By Tim Bradner
After years of effort and hundreds of millions of dollars spent, are we any closer to getting a North Slope natural gas pipeline? A number of people are asking whether it’s worth continuing the effort including state legislators who have to pay the bills for work that is continuing.
Even Gov. Bill Walker, the project’s chief booster, acknowledged that if firm customers for the Alaska LNG Project don’t appear soon the time may be at hand to investigate alternatives for using the large “stranded” gas resources on the North Slope.
Alaska LNG is a $40 billion-plus proposal that would build an 800-mile, 42-inch pipeline from the North Slope to a large LNG plant at Nikiski, near Kenai, and a large gas treatment plant on the slope.
The state-owned Alaska Gasline Development Corp.(ADGC), which is now leading the project, did recently receive responses from two North Slope producers following a solicitation for capacity in Alaska LNG, but those are not binding and the details of volumes of gas proposed to be shipped by the producers are confidential.
Significantly, there was no proposal from the third producer company, but the state’s AGDC did reserve capacity for itself to make this available for the third company.
AGDC would not say which two of the three producers, BP, ConocoPhillips or ExxonMobil, submitted proposals and which did not.
Meanwhile, LNG markets conditions in Asia continue to be dismal. Prices are at about half of what is needed to make the Alaska LNG Project work, and there is a lot of surplus LNG in the market. Also, a lot of competing LNG project builders are waiting in the wings who are near tidewater and don’t have to build an 800-mile pipeline.
Is it time to close the books? Maybe, maybe not. The flip side of this is that Alaska LNG has strategic advantages over competitors that are real – a large, confirmed gas supply, a closer sailing distance, and security of supply with LNG from the U.S. These shouldn’t be lost.
The investment to date shouldn’t be wasted. There is at least $750 million spent to date in this latest effort including $600 million spent through to complete preliminary engineering and regulatory work and $150 million previously by the three slope producers on conceptual planning.
Many argue the state should continue to patiently work toward the time when the market will improve. AGDC, for its part, sees this happening in the early to mid-2020’s when existing LNG contracts will expire and buyers will sign for new purchases.
If it is positioned properly, Alaska has a good chance of landing some of those contracts, but to do that AGDC must have its engineering done and permits in hand. This is a very long-term game.
However, it is also prudent to now look at alternatives. One of these, the governor himself acknowledged, is the notion of direct-shipping of LNG from Prudhoe Bay, which may be feasible with the Arctic Ocean opening up. Russia is now shipping LNG by sea from its Yamal LNG project, which is in the Arctic.
One problem with an Alaska version of this is that coastal waters of the Beaufort Sea are very shallow, which means an offshore LNG loading terminal will have to be several miles offshore, a huge expense. However, there is already one artificial gravel island facility built offshore Prudhoe Bay – Hilcorp’s Northstar oil field production site – which gets out to the 40-foot depth. This would ease the problem.
The more difficult challenge is that while the Arctic icepack is lessening there is still a lot of ice around and summer storms can cause it to move in quickly on the coast, an impediment to navigation. This is less of a problem along Russia’s Northern Sea Route, where the Yamal LNG tankers now operate, but a hazard in the Alaska Beaufort Sea. The commercial problem this presents is that LNG buyers put a high priority on certainty and reliability, which works to Alaska’s disadvantage.
Another alternative, more possible in the near term, is gas-to-liquids, or GTL, which involves a chemical process converting methane, the main component of natural gas, to liquid synthetic crude oil and even finished products like diesel and gasoline.
Commercial-scale gas-to-liquids plants now operate in Malaysia, the Persian Gulf and South Africa. Shell’s plant at Bintulu, in Malaysia, makes petrochemical products that are highly profitable.
While constructing one of these plants on the North Slope presents challenges – nothing is easy or cheap on the slope – the flexibility of this technology offers advantages. Harold Heinze, a former ARCO Alaska president and state resources commissioner, believes such a plant could make specialized “designer” liquids that could have a wide variety of applications on the slope.
New improvements in GTL also allow for smaller scale plants to be viable (traditionally GTL plants have had to be very large) which would lower the front-end costs and risks, and allow the plant to be expanded over time.
Richard Peterson, whose Anchorage-based Alaska Natural Gas-to-Liquids LLC, has done extensive work on the idea of a slope GTL plant and points out that the synthetic crude oil that would be produced could add several hundred thousand barrels per day of new volume through the Tran Alaska Pipeline System (TAPS).
More important, synthetic crude would have the effect of raising the value of the entire stream of oil moving through TAPS because of the quality and value of the GTL fluids.
Most important, however, increasing the flow of oil though TAPS would lower the cost of moving all of the oil, benefitting the existing oil producers and fetching a higher value for the state with its royalty oil.
In reality, both LNG and GTL could be pursued because there’s enough gas on the slope for both. AGDC has also spoken of the possibility of starting its LNG project at a smaller scale and expanding as the market develops.
A sensible approach would be to pursue both LNG and GTL, start both smaller and grow them, one putting more fluids into TAPS and the other delivering gas to export markets and, most important, Alaska communities.
There are 35 trillion cubic feet of confirmed gas reserves just in two fields on the slope, Prudhoe Bay and Point Thomson. Federal and state geologists believe there could be as much as 100 tcf of conventional gas that would be explored and discovered once a customer for the gas is in place. There should actual be two customers, an LNG along with a GTL project.
Tim Bradner is co-publisher of the Alaska Legislative Digest and Alaska Economic Report
