinese companies signed agreements with Russia’s Novatek to buy a 20 percent stake in its Arctic LNG2 plant, Reuters reported. That deal followed on Rosneft, Russia’s largest oil producer,  selling 20 percent of its gas subsidiary to Bejing Gas in 2017.

“The (Rosneft) deal is part of a Russian drive backed by President Vladimir Putin to forge closer economic and political ties with China amid a standoff with the West,” Reuters reported at that time.

With China pumped on Russian gas, Walker’s dream market went away, and prospects for Alaska gas elsewhere didn’t and now really don’t look much better. The globe is in the midst of a production boom, and most of the gas is coming from places with significantly cheaper development and operating costs than Alaska.

Meanwhile, with production already up, more gas looks to be coming online even as the market tries to reduce its use of hydrocarbons.

Foreign Affairs magazine was on Monday bemoaning how “Striking Oil Just Ain’t What It Used to Be.”  But the story below the headline was about a lot more than oil, including BP’s big gas find only months earlier.

“The British oil major BP announced the largest natural gas discovery of 2019: the energy equivalent of 1.3 billion barrels of oil lies waiting to be extracted off the coast of Mauritania, more than enough to support a liquefied natural gas (LNG) hub,” Felix Clay wrote. “And the same year in Mozambique, Total acquired a $3.9 billion stake in an LNG project whose total cost will likely dwarf that country’s national economy.”

One of the original players in the development of Alaska’s North Slope oil, BP announced last year that it was bailing out of the 49th state. The reason was simple. BP’s returns on its Alaska’s investment weren’t particularly good anymore, and it had better options elsewhere in a tough global market.

Too much gas

“At a time when many countries are finally trying to reduce their reliance on fossil fuels, the world is suddenly awash in oil and gas discoveries,” Felix wrote. “Large oil and gas companies see long-term prices trending downward. As a result, they are investing in fields that can be brought into production quickly instead of developing expensive, far-flung reserves.”

Alaska is both expensive and far-flung.

And although all industry analysts expect global LNG prices to continue to creep slowly upward, not go down, the near term market does not look good.

The World Bank, which forecasts out to 2030, predicts U.S. and European prices will be about 60 percent higher than today by the end of the decade with Japanese prices falling by about 15 percent in this time period.

Though that might sound good, the U.S. price will still be lower than what natural gas was going for in 2014, and the Japanese and European prices will be only 60 to 70 percent of what gas was going for in those regions in 2014.

As Exxon-Mobil puts it in the company energy perspective for now through 2040, “the LNG market is expected to remain highly competitive due to abundant natural gas resources and many aspiring exporters.”

More than $100 million deep in gas pipeline studies, the state of Alaska is plunging ahead on permitting and hopes to be this year granted a federal permit for pipeline construction. When that construction will start – if ever – is a total unknown.

Russian model

Prospects for the pipeline are so slim that there is new interest in shipping North Slope gas to market from an LNG terminal in the Arctic Ocean.

With the planet warming and Arctic ice diminishing almost every year, Lloyds Energy is dusting off this idea rejected in the past because of the shallow water on the state’s northernmost coast.

“Dubai-based Lloyds Energy was formed in 2013 to develop floating LNG projects,” reported S&P Global. The company is studying putting such a plant six to 12 miles offshore where there is enough water for tankers.

Whether the plant would operate seasonally or year-round is unclear, but ExxonMobil has already agreed to provide it natural gas.

“ExxonMobil is now operating a gas cycling and concentrate production project at the (Point Thomson) field, injecting produced gas back into the high-pressure reservoir and shipping the liquid condensate by pipeline 60 miles west to the Trans Alaska Pipeline System,” S&P reported. “The gas cycling and condensate project has been technically challenged, however….Elimination of the gas injection by selling produced gas as LNG for export will allow ExxonMobil to maximize liquid concentrate output.”

That might be a bit of an understatement. ExxonMobil has had such big trouble controlling pressure that its hoped for gas to liquids (GTL) production has sometimes fallen below the 10,000 barrels per day promised the state of Alaska.

And it doesn’t appear to be from lack of trying to produce.

ExxonMobil has sunk a reported $4 billion into Point Thomson. It would no doubt like to find a new revenue stream to help get some money flowing back into the company to pay back some of that investment.








