Saturday, October 8, 2011

Japan pays $19/MMBTU for LNG

Mega Projects like the Alaska Gas Pipeline don't get funded on the basis of a sky high spot price, but $19/MMBTU LNG vs. $3.48/MMBTU gas in the lower 48 should stimulate a new long term LNG strategy by Japan and Alaska.  (LINK). The LNG price paid vs. lower 48 gas price leads to two conclusions. 1) Alaska gas is stranded indefinitely and 2) Either the Gulf Coast or Alaska have an opportunity to strike long term deals with Japan for LNG sales.

The chart above shows how the Japanese price paid for LNG diverged from other markets in late '08.  Here's a chart of Japan's LNG import volumes:

Japan's current LNG imports equal about two times Alaska's potential gas production.  I've crunched and few numbers and it looks like $10 to $12 per MMBTU for Alaskan LNG would justify a project. 

Mega Projects like this require risk mitigation. Typically LNG prices are indexed to crude oil prices.  Using that pricing mechanism places too much downside risk on Alaska in the event oil prices take a dive as the economy continues to sputter.  What would work is fixed pricing until the project reaches payout, then index to crude.  That would allow the project to reach payout at the soonest possible date.

The "do nothing" option (Alaska's current path) will lead to some incremental development of Gulf Coast LNG export capacity with a marginal impact on lower 48 gas prices.  That impact will not be enough to shove prices back into the $6/MMBTU range needed to justify the Alaska Gas Pipeline.

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