Department of Energy Filing

From Governor Parnell's website:

July 21, 2014, Anchorage, Alaska – After ensuring that Alaska’s gas could go to Alaskans first, Governor Sean Parnell today lauded Alaska’s LNG Project for applying to export liquefied natural gas (LNG). The application was submitted to the U.S. Department of Energy.

“We are building Alaska’s future with a gasline to heat our homes and fuel Alaska’s businesses,” Governor Parnell said. “Alaska’s LNG Project is on the right track with hundreds of Alaskans out in the field this summer working to secure permits and hundreds more working to refine the engineering and design challenges of the project. I am committed to getting Alaska’s gas to Alaskans and then to markets beyond. I look forward to continued progress on this important project.”

The application requests authorization to export up to 20 million metric tons per year of LNG for a period of 30 years. The application seeks to export to countries that have existing free trade agreements with the U.S. and to non-free trade agreement countries.

Link to Platts (more detail)

Alaska-LNG website press release

SB - 138 Signed

Alaska Governor Sean Parnell has signed SB-138, the legislation that may enable the Alaska gas pipeline and LNG plant.

Link to Press Release

The BIG Agreement

Memorandum of Understanding (MOU)

Heads of Agreement (HOA)

AGIA TERMINATION / SKIN IN THE GAME

 Ding Dong AGIA is dead. Any predictions on the degree of State participation?  I'm guessing an eighth or more.  An eighth would equal $7.5 billion which should be a manageable figure for the state.

Why this is Good:

1. AGIA may have worked in a shale gas free world,but it was absolutely doomed after shale gas gathered momentum in the lower 48.

2. State participation gives the project better financing  options and terms.

3.  Alignment - State interest are better served as partners.

4.  Revenue - as an investor the State stands to receive a return on the investment.

5. Agreements are forthcoming - I have to assume the Governor wouldn't make this announcement unless the grand deal was about to signed.

6.  A Flat Gross Tax on gas sounds like fiscal certainty at long last?

What would make this better:

1. LNG Buyer participation - nothing says that won't happen, but LNG customer participation could strengthen the project. 

What could go wrong:

1. Just about anything and everything can go wrong at this stage.  The problem with grand deals is that somebody or group will feel left out or abused by the deal, then the lawsuit phase of the project begins.  I hope the project survives that stage but hang on to your hat.

Good luck Governor, this is a big step in the right direction.


Press Release from Alaska Governor Sean Parnell (LINK), text:

January 10, 2014, Anchorage, Alaska – Governor Sean Parnell today announced that the State of Alaska will pursue becoming an equity partner in the Alaska LNG project. The governor also announced the state will terminate its involvement with TransCanada as its licensee under the Alaska Gasline Inducement Act (AGIA), and partner with the company in a more traditional commercial agreement.

“For the first time in our state’s history, the framework is in place to build an all-Alaska gasline on Alaska’s terms and in Alaskans’ interests,” Governor Parnell said. “We have all the necessary parties to make an Alaska gasline project go - three producers, a pre-eminent pipeline builder, an entity in AGDC that can carry Alaskans’ interests, and state agencies responsible for the royalties and taxes.”
The governor stated he soon expects a commercial agreement, known as a Heads of Agreement, for the Alaska LNG project. The agreement is anticipated to be signed by Exxon, BP, ConocoPhillips, TransCanada, the Alaska Gasline Development Corporation (AGDC), and by the commissioners of the Departments of Revenue and Natural Resources. The Heads of Agreement will be subject to public review by the Legislature.

“As a partner in the gasline project, Alaska will control its own destiny,” Governor Parnell said. “Ownership ensures we either pay ourselves for project services, or negotiate and ensure the lowest possible costs. As a partner, Alaskans stand to gain more.”

Governor Parnell also intends to introduce legislation addressing how the state will manage its gas resources by authorizing the Department of Natural Resources to modify certain leases, and enter into shipping agreements to move and sell the state’s natural gas. The legislation will propose moving from a variable net tax to a flat gross tax for North Slope gas, allow certain leases to pay production taxes with gas, and enable the Departments of Revenue and Natural Resources to manage the state’s gas revenues.

