Oil Prices Rise As BP Shuts Pipeline

The future of Alaska’s abundant natural gas reserves has hung in the balance for decades, with much disagreement over how to maximize value for the disparate stakeholders and minimize negative environmental impacts associated with developing the gas. However, the US energy picture has been radically redrawn in recent years, finally putting a potential solution within reach.

This issue will feature prominently at the 32nd US Association of Energy Economics North America Conference taking place in Anchorage this July, as industry representatives exchange ideas with government officials, the academic community and other energy market participants.

For many years, the Alaskan natural gas discussion circled around various options for piping the gas to the lower 48 states, but as the shale revolution continues gathering steam – depressing prices and US demand for Alaska’s gas along the way – the rationale for a pipeline has been mooted. Much like in the contiguous states, LNG exports are the talk of the town in Alaska these days.

ExxonMobil, ConocoPhillips and BP, along with TransCanada, are mulling an LNG export development project linked to North Slope gas.

The gas reserves in question – estimated at 35 trillion cubic feet, which is half of Canada’s total proven gas reserves – are mostly associated gas produced along with North Slope oil in the Prudhoe Bay area. The potential export project under discussion would move the gas 800 miles south, liquefy it and transport it to – hopefully – eager buyers in Asia, Larry Persily, Federal Coordinator for Alaska Natural Gas Transportation Projects recently told Breaking Energy.

“The project is expected to cost $45 to $65 billion, so how do you finance that? It’s not like buying a car, he said.”

“Who are the partners? You gotta have the buyers, the markets etc. So do you finance it with cash flow from company balance sheets? Do government export/import banks get involved? It has to do with the financial wherewithal of the developers,” explained Persily.

There are numerous financing strategies for projects of this magnitude – Persily recently co-authored a paper on LNG project finance that he’ll discuss at the USAEE conference – and they are all currently on the table. Companies decide whether to go forward, then decide on financing arrangements, he said. “Maybe they would want to go it alone, or set up some kind of venture to help finance it, maybe they would want to bring in partners. In Asia, government entities are helping finance because it’s in their interests, they want the gas.”

Can Policy Help the Project Get Built?

Asked what policies government could put in place to stimulate the export project’s development, “there’s no answer to that,” he said. “Government can’t take an uneconomic project and make it economic, unless they want to write a $50 billon check.”

“At some point the state and companies will have to discuss fiscal terms, at some point this will come into play and they will have to decide if it makes sense.”

“It’s not like a baseball stadium where a government can build an uneconomic project and jack up rental car rates and other services to make up the difference, a gas line doesn’t work like that,” said Persily. “The state and the companies will still have to figure out what’s a fair arrangement regarding taxes and royalties.”

This is an issue the oil industry and Alaskan Government have butted heads over for years. The state recently announced a controversial tax decrease – read more on that from Breaking Energy here.

ExxonMobil, ConocoPhilips and BP own the reserves, while TransCanada would take the lead on the pipeline portion. Sometimes it can be difficult for these large companies to cooperate on projects, with squabbles over operatorship and decision making in general – Exxon in particular is known for favoring a “go it alone” approach, whenever possible.

However, in this case working together is “a necessity,” according to Persily. “No company would take on a project of that size without spreading the risk and since they jointly hold the leases/own the gas, they have to work jointly,” he said.

Oil and Associated vs. Non-associated Gas

The companies have produced oil from Prudhoe Bay since 1979, with dramatic output declines in recent years. “Prudhoe Bay will not be producing [oil] forever,” Persily said. The natural gas produced along with the oil – known as associated gas – is currently reinjected into the reservoir to maintain pressure that keeps oil flowing through the production wells. This process is known as enhanced oil recovery. As oil output continues declining, there comes a point when producing the gas makes more economic sense.

“What is the value of the oil you might not get versus the value of selling 35 Tcf of gas? The answer is pretty clear, selling the gas will give you more value,” said Persily. The gas also happens to be rich in CO2 (12.5%), which can be stripped out and reinjected for EOR, he said.

Cannibalizing their Global LNG Portfolios?

Inasmuch as Exxon, Conoco and BP are global companies with extensive worldwide LNG operations, some have made the argument that Alaskan LNG production would compete with volumes from their plants in other regions. But Persily dismisses this as a “paranoid illness that’s affected Alaska for decades.”

“Yes, there is a global market for gas, and every molecule competes with every other molecule. So yes, Alaska will have to compete with other projects. But unless you convince Walmart to spend $50 billion to build the project, you will have an energy company building the project, and usually large energy companies have more than on project. If not an energy company, then who else? It’s an emotional argument that ignores reality. If the Alaska project offers the best return with the least risk, it will get built.”