Just what we needed

The Alaska Gas Pipeline is starting to get a lot of attention these days.  Of course all attention is not good attention.  From the Juneau Empire (LINK) "U.S. Rep. Edward Markey, D-Mass., told oil giants BP, ConocoPhillips and Exxon Mobil his natural gas export bills now in Congress would block a proposed $40 billion pipeline to export Alaska natural gas to Asia. " and "Markey said the purpose of one bill is to keep natural gas prices low in the U.S. by shielding the U.S. market from the volatility of the international market."
Nice going Congressman, thanks for sticking your beak into Alaska's business. Now go away.
Kudos to Senators Begich and Murkowski for supporting the idea of Alaskan LNG exports.


Links to other non-news news items of the week (somebody has cranked up the PR machine):


A Northern Pipeline President Obama Should Love


 Exxon Says ‘Significant Progress’ Made to End Alaska Gas Dispute

Breakthrough around the corner?

Maybe, possibly, who knows.  I don't tend to get too excited anymore, but this story made the DrudgeReport, has a link to a Financial Times story on the Alaska Gas Pipeline.  (See today's Drudge Report for a link that works (LINK)

Here's a quote:

According to people close to the negotiations, the three companies and state authorities hope to reach agreement next week over a long-running lease dispute at Point Thomson, a large oil and gas field on Alaska’s North Slope.

A settlement would clear the way for the companies to hasten their commercial assessment of a large gas pipeline to Alaska’s southern coast, from where LNG could be shipped to China and other Asian countries. Sean Parnell, Alaska’s governor and a champion of the project, told the Financial Times he was “cautiously optimistic” that the plan would be able to move forward.

Maybe it will play out like they say. A Point Thomson settlement would help in terms of immediate employment opportunities so fingers crossed.  Hastening the gas pipeline may be a stretch.  "Hastening commercial assessment" doesn't sound like a project anytime soon.

Team Alaska - Missing

Japan continues to lobby American officials on the topic of LNG exports (Platt's Link).  Quote:

Japanese officials will meet with a US delegation headed by Deputy Energy Secretary Daniel Poneman later Tuesday to ask that Washington allow exports of LNG to Japan, the world's biggest importer of liquefied natural gas, a Japanese delegate said. 

Platts assessed its Japan/Korea marker Monday at $15.45/MMBtu for April, while its Northwest and Southwest European markers were assessed at $10.95 and $11.35, respectively, for April. In contrast, the NYMEX April gas futures contract settled at $2.269 Monday.

Where's all the Alaskan leadership?  Senators Murkowski and Begich, Governor Parnell, Representative Don Young  - where are you when LNG customers come knocking?  You would think a project to sell Alaskan LNG priced at $12 -$15 would motivate these elected leaders to weigh in and lend a hand, a photo op, a trade mission, something.  Instead they are missing and silent.  The LNG for Japan opportunity may be the last chance for decades.

Alaska LNG for Japan?

ALASKA LNG For

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.

Go Pedro

The Alaska Dispatch has a good letter from Pedro van Meurs (LINK).  Pedro has replied to the Concerned's invitation to run for Governor.  Both the invitation and the reply are humorous and point to the root cause of Alaska's ongoing failure to build a gas pipeline.  Pedro says:

Alaska has not lifted a finger to attract new investment from a fiscal perspective. In fact, Alaska does not even have useable fiscal terms for heavy oil, shale oil and natural gas that can be published in a simple investor brochure. How can Alaska attract investors in this way when other nations (Canada, Lower 48, Australia, Brazil, et al.) offer attractive well defined terms?

And

Unless substantial policy and fiscal changes are introduced that encourage large scale investment in heavy oil, shale oil and natural gas in Alaska, as is being done in competing jurisdictions, the future of oil and gas production in Alaska is bleak.

Sadly I agree fully with the last paragraph.  At today's gas prices I can't understand why Alaska doesn't take bold action to get things rolling. I know the Alaska constitution says "The legislature shall provide for the utilization, development, and conservation of all natural resources belonging to the State, including land and waters, for the maximum benefit of its people" but too many Alaskans focus on the "maximum benefit" rather than the whole sentence including  "utilization, development".  No gas will ever be utilized or developed unless Alaskans accept what Pedro is telling them.

My idea of a good incentive program is a combination of tax holidays and flat taxes. Pick a flat tax rate for new oil and gas and declare a tax holiday for new oil and gas sales.  Imagine the effort that would go into a gas  pipeline if there was a potential payoff for early completion, otherwise sit back and watch the rest the world trade LNG, develop shale gas resources and build the big pipelines.  Alaskans can cling "maximum benefit"but its really about competing. Pedro tried to warn you.

New GTL Developments

Spending $40 billion for an Alaskan gas pipeline to the lower 48 seems less and less feasible every day.  $20 billion for a short pipeline to Valdez plus another $20 billion for a LNG plant seems to offer only slight advantages over the big line. Other small pipeline options fail to monetize the the full volume of available North Slope gas.