“While most Alaskans have seen past efforts to develop a large gas project falter for various reasons, this time is different,” Governor Parnell added. “AGDC is our ‘ace in the hole,’ meaning we can still opt for the smaller volume ASAP project.”
###

Video

Stand Off ? Game Over ?

Platts reports that the State of Alaska "will withhold an offer of special state fiscal terms for a large North Slope gas pipeline and liquefied natural gas project until companies working on the project reach agreement on terms among themselves to proceed with the project"

Interesting news - Obviously the AGIA project team of TransCanada and ExxonMobil will need to agree to abandon AGIA for new undisclosed agreement and project structure.

If TransCanada and the North Slope producers assemble a new project structure will the new project include an equity position for the state? And what about the Japanese (JBIC & REI) I'd like to think customers with money to invest would have a role on the project.

There are a lot of moving parts here and the state of Alaska and the producers have spent years and millions of dollars with very little to show for their efforts.  The clock is ticking down and I see Governor Sean Parnell losing the game in the last second.

The first big loss happened on Sarah Palin's watch - The gas line was almost a reality when North American shale gas burst upon the scene.  North Slope producer ExxonMobil bet big on shale gas ($40billion) and bought XTO.  Fractional term Governor Palin's introduction of AGIA burned valuable time off the clock and the win went to gas investments elsewhere.

The full impact of shale gas was not immediately apparent and it took some years for the overland Alaska gasline to morph into an all-Alaska gasline feeding an LNG export terminal.

Along the way fate dealt Japan a cruel hand in the form of a devastating earthquake which also destroyed nuclear plants at Fukushima.  The magnitude of the Fukushima disaster resulted in the closing of all nuclear plants in Japan and a dramatic uptick in Japan's need for imported energy including LNG.

Somehow the state skillfully avoided the obvious and failed to engage with Alaska's long term LNG customer to strike a deal.

Meanwhile cheap shale gas in Texas and Louisiana prompted many Gulf of Mexico LNG import terminals to invest in LNG export projects.  Soon, the first loads of GOM LNG will hit the market.  A portion of those sales will go to Japan.  Again other projects are getting built while Alaska make no progress.

The losses keep piling up. Maybe Governor Parnell knows what he's doing but the producers have hundreds of competing projects with known variables competing for their investment dollars.  In fairness to the Governor he did win the battle of Point Thomson so I have some level of faith in his abilities.

Other opportunities exist (state equity position, and low interest customer government backed financing).  Again Alaska is avoiding the win or ignoring the clock, either way investment dollars are poised to go elsewhere.

The clock is ticking, and oh by the way interest rates are heading up. Spoiler Alert Governor Parnell - interest rates will kill the gas line for decades unless the grand bargain is reached in 2014.

LNG Project Presentations

The project concept letter from last week was brief and left readers wanting more detail.  This week Mr. Steve Butt Senior Project, Manager Alaska LNG Concept Selection provided a presentation "Progress Exxon/Mobil ConocoPhillips BP &, TransCanada Have Made to Advance North Slope, Natural Gas Development"

LINKS

Video

PDF

Thanks to Matt Buxton, Government Reporter, Fairbanks Daily News-Miner  for providing the links.

I think you'll find the presentation is more informative than the letter.



 

The $65,000,000,000 Question

Can we build a pipeline project that will make all of Alaska's natural gas dreams come true for $65 Billion?  Dermot Cole doesn't think much of the recent letter sent to Governor Parnell, he says the letter doesn't show much enthusiasm.  To a certain degree Mr. Cole is right.

The $65 Billion price tag is a reality check.  If Alaskan LNG is priced to compete in the global market the project may move forward.  I estimate the base price of Alaskan North Slope gas LNG at around $12/MMBTU before operation cost and taxes are added. At current oil prices, oil indexed LNG trades in the $16/MMBTU range.  The global LNG consumer community want to de-link LNG from crude oil or discount LNG from crude. According to the Federal Energy Regulatory Commission (FERC) Japan and Korea currently pay about $13.80/MMBTU for LNG - the highest rates in the world.

The reality check shows that there is no wiggle room for pricing in excessive profits or taxes.  The whole project is at the ragged edge of feasibility.

