Economics of Alaskan and US Gulf Coast LNG Projects

on March 04, 2014 at 12:00 PM

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A myriad of countries and companies around the world are feverishly trying to access Asia’s high-priced LNG market. Sudden discoveries of vast new and economically exploitable natural gas deposits – the shale revolution in the U.S. – have created the opportunity for many countries to become net exporters of natural gas and to challenge the ‘primus inter pares’ of the Asia LNG export market, Qatar. In the U.S., Cheniere Energy expects its Sabine Pass – the largest U.S. liquefied natural gas export terminal in coastal Louisiana – to deliver its first LNG cargo to Asian customers in February 2016. Anticipated dates should, however, be taken with a grain of salt. Project cost overruns and associated delays are a relatively common occurrence in the energy industry.

Alaska lng1

Source: The Globe and Mail

Recently, EIA Administrator Adam Sieminski gave an interview to, in which he explained how the expansion of the Panama Canal is connected to seaborne U.S. liquefied natural gas exports:

“What they’re doing is widening the Panama Canal. They’ll make the Canal itself wider and the locks longer, and the net result will be the potential to save in transportation costs through the use of larger oil tankers and LNG tankers. This offers an opportunity to reduce the costs associated with global trade. (…) There have been some cost and labor issues, but I’m sure those will be resolved and this expansion will eventually be completed. When that happens, it’s going to reduce the cost of moving goods back and forth between the Atlantic and the Pacific, and that’s going to apply particularly to things like liquefied natural gas and oil.”

Sieminski alludes to the substantial transportation costs involved in potential U.S. LNG exports. Transportation costs are a significant part of any LNG export equation and can challenge competitive pricing. The current dispute over who should pay the higher costs of widening the Panama Canal puts in limbo the canal’s completion date of June 2015, even though the expansion of the canal is about 70 per cent complete, the Wall Street Journal reports. This creates uncertainty for all market participants. Note, the relatively low Henry Hub gas spot benchmark price in the U.S. will not alone keep newly planned and/or constructed U.S. LNG projects on the U.S. Gulf Coast globally competitive.

According to Reuters, the widening of the Panama Canal – indispensable for LNG tankers – will entail a significant reduction in transportation cost for U.S. LNG exporters by shortening the passage to Asian markets in Japan, South Korea and China. Reuters cites data from the LNG shipping consultancy Platou stating that only 21 of the existing global fleet of about 370 LNG tankers are currently able to pass through the Panama Canal. Therefore, not only would the distance to ship U.S. LNG from the U.S. Gulf Coast to Asia fall to about 9,000 miles from 16,000 miles upon completion of the expansion work, it would also enable more than 80 per cent of LNG tankers to transit through the canal en route to Asia. Those vessels would not be forced to reroute around the Straits of Magellan or Cape Horn along the Drake Passage over the tip of South America.

Alaska lng2

Source: IEA – World Energy Outlook 2013

The next chart shows natural gas liquefaction and its seaborne shipping becomes cheaper than transporting natural gas in offshore pipelines for distances of more than 700 miles or in onshore pipelines for distances greater than 2,200 miles.

Comparison of Natural Gas Transportation Costs Relative to Distance

Alaska lng3 It is in this context that Sieminski’s following statement during the interview has to be viewed:

“We think that there might also be some production, believe it or not, from Alaska, because the economics ultimately will favor construction of an LNG facility in Alaska that would allow production from the associated gas in the North Slope of Alaska.”

Sieminski refers to the Alaska South Central LNG (SCLNG) project, which could receive approval from the Alaskan state legislature in the near term. The giant project is estimated to cost between $45 billion to $65 billion for a gas treatment plant on the North Slope, a 800 mile long pipeline transporting North Slope natural gas south to a new gas liquefaction plant in Nikiski on the Kenai Peninsula and eventually to a new port with a shipping terminal to export LNG to Asian markets. The project would have the capacity to export 15 million to 18 million metric tons of LNG annually. According to a recent Bloomberg report, Alaska plans to help fund this massive LNG project by joining ExxonMobil, BP, ConocoPhillips and TransCanada as an equity partner, which improves its prospects.

It is noteworthy that while North Slope oil production steadily declines, there is at least 35.4 trillion cubic feet of proven – i.e. economically producible – associated-dissolved natural gas reserves in the four existing North Slope oil fields at Prudhoe Bay, with additional probable natural gas reserves in the area according to the EIA. Moreover, the existing Kenai LNG plant – built in 1969 and today still owned by ConocoPhillips  – used to be the U.S.’s only LNG export facility with Japanese utilities as primary customers and a reliable track record. Thus, even though six years of construction are not expected to begin before 2018, this Alaska LNG project could outcompete U.S. Gulf Coast projects in the medium to long term in term for at least two reasons. First, for an LNG export facility to be economically viable, the operators typically require a committed natural gas resource with sufficient reserves for at least 20 years, which is generally period needed to amortize capital costs incurred.

Given the robust knowledge of Alaska’s North Slope geology, the gas resource volumes are well understood and technological advances could shift a portion of the region’s probable reserves into the proven category.

And second, LNG projects remain highly dependent on site-specific factors, meaning that Alaska is closer to Asia, which cuts down on shipping costs. Thus, even though North American projects appear to have a comparative advantage because they offer customers pricing indexed to the U.S. Henry Hub benchmark price, there is a significant degree of uncertainty regarding LNG market conditions at the time of project completion. In the EIA’s Reference case forecast (AEO2014), the Henry Hub spot natural gas price reaches $4.80 per million Btu (MMBtu) (2012 dollars) in 2018 and eventually rises to $7.65 per million Btu in 2040 with production reaching 37.5 Tcf the same year.

But not all approved and/or planned global LNG projects will be constructed, which could result in thinner global LNG supplies than currently forecast. Alaskan LNG could outcompete some U.S. Gulf Coast LNG projects based on proximity to Asian markets and thus lower shipping costs, as the following charts indicate.

Global Sea Routes – Comparative Advantage of Alaska LNG

Alaska lng4

Source: Alaska Support Industry Alliance

Shipping Distances to Asia from Kenai (Alaska)

Alaska lng5

Source: Alaska Natural Gas Transportation Project