10 replies »

  1. It’s doubtful that today’s Admin would allow Alaska to suffer another mid-1980s Post Pipeline crash, in which it was claimed the state lost about one quarter of it’s entire population (with the heaviest losses in Anchorage). The Anchorage-feature might be a popular countervailing argument … and AK may well have worked hard for it’s nervous-breakdown … but the White House has other plans.

    So no, no state-collapse spectacle in the offing, although some true Alaskans do see an upside. They even wonder at times if Jay Hammond really had his head screwed on all the way.

    There are options, to compensate for the current (and possibly long term) disastrous gas prices. Pebble, Southeast logging, and a continuation of robust Interior development.

    Anchorage? Some say ‘Why bother?’, but it’s share of the possibilities is secure. Why you ask? Because counter to prevailing urban trends (if 300k is ‘urban’), Anchorage is the reddest area of the whole state, going MAGA in a super-landslide of 70-80%.

    So no worries, y’all.

  2. I always found amusement in the whole supply “peak oil” conversation, my brother was a believer in peak oil me not so much. One day we will actually reach true peak oil but that day is a long ways off. I would hazard a guess and say that peak oil actually happens regarding demand prior to it happening due to supply. However since oil demand is still trending upwards on the global scale and showing no real signs of easing anytime soon I very much doubt that demand peak oil happens in the next decade. But there is a possibility of it happening within the next two decades if enough people worldwide are content to live in abject poverty while others advance beyond oil.

  3. Low interest rates have helped a lot of marginal projects over the hurdle which says the pipeline to LNG export concept will never happen at the current combination of rates and gas sales price. The offshore floating LNG concept has a chance, but for Alaskans the project job impact is almost nil compared to a full blown pipeline.

  4. Be interesting to look at shipping LNG coastally(?) from the Slope down to distribution port(s) for Western and Southwestern Alaska. Get it out to at least the larger villages and towns via local pipelines.

  5. How much exactly did the Walker administration embezzle on the gasline project over four years?
    I would like to see a total figure that was drained from the state coffers over his time in office on this conundrum of a failed project…
    (At the same time Walker was garnishing our PFD’s to fund state government)
    Isn’t Dunleavy currently paying Parnell big bucks to keep the dream alive even though everyone from Bangkok to Anchorage knows it is a bust?
    These multi million dollar “pet project” fiascos sure would pay for a lot of rescues for years to come in AK instead of enriching the pockets of a few wealthy cronies while leaving the rest of us out in the dark.

  6. For years, I’ve been unable to understand the push for a gasline. Worldwide, there is a massive amount of drilling on and offshore. Wellhead Marcellus Gas in Pennsylvania is less than $2.00 MM/BTU. Supposedly, gas would have to be over $17 MM/BTU to break even after traveling from the Slope to Kenai. LNG shipped by tanker from the Slope seems the only logical solution.

    • Marlin,
      Hindsight is amazingly clear,for a very brief window,it would have pencilled out.
      And then low and behold,ingenuity,with a dash of greed solved the supply issue.
      I think XOM knew all along,but thats the advantage of industry knowledge (which the state has lacked on almost all its pipedreams).
      I was one of the coolaid drinkers,but it was clear less than midway thru Walkers admin,that the price wouldnt support it.
      Unless the state comes up with a cure for cancer,the best growth days are behind us

      • In 1977 after we built TAPS, Camps, Workers, and Equipment were in place. Rumors were the Gasline was next. Never happened. Had it been economic at the time, it would have been the least expensive a project of that magnitude could have been completed.

  7. Alaska has spent lots of dollars on a pipe dream, which has a very low %, of ever being built. The US (due to copious amount of shale oil) became an oil exporter last summer. I can remember, in the ‘70s, that industry experts were predicting, the world would run out of petroleum reserves, by 2000. They were incorrect in their prediction.
    Alaska oil production has now become a footnote in the international oil market.
    Time to look for other revenue sources, ie: stop the PFD, raise taxes and lose about 250K AK residents. I have left, so that is one down and 249K to go. Our current state revenue sources, with 750K residents, does not compute.
    The US news today was that the 2020 census was kicked off and started in the AK village of Toksook Bay. In the 2010 census, 590 people claimed residency there. Recent informal counts now put pop at close to 661.
    The Fed Gov still pays highest per capita benefits in AK, than any other state. How long will that last?

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