AGDC works to reduce Alaska gas project cost as feds give final approval

The U.S. Federal Energy Regulatory Commission gave its approval for the Alaska LNG Project last week and a final order from the Commission in expected June 6.

It doesn’t mean the North Slope’s large natural gas resources will be moving to market anytime soon, however.

With the world’s economy mired in recession and energy prices that have crashed, including for liquefied natural gas, although they are now rising slowly. However, the economics for the $42 billion-plus Alaska gas project don’t look any better.

In the past, estimates were that LNG prices landed in Asia would have to be in the $12 per million British Thermal Unit, or mmBtu, range for the project to be viable, although Alaska Gasline Development Corp., the state corporation that now owns the project, has argued that it might be able to lower costs enough to cut the delivered cost to $9 per million Btus. However, the latest spot market price for LNG delivered in northern Asia is about $2 per million Btus.

Recently AGDC has been working on new cost reduction planning, in cooperation with BP and ExxonMobil. Fluor has been contracted to do the work and a final report on recommendations, and with a new cost estimate in 2019 dollars, has been completed and is now being modeled, AGDC’s board was told May 21.

Revised costs have not yet been released to the public, however.

Achieving final blessing for the project from the federal government is a milestone, however. It means the project is truly “shovel ready,” if LNG buyers can be found along with financial backers. Alaska Gasline Development Corp., or AGDC, the state’s gas corporation, now owns the project and is looking for a buyer. It’s an opportunity of some kind for someone with very deep pockets. “The ongoing project economic review and discussions with potential partners will determine the next steps for this project,” Gov. Mike Dunleavy said.

Frank Richards, AGDC’s president, said “FERC’s authorization validates that the Alaska LNG Project can be safely built and operated, delivering numerous potential benefits with manageable environmental impacts.

“Obtaining FERC approval significantly de-risks the project execution with defined environmental stipulations. Our momentum continues as we complete our assessment of the project’s economics and competitiveness, and engage with potential project partners to determine the best path forward for the Alaska LNG Project,” Richards said in a statement.

AGDC has been working on ways to lower costs of the project but one option, shortening the project’s 800-mile pipeline from the North Slope by 60 miles and terminating it in the Matanuska-Susitna Borough rather than at Nikiski, on the Kenai Peninsula, appears not to be on the table.

The Mat-Su Borough has argued that the original route analyis did not adequately consider a pipeline terminus at Port MacKenzie, on upper Cook Inlet, rather that Nikiski. AGDC, however, argues that it has analyzed Port MacKenzie, finding that navigation issues for LNG tankers in the upper Inlet offsets any advantages of a shorter pipeline.

Despite the disagreement, Mat-Su Borough manager John Moosey said the borough supports project as it is. “It would be very good for Alaska,” he said.

Mat-Su has a big stake in a North Slope gas pipeline even without having the terminus at Port MacKenzie. A substantial portion of the 42-inch pipeline would be built through the borough, and having gas from the North Slope delivered through a large-diameter, high-pressure pipeline could substantially lower regional energy costs.

AGDC has estimated that North Slope gas delivered through the pipeline could be priced at about $5 per million Btus compared with Hilcorp Energy’s price for Cook Inlet gas of about $8 per million Btus (the unit is roughly compared to the thousand-cubic-foot measure, or mcf, also commonly used). Lower gas prices would help Mat-Su residents and also help make local manufacturing using natural gas possible.

A big problem in Alaska LNG’s economics is the need to build an 800-mile pipeline to a liquefied natural gas plant in southern Alaska. Without the pipeline, as if the gas were located at tidewater in south Alaska, the gas and LNG would have been flowing years ago.

Actually, North Slope gas is at tidewater, although it is near the Beaufort Sea in the Arctic rather than Cook Inlet. Questions have long been asked whether an LNG plant could be built on the slope with liquefied gas shipped to Asia through the Bering Strait, as LNG is now shipped from Russia’s Yamal project, which is also in the Arctic.

Former Lt. Gov. Mead Treadwell is now leading an initiative by a Dubai-based firm, Lloyd’s Energy, to do just that. The company formed to pursue the idea, Qilak LLC, is considering an offshore plant, built on an artificial gravel island, near Point Thomson east of Prudoe Bay.

There are about 8 trillion cubic feet of gas reserves at Point Thomson now essentially “stranded” by lack of a gas pipeline. ExxonMobil and BP own most of Point Thomson and ExxonMobil is now working with Treadwell’s group. If the offshore LNG plant were built gas from Prudhoe Bay, where there is about 26 trillion cubic feet of gas, could eventually be brought there, although a gas pipeline from Prudhoe would have to be built.

Another idea for moving stranded gas from the slope, absent a pipeline, is building a gas-to-liquids, or GTL, plant that would convert natural gas to liquid products, like a synthetic crude oil even fuels like diesel or jet fuel, using the existing Trans Alaska Pipeline System, which is now operating at less than one-fourth capacity.

ExxonMobil and companies like Sasol, a South Africa-based major energy company that operates gas-to-liquids plants in South Africa and the Middle East, have looked at possibilities of GTL plants on the North Slope. The high costs of building and operating the plants on the slope caused ExxonMobil to hesitate. The plants are essentially chemical plants and are complex.

The company periodically reviews the idea, however. If direct-shipping of LNG fails to advance as a concept the GTL idea may get a refresh. Sasol, the South Africa-based energy company that has operated GTL plants in South Africa and the Persian Gulf, has also been interested in the North Slope.