Gas to Gasoline?

Petroleum News carried additional details (LINK) on Janus Methanol chairman Deo van Wijk's ideas for un-stranding Alaska's natural gas. The idea is called "MTG" or Methanol to Gasoline. Given the dismal prospects of the umpteen dozen proposed gas lines maybe this idea is worth a second and even a third look.

In a nutshell van Wijk's concept is to convert Alaska's natural gas into valuable liquids and batch the liquids to market via the existing TAPS oil pipeline to Valdez and then on to markets where the material will trade as gasoline.

How it works - Cleaned up natural gas is converted to Syngas (carbon monoxide and hydrogen), Syngas is converted to Methanol (MeOH) and Methanol is converted to liquids, i.e. gasoline via a process owned by Exxon.

Quote from the Petroleum News article:

Using ballpark estimates of development costs on the North Slope, assuming for example a more than doubling of costs compared with a region such as the U.S. Gulf Coast, Van Wijk has estimated a $7.7 billion price tag for an initial two-train plant. Assuming a 20 percent return on investment over a 15-year period and a tax rate of 35 percent, gasoline could viably be sold at a price of $1.583 per gallon at a natural gas price of $2 per thousand cubic feet, Van Wijk said. The viable gasoline price rises with increasing natural gas prices, with the gasoline price reaching $3.458 at a natural gas price of $10 per thousand cubic feet, he said.

Van Wijk estimates the initial two train unit will produce 63,000 bbls per day of low sulfur low benzene gasoline. The economics, as stated look good, although where are North Slope gas producers going to get $10/MMBTU for their gas? (LINK TO VAN WIJK SLIDES)

The price of North Slope gas is really an imaginary number without other viable outlets. I figure that gas input to the facility should be at cost with gas producers compensated and tax assessed on the product stream ex-Valdez.

Van Wijk didn't indicate if the cost of a train includes gas pretreatment so let's tack on some capital cost for other items, say $1.3B for offsite utilities (gas treatment) , tankage at Valdez and assorted items along the pipeline. At $9B per two trains the project should still work.

What's good about this idea:

1) It converts Alaska's gas into revenue.

2) It's incremental, initial cost are more easily financed.

3) It fills the pipeline, extending the life of the pipeline.

4) It puts Exxon in the game as the technology licensing participant.

5) Fewer permits required, fewer jurisdictions.

6) It's an "All Alaska" option.

7) The incremental approach depressurizes the North Slope more gradually than a full size gas pipeline, i.e. it extends some oil field production.

8) There are actual buyers for the product.

Here's what people will hate about this idea:

1) No gas for Alaskans - Better start thinking propane

2) $500 Million for AGIA down the drain, maybe $1.5 Billion if damages are paid to TransCanada. Maybe the viability of MTG will force the discussion of AGIA feasibility.

Conclusion - I say why not - Van Wijk's team should press on and develop a full cost estimate. Clean up the concept and minimize capital installed on the North Slope. Get a proof of concept unit going on the Gulf Coast and iron out the arctic constructability issues.

Natural Gas and the EPA Train Wreck

The Alaska Gas Pipeline has a few high drag problems, namely State of Alaska - Producer problems (Point Thomson / Fiscal structure) and market problems ($4/MMBTU gas / Shale gas / lack of customers).

Setting aside State of Alaska - Producer problems will the demand side ever tilt in favor of an Alaska Gas Pipeline? One factor of this equation may be new EPA regulations that impact coal fired power plants. The wave of new EPA regulations is known as the "train wreck".

Outfits like TVA are closing old coal plants (LINK) and building more nuclear and more gas fired combined cycle plants.

They say even a blind hog finds nut now and then, maybe an unintended consequence of the EPA Train Wreck will be higher gas prices and firm buyers for more gas.

Plethora of options

Tons of ideas out there, but still no buyers for Alaska gas. Here's links to pipeline related presentations submitted to the Senate Resources Committee this week :

Larry Persily, Federal Coordinator (LINK)
TransCanada (LINK)
Bill "Valdez LNG" Walker (LINK)
Malcolm Roberts (LINK)
Harold Heinze ANGDA (LINK)
David Gottstein (LINK)
AGDC, answers to 54 Wielechowski questions (LINK)
DNR Dan Sullivan, Gasline Update (LINK)
Dan "ASAP" Fauske (LINK)

No Precedent Agreements

That's the word from TransCanada (LINK to slides) in a presentation to Alaska State Legislature Senate Resources Committee on August 16, 2011. Here's a chilling quote from the slides.

"APP has not been able to secure Precedent Agreements with Shippers at this time"

No shippers, no buyers, no project. Tony Palmer, TransCanada VP was unable to show proof of project viability to lawmakers in testimony to the Alaska Senate Resources committee on Tuesday (LINK). Point Thomson is identified as the major sticking point. According to TransCanada:

"Resolution of Pt. Thomson and gas fiscals are essential to commercial success"

A solution to that problem may be in the works (LINK to Alaska Dispatch). Alaska Dispatch ran the Point Thomson story on the 15th however other news outlets have been slow to grasp the significance of an agreement on Point Thomson. The Fairbanks New-Miner has a followup story with no new content (LINK).

We do know that ExxonMobil has drilled a couple of wells (PTU-15 and PTU-16) in recent times and has plans to produce condensate as early as 2014. (USACE EIS LINK). At a minimum Exxon has more data and is in a good position to negotiate with the the Department of Natural Resources. (LINK to a good description of Point Thomson).

