Friday, August 24, 2012

Golden Pass LNG

North Slope producer ExxonMobil holds a 30% position in Golden Pass Products LLC.  This week GPP announced their intent to move forward with a $10 billion LNG project at the Sabine Pass location.  The project will export an average of 2.0 BCFD of gas.

Obviously it's cheaper to build on the Gulf Coast rather than Alaska, but the cost and capacity data provide an insight into LNG project economics.

In Alaska producers have stranded gas.  Stranded gas has value as an energy source and as a means to maintain reservoir pressure.  At Golden Pass the problem is non producing stranded hardware.  The Golden Pass facility was built to receive imported LNG and sell that gas to the American market.  The shale gas revolution made import facilities like Golden Pass obsolete.  Gas from imported LNG can't compete with cheap domestically produced shale gas.

The Golden Pass export project investment equals about $14/MMBTU/yr export capacity.  ($10 Billion @2 BCFD capacity).  In comparison the Alaska Gas Pipeline Project plus LNG will cost about $40 Billion and export about 3 BCFD which equals about $37/MMBTU/yr export capacity.  By this measure the Alaskan project is over two and half times more expensive than a Gulf Coast stranded equipment project.

The big disadvantage to an Alaskan project is the pipeline required to move the gas to tidewater.  If the pipeline cost is eliminated from the calculation the Alaska Project would only cost 1.33 times the Golden Pass Project - a reflection of the cost of building in Alaska and the value of sunk assets at Sabine Pass.

Of course an Alaskan gas project has other benefits including affordable energy for (some) Alaskans and proximity to Asian LNG buyers.  At the end of the day these benefits will not tip the balance in favor of the Alaskan project.

The value of co-produced natural gas liquids (NGL) will promote Alaska project economics to a small degree, but not a significant amount, perhaps as little as $5 Billion discounted back to the project start date.  Helpful, but not a game changer.

Assuming a relative free market we can expect the low hanging fruit of Gulf Coast import terminals to be converted to export terminals fueled by cheap shale gas.  As more export facilities come on line the domestic price of gas can be expected to increase while abundance of supply puts downward pressure on the asking price of LNG.  The increased cost of feed stock and reduced revenue for products will tend to pinch out projects that move forward later rather than sooner.  Stir in a helping of anti free market regulation and the number of stranded equipment conversions may stay in the single digits.

Still standing by for good news in September, but I don't see a home team bounce in the project economics yet.

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