New Calls to Dump AGIA

The Alaska Gasline Port Authority (AGPA) has a new press release (LINK) calling for an LNG plant at Valdez (LINK to Report).

In a nutshell the report claims that an LNG plant at Valdez is competitive with other LNG projects for supplying LNG to Asian buyers.

The report does a good job of quantifying the demand side without any actual indication of buyer interest in Alaskan LNG. At this point in time non binding expressions of interest would go the next step to show that buyers are actually interested and armed with baskets of cash. This is important because all Alaskan gas projects are empty promises until buyers step up.

Some other metrics from the report - The LNG plant is estimated to cost $1,200/ton and operate on 9.65% of the gas feed. The reports assumes that pipeline LNG gas plant owner operators will be satisfied with 8% ROE and that natural gas liquids will garner $80/bbl.

The all in cost of delivered LNG is estimated to equal $8.50/MMBTU priced at rates indexed to crude oil prices. This cost well below current and projected LNG cost.

Weak points - 8% ROE won't bank the deal. Think 14% - 15%. Without some indication of buyer or developer interest the report has the empty ring of the early days of project promotion.

Instead we're hearing the Tokyo Gas is looking to Atlantic LNG (LINK).

Recommendation: An Asian LNG buyer should cash in US treasuries and take a large equity position in securing Alaskan LNG. Let's face it who wouldn't rather own MMBTUs instead of USDs if the exchange rate is $8.50/MMBTU.

More LNG exports considered

This time Shell is considering LNG exports to Asia from B.C. From the Vancouver Sun:

In Canada, Shell Canada paid $5.9 billion in 2008 to buy Duvernay Oil Co., a major player in B.C.’s Montney shale gas deposit near Dawson Creek.

Petroleum Intelligence Weekly reported shortly after the Japanese tsunami in March that, as a result of the destruction of two nuclear reactors there, “Shell and its Asian partners could scale their proposed Prince Rupert plant in British Columbia toward the top end of its mooted 8.5 million-14.0 million tonnes/year range.”

Those volumes equal 25% to 40% of the capacity of the Alaska Gas Pipeline (4.5 BCFD). A pipeline from Dawson Creek to Prince Rupert would be about 400+ miles long as the raven fly vs. 800+ miles for a North Slope to Valdez line. Based on flow rates the line would be 24" to 30" vs. 48" for the proposed Alaska Gas Pipeline.

I have mixed feelings about this story - First it's good to see North American shale gas sponged up for export, however my "something is not right here" alarm is going off. If an Alaska LNG plant at Valdez is not feasible, exporting LNG to Asia at $12/MMBTU - how can a smaller plant be justified in Canada? In Alaska, the wells are drilled, in Canada (shale gas) wells are yet to be drilled, and shale gas completions are not cheap.

Update: More from Petroleum News (Link). Perhaps the "Floating Technology" will play a role enabling plant owners the chance to drag up and move the plant if and when the return on capital employed drops below other opportunities.

Economy of scale should work in favor of Alaska - double the length of the pipeline for more than double the amount of gas. Of course economy of scale drop for smaller Valdez LNG plant options (LINK to AGIA Findings LNG Chapter).

Something to keep an eye on. And by the way - where's the Asian interest in Alaska gas?

AGIA, Denali, Exxon, Shale Gas, and all that

The announcement this week that the ConocoPhillips / BP Denali project is over (link) has the pundits punditizing. The alternative plans are rampant: terminate AGIA, built a LNG plant in Valdez, build a small line to _______fill in the blank, make petrochemicals, make methanol, make ethanol and so on.

Concerning AGIA. It's all about unintended consequences and timing. Amanda Coyne of the Alaska Dispatch assembled a good timeline of recent efforts to build an Alaska Gas Pipeline (LINK). Let's add price data to the pivotal points in the timeline:

March 2007, Sarah Palin rolls out AGIA, well head gas price = $6.65/mmbtu.

January '08 AGIA has five bidders, gas at $7.38/mmbtu

April '08 ConocoPhillips & BP form Denali, gas at $8.87/mmbtu

June '09 ExxonMobil joins the TransCanada AGIA licensed project, gas price $3.38/mmbtu

December '09 Exxon announces acquisition of shale gas producer XTO, gas price $4.66/mmbtu.