Sometimes it seems like this project is all lawyers, politicians, and guys in nice suits. It's good to see at least one outfit (Exxon) is out there, boots on the ground, building, drilling, hiring and making tangible progress. With a little luck maybe their success will get the ball rolling.

Exxon X120 Piple Welding

One way to improve the economics of a remote gas pipeline is to use stronger steel.

Here's a press release from Exxon on X12o pipe welding. (LINK).

Because I'm an optimist I read "Alaska Gas Pipeline" into this portion ofthe press release:

X120 ultra high-strength linepipe was jointly developed by ExxonMobil’s Upstream Research Company and Nippon Steel. X120 linepipe is 50 percent stronger than the strongest linepipe steel (X80) commonly used in gas transmission pipelines and is a cost effective and safe method of transporting natural gas from remote regions to urban customers using high-pressure, large-diameter pipelines.

Natural gas demand is forecast to grow 60 percent globally in the next 20 years. Many new gas resources required to meet this demand are in remote areas and will require cost-effective transportation options before they can be commercialized. The use of X120 linepipe could substantially improve the economics of long-distance pipelines used in the development of remote gas resources.

FERC Notice of Intent for EIS

The Federal Energy Regulatory Commission (FERC) has issued a Notice of Intent to proceed with preparation of the Environmental Impact Statement (EIS). It's difficult to link to the FERC document, but it's available on FERC.GOV, search Docket Number PF09-11-000 or accession number 20110801-3001. I'll send you a copy by email upon request - just leave a comment.

Quote from the Notice of Intent:

Summary of the Planned Project

The APP would involve construction and operation of a new pipeline system to transport up to 4.5 billion cubic feet of natural gas per day (Bcfd). Specifically, the planned project includes the following major components in Alaska:

· About 58 miles of 32 inch diameter pipeline and associated aboveground facilities (the Point Thomson Pipeline) from the processing plant at the Point Thomson Field to a planned gas treatment plant (GTP) near Prudhoe Bay, Alaska;

· A new GTP near Prudhoe Bay capable of producing up to 4.5 Bcfd of pipeline-quality gas;

· About 745 miles of 48 inch diameter pipeline and associated aboveground

ancillary and auxiliary facilities (the Alaska Mainline) from the GTP to the Alaska-Yukon border. The Alaska Mainline would have a maximum allowable operating pressure of 2,500 pounds per square inch;

· Construction of at least five delivery points, eight compressor stations, two meter stations, various mainline block valves, and pig launching/receiving facilities; and

· Associated infrastructure such as access roads, helipads, construction camps, pipe storage areas, contractor yards, borrow sites, and dock modifications and dredging at Prudhoe Bay.

The planned Alaska Mainline would start at the GTP and generally follow the existing Trans-Alaska Pipeline System crude oil pipeline (TAPS) and adjacent highways southeast to Delta Junction, Alaska. From Delta Junction, the mainline would diverge from TAPS and generally follow the Alaska Highway southeast to the Alaska-Yukon border. At the Alaska-Yukon border, the pipeline would interconnect to a new pipeline in Canada to deliver gas to North American markets through the Alberta Hub or other facilities with existing off-take capacity at or near the British Columbia/Alberta border.

One item of special interest for proponents of the Valdez LNG option:

The project proponent is also considering an alternative proposal to build a natural gas pipeline to Valdez, Alaska for delivery into a liquefied natural gas (LNG) plant for liquefaction and export to global LNG markets. Because the Commission has received very little information on the LNG plant and the associated pipeline, the Valdez proposal is not sufficiently developed for the FERC to include in the environmental review at this time

Ouch! That indicates that nothing permit-able has transpired on the LNG option.

Is FERC going through the motions or is this real progress for the project. As always there's too little information and no indication of pending commitments.

EIS Flowchart from the Notice of Intent:

The Future of Natural Gas

The Economist has a new article on the future of natural gas. (LINK). No big surprise the future is shale gas and global trade in LNG. The article also points to a study conducted by the James Baker Institute (LINK).

The take away point of the article and the study is that shale gas has changed the global energy balance. The new global top three gas reserves are, in order, Russia, China and USA. If we combine Canadian and American gas the ranking becomes Russia, North America, and China.

Here's a tabulation of the data showing US Energy Information Agency (EIA) estimates of conventional gas and technically recoverable shale gas by country:

The Baker Institute study estimates American recoverable shale gas at 637 TCF. The Baker Institute also estimates the average break-even pricing of shale gas plays (Table 1). The average break even price works out to $5.42/MMBTU with a standard deviation of $1.00/MMBTU indicating that shale gas producers will drill and develop shale gas when the market price ranges no lower than $4.42 to $6.42 per MMBTU. The low range rings true based on the past year or two of gas prices and the upper range rings true as shale gas developers now tend to target "wet" shale gas to boost the net revenue per well.

What does this mean for Alaskan Gas? First I'm encouraged to see general agreement on the scale of global shale gas. No one can be expected to invest in Alaska if global shale gas was too cheap to meter - but that's not the case. Gas prices have tested the $4/MMBTU support level and producers will shut in wells rather than sell gas below that level. As the uncertainty fades away an Alaskan Gas Pipeline becomes bankable. It won't be wildly profitable, but a gas line can be built - keep in mind that conventional gas from Alaska is loaded with the same natural gas liquids (NGLs) the boost the revenues of "wet" shale gas plays.