Having said that Alaskan LNG has huge benefits that few other projects offer:

• Short Stable Shipping lanes .  The shipping lanes between Alaska and Asia don't have a Strait of Hormuz to deal with.  Asian LNG buyers need the diversity of supply the Alaska LNG project offers.
• Political Stability.  LNG from second and third world sources is always at risk of political disruption, especially in the new world of tweeting community organizers.
• Jobs for Equity Partners. You don't hear much about this but a project of this size will generate a massive amount of commerce in the Asian countries that build modules and pipe for the project. It's possible that equity partners could spend 100% of their project cost within their own borders.
• Conventional Gas. I support shale gas development, but investing in a large, developed conventional gas resource is more predictable than investing in an undeveloped shale gas resource. 

Project alignment is good and it's good to get the scary reality check estimate out in the open. The Governor, Dan Sullivan and Senator Lisa Murkowski are all out in force saying the right things and engaging with potential LNG customers.

With a bit of luck, more will detail will develop and the project will move forward.

Project Progress Report posted on line

Here's a link to the progress report letter.

More analysis to follow.

One Message: Alaskan LNG

At long last Alaskan leadership is on message with the same story: LNG.  Lower 48 shale gas killed the gas pipeline to Canada.  The pipeline is headed to a tidewater LNG plant.  We can still argue about the route, taxes, branch lines, straddle plants and natural gas liquids, but consider the main project objective settled.

On Wednesday Dept of Natural Resources Commissioner Dan Sullivan and Dept. of Revenue Commissioner Bryan Butcher approved TransCanada's Project Plan Amendment (PPA) which switches the gasline focus to commercialization of Alaskan gas a LNG for export (LINK to approval letter).

Meanwhile Senator Lisa Murkowski is in Japan talking Alaskan LNG (LINK).  DNR Commissioner Dan Sullivan also pitches Alaskan LNG in Asia (Slides).  Of course Governor Parnell is on message with his support of the LNG project (LINK). Finally the North Slope producers are aligned (LINK).

Looks like the end of the beginning.

Northern Pipelines - On Hold

Low gas prices can't support Arctic gas pipelines:

First the Mackenzie Pipeline (Calgary Herald link) and quote:

CALGARY - Partners in the proposed Mackenzie Valley pipeline have put the $16.2-billion project on hold, slashing budgets and eliminating staff in response to continued poor price outlooks and lack of commercial support.
Imperial Oil, the lead producer in the project with a 34 per cent interest, will close offices in Norman Wells and Fort Simpson, Northwest Territories, this year, and has reduced the size of its office in Inuvik, N.W.T., spokesman Jon Harding said Thursday.
Cheap shale gas that pulled down prices, and cost escalations played into the partners' decision to cut capital on the pipeline project, he said

Back in Alaska pipeline company TransCanada has asked permission to curtail work on the eastern part of the Alaska Gas Pipeline (LINK) and quote:

TransCanada has asked the commissioners of Natural Resources and Revenue to allow it to "curtail" its work on a line that would run from Alaska's North Slope into Alberta, Canada, to focus on a liquefied natural gas project, said Tony Palmer, the company's vice president for major projects development. TransCanada's piece of that project would be the pipeline.

So now there is one project with two probable phases. Alaska LNG pipeline Phase 1 (condensate to TAPS and gas Prudhoe Bay) then Phase 2 (Gas to tidewater + LNG plant).  Lots of permutations and iterations along the way, but many options are now off the table.  Expect LNG for Japan, Korea and China in about a decade.

Reaction to Point Thomson Settlement

Maybe it's a case of what was said doesn't equal what people heard.  Fairbanks News Miner columnist Dermot Cole heard the part about no commitments (LINK).  The Anchorage Daily News heard (correctly) that Alaska has a deal to develop Point Thomson Gas (LINK) . The Wall Street Journal heard that "Alaska, Gas Firms Clear Way For Pipeline" And many media outletS proclaimed that Alaska and Exxon have agreed to build an LNG plant "Exxon seals deal with Alaska to develop $26b LNG plant".

If you want to know that facts I suggest you look at the documents on the Alaska DNR website (LINK).

