Alaska LNG: A New Global Competitor?

A new large-scale proposal to export natural gas from Alaska could bring a new competitor into the race to export North American product to Asia.

The plan is being hailed by many as a move that could pressure Canadian exporters to up the pace at which natural gas projects are moving ahead. Until recently, investor focus has been primarily centered on the Pacific Trail Pipelines Limited Partnership, a consortium aiming to build a $4.5-billion-plus liquefied natural gas (LNG) terminal in Kitimat. First exports from the terminal are anticipated early in 2016.

New details relating to the Alaskan scheme note that the estimated cost of the project is between $45 billion and $65 billion. It involves an 800-mile pipeline that will move gas from Alaska’s North Slope to a port near Valdez, or Anchorage, where it will be liquefied for tanker transport for export to markets in Asia. Citing the North Slope’s conventional gas reserves of 35 trillion cubic feet (Tcf) and more than 200 Tcf of undiscovered resources — coupled with the scope of the proposed project — Alaska Governor Sean Parnell stated that the project will be “one of the largest in the world.”

Influential corporate backers

Besides the profit potential of shipping gas to Asian markets, investors will no doubt be paying increased attention to the scheme based on the stature of its backers — namely BP (NYSE:BP,LSE:BP), ConocoPhillips (NYSE:COP), ExxonMobil (NYSE:XOM) and TransCanada (NYSE:TRP,TSX:TRP) — which have finally pooled their resources and financial sway following years of competition. The partners confirmed that they already have a team of more than 200 people working on the project and commented that BP is taking the lead role on the commercial side, while Exxon will lead the technical side.

The group’s intent in seeking to advance the project is underlined by a joint letter to Governor Parnell, which states: “Individually, each of these components would represent a world-class project. Combined, they result in a mega-project of unprecedented scale and challenge.” However, the group also recognizes that “significant environmental, regulatory, engineering and commercial work remains to reach upcoming decisions to bring North Slope gas to market.”

Previously, TransCanada and ExxonMobil had drawn up plans to build a $40-billion pipeline to connect North Slope gas to the Canadian pipeline system and the lower 48 states; however, earlier this year the partnership and pipeline sponsors agreed to instead shift focus to the LNG export project.

A study in superlatives

With a price tag of at least $45 billion — and perhaps more than $65 billion — the Alaskan project is a study in superlatives, according to The Globe and Mail. If it reaches the production phase it will require the construction of facilities able to load between 3 billion and 3.5 billion cubic feet (Bcf) of natural gas per day onto vessels bound for Asia. That would see the Alaskan terminal effectively elbow itself into a market that has, until now, been the focus of a number of global producers, “with numerous LNG terminals either being proposed or built in Qatar, Australia and elsewhere.”

Challenges remain

Despite the obvious investor buzz surrounding the announcement, top-ranking officials have warned that the progress made so far does not yet amount to a commitment, underlining that the work remaining is immense and that there is a possibility that the project may never materialize.

In 2010, TransCanada announced to potential customers that an 803-mile pipeline to Valdez, which included a treatment plant to extract water and impurities from the natural gas, would cost between $20 billion and $26 billion. The new proposal includes the cost of a natural gas liquefaction plant, which increases the overall project costs substantially, according to Tony Palmer, TransCanada’s vice president.

Increasingly narrow window

If this project is given the go ahead, a significant amount of investor interest is bound to shift west of Northern British Columbia’s gas projects. There are presently seven projects under development or consideration in BC, and if they all go online successfully, the amount of gas they produce will amount to several times the volume of daily exports that might flow out of Alaska.

However, it is not necessarily volume of export potential that will top investor checklists; the distinct advantages that Alaska holds may prove more important. The state is located nearer to Asian markets than many of its competitors, and would be making use of supplies that are considered more reliable than large portions of BC’s shale gas reserves, where few projects have reached the production phase.

In an interview with The Globe and Mail, Jihad Traya, a Calgary-based associate director of North American natural gas for IHS CERA, noted that the project’s timeline also underlines the fact that the window is narrowing for BC projects to construct and commence production.

“It is a tight global market, meaning that there is more supply being proposed than potential markets,” he said. He added that Canadian projects are already at a disadvantage in comparison to other parts of the world. “We’re somewhat behind the eight ball when it comes to getting the developments rolling, getting the contracts signed, getting the facilities built.”

He concluded that from that perspective, the Alaska plan “does add some element of pressure.”

Oil vs. gas scenario

Meanwhile, Cathy Foerster, a commissioner with the Alaska Oil and Gas Conservation Commission, noted that the project presents more than just cost complications in that oil and gas companies on the North Slope are only now producing roughly the amount of gas volume needed to make the export project a success.

However, the difference between actual export potential and current supply is that gas presently being extracted is being re-injected underground in an effort to maintain the pressure needed to stimulate oil flow. Foerster confirmed that Alaskan oil volumes have already declined — down to 517,000 barrels a day in September after averaging 600,000 last year — and that if this gas supply is taken away, there will be “irrevocable losses” to the state’s oil supplies.

While the Alaskan project is still in its conception phase, it does provide food for thought for investors moving forward. While many may consider the project a threat to investments already made in areas such as Northern BC, others might welcome the move in that it is certain to result in companies seeking to up the pace of projects already moving ahead. At current gas prices, many feel that this project simply does not make economic sense. However, the market is showing no shortage of natural gas bears, and if the commodity’s economics improve, a large-scale project of this nature could very well become an investor favorite moving forward.

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.