It's always tempting to talk about Gas-To-Liquids (GTL) to convert Alaskan gas to petroleum products but the cost never seem to add up.  I think this is because many GTL projects like Shell's Pearl convert gas to refined petroleum products (low sulfur diesel, kerosene etc). An Alaskan GTL plant only needs to convert gas into petroleum liquid in the C6 to C16 range, i.e. something liquid at atmospheric pressure and pumpable.  Such a material could be blended with crude oil, moved down TAPS, and sold as crude oil.

Another factor working against GTL plants is size. Plant size drives up cost.  The heart of a GTL plant is the Fischer-Tropsch reactor.  The F-T reaction is exothermic (gives off heat) so reactor size becomes is dependent on effective heat transfer.  An  F-T reactor is fed by syngas produced by reforming natural gas.  Some syngas plants require pure oxygen to form syngas.  An expensive air separation plant must be built to supply the pure oxygen.  An air separation plant adds both capital cost and operating cost.

What if the size and cost of a GTL plant could be reduced and a GTL plant could be customized to the needs of Alaskan gas?  A new outfit is commercializing a technology that might just fit the bill. CompactGTL is scaling up a modular GTL technology that can convert Alaskan gas to synthetic crude oil at lower cost than other GTL processes.  (LINK to CompactGTL presentation) Here are the advantages I see for the CompactGTL process:

1) Reduced reactor size. CompactGTL claims to have reduced reactor size by a factor of 10 through the use of  mini-channel reactors.  I believe in that claim.  The mini-channel reactors integrate a reactor within a plate type heat exchanger. This type of heat exchanger provides very high heat transfer rate.  CompactGTL has implemented this type of reactor for both the steam methane reformer (SMR) and the Fischer-Tropsch (FT) reactor. Size reduction will yield cost reductions.

2) No oxygen required. The CompactGTL process does not use an autothermal reformer therefore no costly air separation plant.  That's a cost reduction.

3) No carbon dioxide separation required.Alaskan natural gas contains about 12% carbon dioxide (CO2). The CompactGTL process does not require CO2 removal.  This reduces cost compared to pipeline alternatives.

4) Modular Design. Modular design suits Alaskan construction needs.  Any gas line project envisions modularized gas treatment plants.  Incremental deployment of CompactGTL using modules would take years and extend the oil production benefits of gas reinjection thus optimizing the total field production.

5) Synthetic Crude Oil. The CompactGTL process is geared to produce an unrefined product.  That keeps cost low and options open.  A synthetic crude could be blended with ANS crude or batched to Valdez. The product would be valued near the price of crude depending on the capabilities of the buyer's refinery.  Note - a FT synthetic crude is not an exact replacement for crude oil, it lacks aromatics, the key ingredient of gasoline. On the plus side a FT synthetic crude lacks low value heavy cuts and troublesome sulfur.   FT synthetic crude is ideal for clean diesel, kerosene and naphtha production.  Converting Alaskan gas into a crude oil equivalent would forever break the market link to cheap shale gas.

6) Economics.  CompactGTL shows one cost comparison in their presentation. Since they are currently focused on floating production, storage and offloading (FPSO) units I'll use that cost unescalated. i.e. "Alaska Factor" equals 1.00,  I figure the cost of building a module on a ship will cost the same as deploying a module to the North Slope.  Crunching those numbers I find that a full deployment of CompactGTL for Alaskan gas would cost upwards of $68 billon and it would produce about $15 billion annually in gross revenue if the product is priced at $100/bbl.  The capital figure is 1.7 times higher than a gas pipeline but the synthetic crude product sells for 5 to 6 times the price of natural gas so that a BTU of North Slope gas could sell for 3.5 more if converted to liquids. These are of course very rough calculations, but the conclusion points in the right direction.

Other considerations

1) Timing.  CompactGTL is currently in the commercialization phase with a demonstration plant funded by Petrobras. It will be some years before we're ready to talk deployment to a cold region.  In those years I doubt the gas to liquids value ratio will change all that much.  I also doubt that Alaska will ink a deal to sell gas as LNG into a market flooded with cheap shale gas and cheap shale gas derived LNG.

2) GTL Trend.  The world is full of cheap gas and stranded gas. CompactGTL is only one of many outfits focused on converting stranded or wasted gas into useful liquids. Technological leaps in catalyst and reactor design may push GTL into full commercial in North America in the near future.

3) NGLs.  Most urban Alaskan would like a big pipeline to deliver gas to their homes at an affordable price.  That may never happen and Alaskans need to make other plans for in-State energy needs.  A GTL plant does not exclude the possibility of propane and butane (NGLs) recovery from North Slope gas upstream of a GTL plant.  The economics of a GTL plant is not dependent of the BTU content of the feed gas, so a GTL plant would not compete with the interest of supplying Alaskans with affordable home-grown energy from NGLs.

ASAP Draft EIS Available

The draft environmental impact statement is available: (LINK)