February 12, 2014 9:28 am

Alaska gas exports face crucial decision

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This image provided by the US Coast Guard, shows the conical drilling unit Kulluk aground on the southeast shore of Sitkalidak Island about 40 miles southwest of Kodiak City, Alaska, January 3, 2013. The Kulluk grounded following many efforts by tug and Coast Guard crews to tow the vessel to a safe harbor when it was beset by winter storm weather during a tow from Dutch Harbor, Alaska, to Everett, Washington©AFP

One of the world’s largest energy projects, which would export liquefied natural gas from Alaska to Asia, is facing a crucial decision in the state’s legislature.

The Alaska LNG project, which has an estimated cost of $45bn-$65bn, would mean a bonanza for the state’s economy and offer a fresh source of supply for Asian gas buyers.

It would also open up large new reserves and long-lived production for ExxonMobil, BP and ConocoPhillips, the project’s three principal backers.

However, the plan to take gas 800 miles across the state from Alaska’s North Slope to a new liquefaction plant on its south coast faces technical and financial challenges. It also still needs to win the support of the state’s lawmakers, some of whom have argued the plan gives too much away to the oil companies.

The administration of Sean Parnell, Alaska’s governor, is planning the highly unusual move of taking a 20-25 per cent stake in the project, meaning it could have to put up more than $10bn to fund its share of the cost, although it has a preliminary agreement with TransCanada, the pipeline company, to cover roughly half of that.

To keep the plan on track as planned for a final go-ahead in 2018, it needs approval from the state legislature in its present session, which ends on April 20.

Angela Rodell, the commissioner in Alaska’s department of revenue, told the Financial Times that Alaska LNG could make “a huge difference” to the state’s economy, generating about $4bn a year or about $5,500 for every one of the state’s 730,000 inhabitants, and raising its unrestricted tax receipts – which the state government is free to spend as it chooses – by about 80 per cent from their 2014 levels.

However, the plan has been criticised in Alaska, where it has become entangled with the continuing controversy over taxes on oil companies, which provide about 90 per cent of the state’s unrestricted revenues.

An oil tax reform was passed by the legislature last year and took effect last month, removing some of the heavier charges that used to hit companies at higher oil prices. It is still opposed by many Alaskans, and a petition on the issue received enough support to force a referendum on repealing the reform, which will be held in August.

Bill Walker a Republican who is running for governor as an independent in the election in November, has opposed both the tax reform and the administration’s plan to work with Exxon, BP and Conoco on Alaska LNG.

Legislative approval is needed to confirm the plan for the state to take a stake in the project, to fund further development work, and for the administration to continue negotiating with potential partners

If the state legislators vote in favour, the next big hurdle will be agreeing long-term gas sales contracts with customers, without which the project will not be able to go ahead.

Joe Balash, Alaska’s natural resources commissioner, said the state had already had expressions of interest from “a number of Asian gas buyers”.

The Japan Bank for International Co-operation, the country’s state-owned development bank, last September signed a memorandum of understanding with Alaska, highlighting the North Slope’s 35tn cubic feet of proved reserves of gas and the estimated 200tn cu ft yet to be found as central to plans for a “closer economic relationship between the state and Japan”.

The project would be a massive feat of engineering, and it might well cost even more than recent mega-projects such as the $54bn Gorgon LNG plant in northwest Australia, or the $48bn first phase of the Kashagan oilfield in Kazakhstan. On the other hand, the North Slope’s gas is in effect free, because it emerges naturally alongside the oil being produced there, and is simply injected back into the field again.

A report for the state late last year argued that Alaska LNG could deliver gas in Asia at a break-even price of about $12 per million British thermal units, which would probably make it rather more expensive than the expected cost of gas shipped from the new export projects being developed elsewhere in the US, in states such as Texas and Louisiana.

With LNG cargoes selling recently in Japan at $19 per mBTU, though, exports could still be profitable.

Frank Harris, an analyst at Wood Mackenzie, argued that the critical factor in securing customers for Alaska LNG was likely to be the competition between the project and the plants being developed in the rest of the US, including the Cameron LNG terminal in Louisiana, which on Tuesday became the fifth such facility to be granted permission by the energy department to sell gas anywhere in the world.

If exports from Alaska are perceived by LNG buyers to be free of the sort of political concerns that loom over US exports in general, including worries about the impact on domestic gas prices for US consumers, then they could succeed. If not, Mr Harris argues, Asian customers will be wary about becoming too heavily dependent on US supplies. By the time Alaska LNG could be in production, by 2024 according to the state’s schedule, other US gas export profits could have been in operation for the best part of a decade.

“At that point, Alaska LNG will face challenges, because it will be chasing a market that is already quite well supplied with US gas,” Mr Harris said.

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