What this data shows is that AGIA imposed a delay of about 4 years at the precise time that gas prices and support for a pipeline surged. It also shows that Exxon joined the TransCanada project near the lowest point in the gas price cycle. It also shows that Exxon made it's big move in natural gas about the same time and also at low gas prices - Exxon clearly picked a shale gas winner (XTO) and bought in at a cyclic low, and built a foundation for a future Alaska gas pipeline. In May '09 Exxon was drilling in the gas-rich Point Thomson field, gas price $3.23/mmbtu.

I'm going to go with the premise that Exxon got it right and that the State of Alaska got it wrong. Got it wrong in several ways, but mainly via AGIA and oil and gas taxes.

So what's next? Denali's collapse shows that a couple of well financed oil and gas firms can't fund an Alaska gas pipeline any time soon. At least they can't get it done without Exxon. AGIA may get chased out of town by villagers with pitch forks sometime soon, but I think we can judge Exxon's intentions by their actions, specifically why are they drilling at Point Thomson unless they believe in a pipeline? I don't like the 2020 date proposed for Alaska Gas flowing, but that's probably what we can expect. We're probably 3 years and 150 hopeful blog posting away from kicking off the project.

Exxon and other producers, and maybe TransCanada will move forward because natural gas will become a bigger part of the power generation mix, and because the lower 48 will begin to export LNG (LINK: Cheniere Unit Wins US Approval To Export LNG From Louisiana). The potential Cheniere export volume (2.2 BCFD) equals roughly half of the proposed Alaska gas pipeline volume (4.5 BCFD). Moves like this will be the game changer, this time back in the favor of Alaska.

Keep in mind any optional use of natural gas is less expensive to execute in the lower 48. LNG export plants, petrochem plants, gas to liquids (GTL) plants, methanol, plastics you name it - I can build it cheaper on the Gulf Coast and feed it with cheap shale gas from Texas and Louisiana.

LNG export and the Fukushima effect will sponge up $4/mmbtu shale gas and prices will move back to $6/mmbtu by the end of this decade. $100/bbl oil will drive heavy oil production in Canada and that will drive gas demand.

Precedent agreements explained

Here's a link to a good explanation of the ongoing precedent agreement phase of the Alaska Gas Pipeline (By Bill White, Researcher/Writer for the OFC) (LINK) Here's a quote from the article, spelling out what we can expect in the weeks, months and years ahead.

Disclosure of Precedent Agreements

As was said, precedent agreements usually get unveiled, in whole or part, when a developer applies to FERC for a certificate to construct and operate a pipeline. The agreements are the developer's affirmation that the project is needed.

For the Alaska pipeline projects, those certificate applications aren't planned until the fall of 2012 for the Alaska Pipeline Project and 2013 for the Denali project.

In an unusual move, FERC decided in 2005 to handle disclosure of the Alaska projects' precedent agreements differently. FERC's Alaska-specific regulations disallow withholding from the public the existence of signed agreements until the certificate filing.

The developer must issue a press release within 10 days of executing each precedent agreement disclosing the name of the shipper, the amount to be shipped and how many years the shipping will last. Then the developer must file the actual precedent agreement with FERC within 20 days of signing it, although the developer can ask FERC to seal the agreement so the public can't see its details. In handling past pipeline projects, FERC typically granted requests for sealing these documents.

Nice article Mr. White - Thanks.

In-State Gas Report

Link to Roger Marks Report on Alaska natural gas pipeline projects (LINK)

Annual Energy Outlook

The U.S. Department of Energy’s Energy Information Administration (EIA) has release the Annual Energy Outlook 2011 (LINK). The Globe and Mail (LINK) calls the report an "Energy Fantasy Land" The Alaska Gas Pipeline is no longer a feature in the AEO base case:

The Alaska natural gas pipeline, expected to be completed in 2023 in the AEO2010 Reference case, is not constructed in the AEO2011 Reference case. This change is a result of increased capital cost assumptions and lower natural gas wellhead prices, which make it uneconomical to proceed with the project over the projection period.

What's behind the demise of the Alaska Gas Line? Shale Gas of course, abundant, cheap shale gas:

The annual average natural gas wellhead price remains under $5 per thousand cubic feet through 2022, but it increases thereafter because significantly more shale wells must be drilled to meet growth in natural gas demand and offset declines in natural gas production from other sources. As the shale gas resource base is developed, production gradually shifts to resources that are somewhat less productive and more expensive to produce. Natural gas wellhead prices (in 2009 dollars) reach $6.53 per thousand cubic feet in 2035, compared with $8.19 in AEO2010

EAI projections show Alaska gas dwindling to oblivion by 2035:I think Jeff Rubin of the Globe and Mail has it right - this is a Fantasy Land forecast, but it's a happy fantasy with cheap oil and cheap gas for decades. I'll offer this forecast: 2011 will see the return to $100/bbl oil and natural gas prices will climb out of the ditch and skyrocket to $5.00/MMBTU.

Mixed Signals?

Are you in or are you out?

Will ConocoPhilips flinch first? (LINK). BP's short on cash, ConocoPhillips is saying the wrong things - maybe by Christmas the projects will merge?

$6 per MCF

I like to follow the plans of Shale Gas leader Chesapeake - they like the idea of $6/mcf gas and want to shift gears and target liquid rich plays.

Good! $6 / mcf is the kind of basement price that can help the rate of return of the Alaska Gas Pipeline.

Concerned about Shale Gas?

Check out shale gas heavy weight Chesapeake Energy's August 2010 Investor Presentation.

They want to sloooooow down drilling until gas prices reach $6/MMBTU and they are looking for more liquids.

(See page 6 of the presentation)

That puts the shale gas threat in perspective. $6/MMBTU gas sounds like a market for AK gas really does exist.

LINKS of the Week

ConocoPhillips Alaska boss killed in avalanche

Chinese Seen As Potential Alaska Gas Customer (Investing in AK gas/LNG makes more sense then buying 0.01% US Govt. Bonds)

ACES has put many Alaskans out of work

South Korea to begin gas hydrate and continental shelf development in 2010 (Huh?)

Gas market goes global - Shale's impact felt around the world

Denali's January 2010 FERC report

The Development of a Global LNG Market Is it Likely? If so, When?

Point Thomson Success

ExxonMobil Reaches Target Depth at First Point Thomson Well.

Plan the work, work the plan - What's not to love about this news? Politicians be damned. This team has a plan to develop the gas that will fill the pipeline.

From the Press Release: ExxonMobil drilled the well to a measured depth of over 16,000 feet. The shore-based rig directionally drilled under the Beaufort Sea to the targeted gas reservoir more than 1.5 miles offshore.

“This is another successful milestone for the Point Thomson project,” said Dale Pittman, ExxonMobil Alaska production manager.

ExxonMobil Senior Project Manager Lee Bruce added, “PTU-15 pushed the limits of drilling technology and demonstrated that the Point Thomson drilling plan is sound.”

The rig will be moved to the second development well at Point Thomson (PTU-16) and continue drilling. Work continues on front-end engineering and design for the initial production system.

Weekly Links

No earth shattering news this week, but here's a few links and items worth keeping an eye on:

LNG demonstration video (LINK) Spoiler Alert: It's cold, it burns, and the dude has a Bic lighter.

LNG Presentations - Who's got it, who wants it and what they pay for it. (LINK)

An Alaska Gas Pipeline article from 1979 (LINK) The most delayed project in history?

Mackenzie Gas Project Report due 31 Dec 09 (LINK).

TransCanada Alaska Pipeline Project's Pre-Filing Monthly Activity Report November 2009. PF09-11-000. (FERC WEBSITE LINK) Yawn....

Denali November09 Status Report (FERC WEBSITE LINK) Notable quote "lack of progress on the State of Alaska’s fiscal regime for natural gas production"

A road to somewhere (with oil) (LINK)

AGIA Report

LINK to the State of Alaska Department of Revenue Department of Natural Resource Report Alaska Pipeline Project Report - Licensed under the Alaska Gasline Inducement Act (AGIA) dated 31 October 09.

Pipeline Progress Update

A good summary update from the Anchorage Daily News: (LINK)

In State Gas Lines Proposed

Building on the success of the AGIA gas line, Governor Palin proposes in-state gas lines (LINK).

Pre-warning for anyone who thinks they'll heat their home for Henry Hub gas prices (~$4/MMBTU). In most locations the cost of distribution is greater than the cost of the gas. I'll post a link as soon as the EIA website is working.

With no economy scale are these pipelines even remotely feasible?

Any reality checks from industry - leave a comment.