What you will find is that one of three alternative or combinations of alternatives will play out over time:

Alternative A - Major Gas Sale : Gas to a pipeline and liquids to TAPS.  The clock is ticking to get this alternative sanctioned by 2016.  The window closes in 2019 when the producers must choose Alternative B or Alternative C.

Alternative B: Increase cycling and produce more liquids for TAPS.  Producers must do this or start losing leases.

Alternative C: Gas to Prudhoe Bay, Condensate to TAPS.   The gas flow to TAPS "Significantly increases TAPS throughput" This alternative also provides gas for in-state use.

None of these options involve a guarantee from the producers. The stated goal of the agreement is "A primary goal of this settlement is to incentivize commercialization of North Slope gas/Major Gas Sale (MGS)"

Looking at these options you can see it's a bit over the top to claim a LNG plant is in the works anytime soon. Possible - maybe, probable no. On the other hand the State and the Producers have covered all the bases, and they have done so in away that allows development of Point Thomson in a way that can boost Prudhoe Bay production in the short term and develop a gas export solution later (i.e. Alternative C first followed by Alternative A).  Alternative B looks like the worst case scenario unless you count Alternative "D" Point Thomson abandoned.

Those are the facts, but what about perceptions?  The markets are focused on the potential of Alaskan LNG entering the global mix.  Alaska's competitors will need to pencil that volume into the mix.  Alaska's potential customers can now step up and start negotiating deals.

Any of these outcomes equal revenue and jobs - Good things for Alaska.

Point Thomsom Settlement Agreement

The full text of the Settlement Agreement is at the DNR website (LINK).  Notice the EOR role of Point Thomson gas.  That seems to be the one of the sure things of the agreement.   EOR helps fill TAPS which is always a good thing.  The agreement also leads to commercialization of gas for sale or a large scale cycling project - either way Point Thomson starts cranking out revenue.  I'm still reading the whole thing, but so far it looks like Alaska is on the road to some large projects.

Here are some key parts:


1.6 This Agreement sets forth the WIOs’ commitment to produce natural gas condensate liquids (“condensate”) from the Point Thomson Reservoir for delivery into theTransAlaska Pipeline System (“TAPS”). The WIOs have committed to construct anInitial Production System (“IPS”) which is to be completed by the end of the 2015-2016 winter season. The IPS facility is being designed to produce and re-inject (cycle) 200 million cubic feet per day of gas and to produce approximately 10,000 barrels per day of condensate. In addition, a liquid hydrocarbon pipeline is being designed that can transport approximately 70,000 barrels per day from Point Thomson to an existing pipeline interconnection at the Badami field, which will provide for final delivery of Point Thomson liquid hydrocarbons into TAPS. Operation and production from the IPS will provide data and information to assist in evaluation of additional development plans, including potential increased gas and condensate production from Point Thomson, and plans for the delivery of Point Thomson gas into a Major Gas Sale pipeline project.

1.7 In parallel with the work on the IPS, Parties and/or their affiliates to this Agreement will, upon execution of this Agreement, undertake work for commercialization of North Slope gas. This work will build on ongoing gas commercialization efforts. If a Major Gas Sale is Sanctioned prior to year-end 2016, the WIOs will begin work on a Point Thomson project associated with that Major Gas Sale. However, if a Major Gas Sale has not been Sanctioned by June of 2016, the WIOs have committed to begin engineering of a Point Thomson Expansion Project. An expanded cycling project would result in additional condensate production, totaling approximately 20,000 to 30,000 barrels per day into TAPS, depending on the level of expansion. Alternatively, a project to deliver Point Thomson gas to Prudhoe Bay for injection would significantly increase the rate of condensate production at Point Thomson, serve as a pre-investment for a Major Gas Sale project, and essentially complete installation of the Point Thomson wells and facilities required for a Major Gas Sale. In addition, this option would materially increase production at Prudhoe Bay, and result in enhanced recovery at Prudhoe Bay.

1.8 The Agreement further establishes terms and conditions to facilitate development and provide benefits to the State of Alaska. Certain acreage within the Point Thomson Unit is secured when specified work activities are completed (e.g., the IPS is completed and producing) and key commitments or decisions are made (e.g., a Major Gas Sale is Sanctioned or WIOs Commit to a Point Thomson gas development / Prudhoe Bay enhanced oil recovery project or an IPS gas cycling expansion project). Likewise, the Agreement provides for the automatic release of certain acreage to the State if the IPS is not completed or if certain key commitments or decisions are not made (e.g., a Major Gas Sale is not Sanctioned or WIOs do not Commit to a Point Thomson gas development / Prudhoe Bay enhanced oil recovery project or an IPS gas cycling
expansion project). Depending upon the work activities that occur, the Point Thomson Unit will remain in effect or may terminate.

2.13 “Initial Production System” or “IPS” means the gas cycling facilities designed with capacity to produce and re-inject (cycle) 200 million cubic feet of gas per day utilizing reciprocal compression and with the objective of a minimum of 10,000 barrels per day of condensate for delivery into the TransAlaska Pipeline System (“TAPS”).

2.16 “Major Gas Sale” or “MGS” means a large-scale pipeline project having a design throughput of more than 500 million cubic feet of gas per day that results in delivery of gas off the North Slope of Alaska.

2.21 “Point Thomson Gas Development / Prudhoe Bay Enhanced Recovery Project” means a project to deliver Point Thomson gas to Prudhoe Bay for injection that would significantly increase the rate of condensate production at Point Thomson into TAPS, serve as a pre-investment for a Major Gas Sale, essentially complete installation of the Point Thomson wells and facilities required for a Major Gas Sale, and allow for continued efforts towards, and positions Point Thomson gas for, a Major Gas Sale. In addition, this project would materially increase oil production at Prudhoe Bay into TAPS and result in substantial enhanced recovery at Prudhoe Bay. A Point Thomson Gas Development / Prudhoe Bay Enhanced Recovery Project would result in
production and recovery of liquids from Point Thomson and Prudhoe Bay that would be greater than production and recovery of liquids from Point Thomson from an IPS Gas Cycling Expansion Project of a minimum of an additional 20,000 barrels per day. Before Project Start-up required approvals from the Alaska Oil and Gas Conservation Commission must be obtained.
The project would consist of:
(i) a newly constructed gas pipeline from Point Thomson to Prudhoe Bay with the capacity to transport significant volumes of Point Thomson gas in an amount that would position Point Thomson gas for a Major Gas Sale, for injection for:
(a) use in repressuring, stimulation of production, and increasing ultimate
recovery of Prudhoe Bay oil; and (b) for ultimate availability for a Major Gas Sale; and
(ii) additional wells and facilities at Point Thomson to produce and process significant condensate production for delivery into TAPS through existing liquid hydrocarbon pipelines and pipelines constructed as part of the IPS Project. These facilities would also be used for a Major Gas Sale

New Focus On LNG "We Have Aligned"

Nothing to bank on but it sounds like the gas line project is morphing into an All Alaska line that will feed a tidewater LNG plant.  The first element of the plan is the Point Thomson settlement (LINK), and quote:

(Reuters) - The U.S. state of Alaska has reached a settlement with Exxon Mobil Corp and its partners to develop a huge, long-fallow oil and gas field, possibly paving the way for a $26 billion pipeline and an export plant for liquefied natural gas.
The settlement, which resolves a long-running lease dispute over the Point Thomson field about 60 miles (95 km) east of Prudhoe Bay, could allow for exports of liquefied natural gas via tanker to Asia and may boost Alaskan oil production after decades of decline.
In exchange for continued lease control, operator Exxon and partners BP and ConocoPhillips have agreed to build a pipeline from the field to deliver 70,000 barrels per day of liquids into the Trans Alaska Pipeline System.
The settlement also calls for the companies to produce 10,000 barrels per day of natural-gas condensates by the winter of 2015-16, state officials said.

That's a lot of condensate, I'm not sure where that flow will go but I'm looking forward to the project awards and jobs that will flow from this settlement.

The second element of this good news story is the possibility of an LNG export terminal (CEOs Letter to Gov. Sean Parnell). Quote from the letter:

Serious discussions between our  companies have taken place over  the past several months,
along wi th the Alaska Pipeline Project (APP) parties who are supporting the AGIA License.  We have aligned on a structured, stewardable and transparent approach wi th the aim to
commercialize Nor th Slope natural gas resources within an AGIA framework.  As a result of  the rapidly evolving global market, large-scale liquefied natural gas (LNG) exports f rom southcentral Alaska will be assessed as an alternative to gas line exports through Alberta.  In addition to broadening market access, a south-central Alaska LNG approach could more closely align wi th in-state energy demand and needs.  We are now working together on the gas commercialization project concept selection, which would include an associated timeline and an assessment of  major  project  components including in-state pipeline routes and capacities, global LNG trends, and LNG tidewater  site locations, among others. 

This isn't the slam dunk project sanction announcement, but it's close to the Kumbaya moment many of us have looked for.  The language is parsed, but you would like to think that the CEOs of the North Slope producers are at least 80% certain of a project before they signed up to "assess" an Alaskan LNG project.

The current trend in lower 48 shale gas prices lead me to believe that Alaskan LNG export is the last hope of developing Alaska's natural gas.  Full development of Point Thomson makes little sense without a viable outlet for the gas.

One certain take away is that all three producers are on Team AGIA now with the "We have aligned" statement.  Nice job Governor, don't stop now.

Additional LINKS

(Washington Post/Bloomberg Link)
(Gov. Parnell Website Press Release - Pt. Thomson Resolved, Aligment on Gasline)
(Alaska DNR Point Thomson website)

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.

More Lower 48 LNG Exports

The idea of lower 48 LNG exports is becoming a reality. A few months back Cheniere start the trend. I made this prediction last November:

What's next? - I assume the Cheniere business model is a good one and similar import terminals with the right ingredients will follow suit.  See page 38 of the Cheniere presentation (LINK) for plant volumes. 

This week the Department of Energy authorized Sempra to export LNG from the Cameron Parish Site (LINK), and quote:

HOUSTON -(MarketWatch)- The U.S. Department of Energy said Friday it has authorized Cameron LNG to export liquefied natural gas, opening the door wider for U.S. natural gas companies to send their bounty overseas.
The export permit is only the third awarded in the U.S. It allows Cameron, a wholly-owned subsidiary of California-based natural gas distributor and marketer Sempra Energy, to ship up to 1.7 billion cubic feet a day of LNG from its in Cameron Parish, La., facility to countries possessing free-trade agreements with the U.S. 

Here's a list of existing North American LNG import terminals with my analysis of proximity to shale gas (including the pipeline infrastructure to move the shale gas) Note, this table does not include the 2.8 BCFD proposed Gulf Coast LNG Terminal, Brownsville Texas:

The plan to convert LNG import terminals into an export terminals make sense for terminals located near shale gas fields and adequate pipelines. By this analysis there's good potential for four more new export terminals.  Two of those potential sites are controlled in part by Alaskan North Slope producers. I say this to illustrate the business decision before the producers: Build liquefaction  units at existing lower 48 import facilities -or- build a North Slope gas treatment plant, a $20 billion pipeline to Valdez, and a liquefaction at Valdez.  Obviously the Alaska LNG option is pointless unless North Slope gas is priced at a deep discount to Henry Hub.  How deep?  To defer the cost of $20 billion gas line to Valdez North Slope gas needs to sale for $1.50/MMBTU less than Henry Hub (based on a discount cash flow over 20 years at 5%).  

Now this isn't all bad news.  In the best case scenario the four import terminal near shale gas listed above are all converted to LNG export pushing the Henry Hub price of gas up into the $5 or $6/MMBTU range.  At that point in time Alaskan gas will not need to compete with the low capital cost of import facility conversion and the deep discount will not be a factor.  In the mean time it's important to remember the North Slope producers can sell LNG from lower 48 import terminals for less cost compared to building an pipeline to Valdez. 

Prediction - expect more announcements of lower 48 LNG import facility conversion to export.

For more information on the effects of LNG export see the  EIA report (LINK), and

Brookings Institution study on exporting LNG from the United States (LINK)

Three & One

Yesterday Alaska's Governor Sean Parnell met with the CEO's of ExxonMobil, BP, and ConocoPhillips to talk about commercialization of North Slope gas, boosting Alaskan oil output and Point Thomson.(LINK to Governors press release), and the agenda:

It's not a kumbaya moment yet, but I'll give the Governor and the CEOs credit  for manning up and doing the adult thing, i.e. start talking about the issues that are stalling development of oil and gas in Alaska.  This group should talk more often.  Quote from the Governor:

“I appreciate the willingness of the chief executives to come to Alaska to discuss the important topic of commercializing North Slope gas,” Governor Parnell said. “For a gas project to advance, all three companies need to be aligned behind it. This meeting is an important step, but much work remains.”

Nice work Governor, don't let up.

2011 - Year of the Yawn

I had greater expectations for the Alaska Gas Pipeline in 2011. To recap -

1. The open season process was expected to yield announcements of precedent agreements for long term commitments to ship gas.  The agreements may or may not have been reached, but no public announcement was forthcoming.  Chances are any agreements reached are so heavily conditioned that they represent no commitment to do anything in the here and now. 
2. In 2011 I expected a viable shipper for a 7 MMTPA Valdez LNG plant to step forward.  What actually happened was that Governor Parnell voiced support for a tidewater LNG project. The Governor's comments had the unintended consequences of delaying submission of resource reports by the Alaska Pipeline Project (TransCanada and ExxonMobil).
3. 2011 Started with two Alaska Gas Pipeline projects - The APP (TransCanada & Exxon Mobil) working to the scope as defined by the Alaska Gas Inducement Act (AGIA) and The Denali Project (ConocoPhillips & BP).  I had an expectation that the projects would merge in 2011.  Instead Denali folded in May citing "open season efforts have not resulted in the customer commitments necessary to continue work on its Alaska North Slope gas pipeline project".  

What's next? - for starters spot Henry Hub gas closed the year at $2.97/MMBTU (see chart for 2011 natural gas prices).   That's astonishing and sobering to any proponent of an Alaskan Gas Pipeline.  Gas that cheap in December is partially due to a mild lower 48 winter but mainly a function of  the glut of shale gas. The 200 day average price is right at $4/MMBTU - essentially the low profit range to drill and produce a shale gas well.

In 2012 the North American gas markets will have little appetite for Alaskan Gas.  Billions will be spent to build Gulf of Mexico LNG export capacity and preliminary studies will be launched to look into the viability of at least one lower 48 Gas to Liquids (GTL) plant.  Anti-fracking stories will continue with little effect on the continued development of lower 48 shale gas resources. The annual average price of 2012 gas may fall within the $3.50 - $5.00/MMBTU range. No new nuclear power will come on line in 2012, but a few gas fired plants will come on line to replace aging coal plants.

Throughout 2012 Alaskans will come to grips with the increasing unattractiveness of Alaskan Gas.  The best comment this year came from Steve Kirchhoff, Vice President – Americas, ExxonMobil Gas and Power Marketing Company in a presentation to the Resource Development Council of Alaska in this video. In this presentation Kirchoff states that "You can't dabble at LNG"

BP, ConocoPhillips OUT

The Denali Pipeline is discontinued for lack of customer interest. We can't says this is a real shocker. From day one we realized that two mainline projects was one too many.

Denali News release (LINK). Quote"

Denali – The Alaska Gas Pipeline announced today that its open season efforts have not resulted in the customer commitments necessary to continue work on its Alaska North Slope gas pipeline project, which has an overall estimated capital cost of $35 billion (2009 dollars). Denali will withdraw its Federal Energy Regulatory Commission pre-file application and, over the next few months, close out its operations.

“Denali is ending its efforts because of a lack of customer support,” said Bud Fackrell, Denali President.“Denali is a market-driven company. As such, we cannot spend the billions of dollars necessary to advancethe project unless we have binding agreements with shippers. Although we have been in discussions with potential shippers for nearly a year and half, we have been unable to secure the financial commitmentsnecessary to advance the project.”

Bloomberg article (LINK) Quote:

Larry Persily, the U.S. government’s federal coordinator for Alaska gas transportation projects, said in a statement that he hopes BP and ConocoPhillips can someday work with Exxon and TransCanada on a pipeline project.

“There could be a place in the market for North Slope gas in the 2020s and beyond, and the gas line is too important to Alaska’s economy not to keep trying,” Persily said.

The real question now is whether or not ConocoPhillips and BP will become customers of the last project standing - the Alaska Pipeline Project.

The Globe and Mail sees a possible win for the Mackenzie pipeline if the APP also stumbles (LINK).

2011 Alaska Gas Line Forecast

The big story for 2011 will be the results of the 2010 open seasons. Each pipeline project (APP* and Denali) will complete and execute precedent agreements where shippers make long term commitments to ship gas. Prediction: With a little luck we’ll hear some positive news on these agreements before the Nenana ice goes out (late April-ish).

To date we know that TransCanada (APP) did not meet its target for binding agreements by the end of 2010 (Fairbanks News-Miner 07 Dec 10). Imagine the difficulty of signing a binding contract loaded with conditional statements about tax rates, project mergers, the price of steel and long-term gas supply agreements. The project cost is also at risk due to uncertainty of interest rates. One day the Federal Reserve might just run out of ink and stop printing free money. That will jolt the bottom line of the project, although a small interest rate jolt might push the project in the right direction and cause a sense of urgency.

Maybe the APP delay is not a bad signal. The TransCanada AGIA proposal included a very notional estimate of the LNG option. It might take longer to execute the agreements if a viable shipper seeks to ship gas on a Y-Line LNG plant option smaller than the options outlined in the TransCanada AGIA base cases. For all we know a viable shipper may have bid to take gas off at Glennallen for in-state use. Prediction: Expect a viable shipper for a 7 MMTPA Valdez LNG plant, that's roughly equal to 1 BCFD, or half the notional capacity described in the TransCanada AGIA proposal.

The next big milestone, not shown on any official schedule, is the merger of the projects. The producers (ExxonMobil, ConocoPhillips, and BP), TransCanada and some surprise as yet unnamed shippers all know that they must converge at some point. Prediction: Project merger announcement in late 2011.

Of course my glass is half full, maybe two out of three of these predictions will come true. Best wishes for a happy and prosperous 2011.

*Nomenclature Note: Henceforth I’ll use the name “APP” to describe the Alaska Pipeline Project instead of TransCanada-ExxonMobil+AGIA.

Denali Open Season Ends 4-OCT-2010

Tomorrow marks the end of Denali's open season. Hundreds of millions have been spent on the Denali and the TransCanada open seasons, hopefully not in vain.

Three years down the road from passing the Alaska Gasline Inducement Act the world has changed a lot, mostly in ways that should make any sane person run like hell from this project - The international economy tanked, the price of oil and natural gas plummeted, and $6/MMBTU shale gas looks like it's here to stay. The pipeline contenders have experienced a wide range of fortunes over the past three years:

TransCanada - Continues to execute successful pipeline projects in North America like the Keystone pipeline - moving heavy Canadian petroleum products to the lower 48.

ExxonMobil - Earnings hit by declining commodity prices but now they are a big player in shale gas via acquisition of XTO. ExxonMobil is also adding Alaska Gas reserves by the bit up at Pt. Thomson. LNG, Shale Gas, Alaska Gas - it's all earning for ExxonMobil - they play to win.

ConocoPhillips - CEO James Mulva "re-evaluating the Alaska project in light of a glutted natural gas market" according to one report, followed by "Oh no - really we stand by the project" statements - I think the first story is closer to the truth, the re-eval will start next week.

BP - The Macondo blowout has cost BP at least $20billion and there's talk of a pull out from Alaska. It's unclear if a crippled BP brings anything positive to the table.

There's also some good news out there:

The shut-in price of Shale Gas seems to be holding at $6/MMBTU - I view that as solid base that will contain the Shale Gas glut.

The commodity price pendulum cuts both ways - Oil and Gas are cheap right now but STEEL is cheap right now. Engineers are cheap too and there are few major projects mopping up the excess - but watch out for the "recovery" when commodity prices recover.

Interest rates are out of this world cheap - Now is the best time in 30 years to fund a mega project.

I expect the pipeline project to continue sideways for at least the next year. Expect talk of project consolidation in the near term.