Project Progress Report posted on line

Here's a link to the progress report letter.

More analysis to follow.

Customers

Good to see Governor Parnell with LNG customers.  Until now customers have been the missing part of the Alaska LNG equation.

Chairman Mitsunori Torihara of Tokyo Gas Co.

President Naomi Hirose of Tokyo Electric Power Co.

President and CEO of Korea Gas Corporation, Kang Soo Choo.

Almost There

After years of nattering nonsense we are starting to hear the right kind of stories about the Alaska Gasline project - stories about customers. All those cliches about "the customer is always right" are true.   LNG is not a commodity (yet) so Alaska must have a long term buyer lined up and participating in the LNG project.

The good news includes a piece in the Alaska Dispatch by Amada Coyne. Apparently a Japanese group called Resources Energy Inc is in Alaska with boots on the ground exploring a gas project.

The next bit of good news comes from the Asia Pacific Energy Research Centre LNG Producer - Consumer Conference recently held in Tokyo.  All of the presentation slides are worth reading, but its great to see Alaska Department of Resources Commissioner Dan Sullivan making the case for Alaska gas to a group of buyers (Dan's Slides).

A smart LNG buyer would negotiate to buy Alaskan gas at a tidewater and be a major equity partner in an LNG facility.  The good news is that there are some smart buyers out there and the stars may start aligning soon.

A Good Week

Good news #1.  Alaska Governor Sean Parnell is making the rounds in Korea and Japan doing what an Alaskan Governor should have been doing since the price of natural gas tanked four years ago.  The Governor's web site features a picture of the Governor smiling, standing next to the US Ambassador to South Korea. That's worth one cowbell, but no more.  Next time the photo op needs to include a living breathing smiling LNG customer.  LNG buyers are making a push to de-link LNG prices from crude oil prices (LINK).  This could be the right time to offer the first delinked LNG supply.  Imagine a long term contract based on cost plus a fixed fee with cost escalators to track inflation rather than the roller coaster linkage to crude oil prices.  Reduced risk for the buyers, producers, and transporters should make a project more appealing.  It's time to get creative Governor.  Buyers want to commoditize LNG - run with that.

Good news #2  Great Bear wants to accelerate their drilling program. Actions speak louder than words.  Keep it up!

September is drawing to a close - still hoping for some more good news.

Mid September Blues

I had some high hopes for the Valdez LNG Summit (LINK) held this past week, but a summit with no buyers and no sellers isn't much of a summit.  I also hoped that the summit would correspond with Governor Parnell's Third Quarter 2012 milestone:

Third Quarter 2012: Two State-funded groups working on parallel projects must complete discussions to examine consolidation prospects. The groups are the North Slope producers and TC-Alaska (MOU parties) and the Alaska Gasline Development Corporation (AGDC).

There's two weeks to go to make this milestone, so remain patient.

So where are the buyer and the sellers? In a word: Canada. Spectra Energy and BG Group are hatching a plan to build a 500 mile pipeline to Prince Rupert for LNG export (LINK).  The stated capacity is 4.4 BCFD at a cost of $8 Billion.  Compared to the $20 Billion Alaska Gas Pipeline to Alaskan Tidewater the Spectra/BG pipeline is less expensive and it moves more gas.  Possible construction start date : 2015.

British Columbia Premier Christy Clark thinks Apache will win the race to export BC LNG. She may be right.  It's a sure bet that BC LNG will beat new Alaskan LNG to Asian markets.  Premier Clark said “We are moving at lightning speed to try to enable this,” she said. “We need to be in the exports market sooner rather than later to lock up those contracts.”

Wow! Great quote, I wish Sean Parnell had said that.

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.

Kitimat Study Released

The next phase in development of the Alaska Gas Pipeline as defined by Governor Sean Parnell will be:

Third Quarter 2012: Two State-funded groups working on parallel projects must complete discussions to examine consolidation prospects. The groups are the North Slope producers and TC-Alaska (MOU parties) and the Alaska Gasline Development Corporation (AGDC).

While waiting for this milestone you might want to read some good papers from the Canadian Energy Research Institute (CERI) Website.

The latest paper titled "Pacific Access:  Part III - Economic Impacts of Exporting Horn River Natural Gas to Asia as LNG" is written from the perspective of Canadians analyzing the proposed Kitimat LNG project.  A lot of the data applies to decisions facing Alaskans.  The paper is well referenced and you can glean a lot of data.  For example: Total LNG Exports equal about 240 mmtpa.  The proposed Alaska LNG project would  added about 20 mmpta to that total, approximately 8% of the total market.  Capital cost of LNG plants are also addressed.  There's a fair amount of quantified data on shale gas production cost too.  File that under good-to-know but remember all shales are not equal and Alaskan shales are not yet proven producers (Although I'm wishing Great Bear the best of luck).

Another good reference is the KBR report titled "LNG LIQUEFACTION —NOT ALL PLANTS ARE CREATED EQUAL"

I hope these provide you something to read and study as we patiently await the September kumbaya milestone. My definition of September success is projects merged into one common plan.