Saturday, March 3, 2012

Alaska LNG for Japan?


This week the Alaska Dispatch ran a story about a Japanese delegation visiting Anchorage to discuss LNG from the North Slope (LINK). First comment - Hooray! It's about time.  I'm glad the Japanese include Alaska on their list of energy solutions.  I've always wondered why Alaskan leaders don't push Alaskan gas sales to Japan more vigorously.  Without customers for Alaskan gas no gas project will ever be built. Now that introductions are out of the way maybe Alaskan leaders can man up and get engaged with a paying customer who may be motivated to partially fund the project.

Having said that what would a Japanese-Alaskan LNG project look like? Japan needs long term politically stable supplies of LNG.  I can see Japan funding and building the LNG plant and terminal in Valdez that would equal about half the project cost.  The producers and the State of Alaska would build the North Slope gas treatment facility, various natural gas liquids (NGL) projects, and assorted sub-pipelines.  The Japanese will be focused on guaranteed delivery of specific gas volumes and the producers will seek take or pay options for delivery of the gas.Fairbanks, Anchorage, Delta Junction and lots of points in between can execute sub projects along the way.   Remote Alaskans may even benefit from propane extracted from North Slope gas.

Could this really happen?  Yes because a Japan-Alaska-LNG project ticks all the right boxes.

First and foremost is project economics.  A million BTUs (MMBTU) of energy from crude oil cost more than $18.75 today (WTI basis, $22/MMBTU Brent basis) and could exceed $20 in the near future as crude prices edge upward. Henry Hub gas prices may have found bottom in the $2.50/MMBTU range this winter.  At least that's the price that shuts down dry shale gas drilling rigs.  Converting gas to LNG cost about $2/MMBTU.  The resulting low end cost of delivered LNG could be less than $10/MMBTU (Henry Hub indexed) and over $20/MMBTU (crude indexed).

LNG is not a true commodity yet so we can expect a unique price for any North Slope Alaskan LNG sold to Japan.  I expect that the unit cost of Alaskan LNG will be higher than Gulf Coast LNG.  This price difference will enable the project and cover the higher construction cost in Alaska.

But what would drive Japan to sign up for an expensive project? The answer is that Alaskan LNG  is a long term, reliable, dedicated source of supply for Japan completely decoupled from the lower 48 market and lower 48 hazards. A bad lower 48 winter or a bad Gulf hurricane season will not disrupt the flow Alaskan LNG.Additionally Alaskan LNG is closer to Japan than Mid East or Gulf Coast LNG.  Alaskan LNG can be shipped in the largest most efficient tankers unlike Gulf Coast LNG tankers that must transit the Panama Canal. Alaskan LNG is also more reliable than LNG shipped through the Strait of Hormuz.

Japan and the North Slope producers share one vital common interest,  Both sides need a long term deal that works for decades.  To quote Steve Kirchhoff, Vice President – Americas, ExxonMobil Gas and Power Marketing Company "You can't dabble at LNG"

Of course the State of Alaska is behind the curve on LNG exports to Japan, or Asia in general. It's easy to imagine Canadian LNG projects shipping product before Alaskan leaders get their heads around the idea. On one hand I'd like to know what transpired when the Japanese met with Alaskan State government officials. On the other hand I'm afraid the Japanese may have heard very little encouraging news.

No comments: