Monday, June 18, 2012

Alaskan Pipeline to Fuel US LNG Exports

The glory days of the Alaskan oil boom are long gone. Alaska's oil production, which at just above 2 million barrels a day in 1988, was less than a third of that at 563,000 barrels a day last year. Oil production from our 49th state is expected to continue declining. However, there is hope.....

Alaska may be able to relive past glories if the huge reserves of stranded natural gas on the state's North Slope can be brought to anxious buyers around the globe, particularly from Asia. Alaska's North Slope has proven reserves of 35 trillion cubic feet of gas, about one-eight of the US total, and unproven reserves estimated at 236 trillion cubic feet. The state already has significant gas production, the equivalent of about 1.5 million barrels of oil a day. But almost 90 percent of that natural gas is reinjected back into the fields because there is no existing way to deliver that gas to customers.

Initially, plans were being laid to ship some of that stranded gas to the lower 48 via a pipeline which was to built by ExxonMobil (NYSE: XOM) and TransCanada Corporation (NYSE: TRP). That idea is still alive technically since it is awaiting approval from the US Federal Energy Regulatory Commission. But for all intent and purposes, it is dead. The US shale boom and plunge in US natural gas prices has made it difficult to justify the project's estimated $40 billion cost.

Alaska's hope was rekindled though several months ago when three of the major international oil companies – ExxonMobil, BP PLC ADR (NYSE: BP) and ConocoPhillips (NYSE: COP) – reached agreement with the state of Alaska to move forward on a $40-$50 billion project to export liquefied natural gas (LNG) to Asia. The companies agreed on a target of 2016 for the large scale project which would include not only a pipeline but a gas liquefication plant to turn the gas into LNG for export to Asian markets.

There is a ready market in Asia for US exports of LNG. Even ignoring China, there is abundant demand for LNG from Japan where all nuclear power facilities have now been shut down. Before the Fukushima accident last March, nuclear generation accounted for about 30 percent of total electricity supply. No wonder then Japan needs some other fuels to power their electric plants and that LNG is selling there for 6-7 times what the US benchmark for natural gas is currently traded.

The Japanese are already hunting for LNG export deals in the United States. In April, its two largest companies – Mitsubishi and Mitsui – signed a 20-year supply agreement to import at least 4 million tons a year of LNG from a new export facility to be built at a site in Louisiana owned by Cameron LNG, a subsidiary of the utility Sempra Energy (NYSE: SRE). The facility could begin exporting LNG to Japan by 2016, if regulatory approval is received.

Probably the key to the success of the proposed Alaskan pipeline will be if long-term contracts are signed for LNG delivery to Chinese energy companies which have been scouring the globe for such deals. It is highly likely that such deals will be forthcoming since final delivery costs for Chinese buyers will be approximately $10 per million BTU, which is less a third of the current rate in Asia.

These contracts with eager Asian buyers will make the project a profitable one for the companies involved and their shareholders. The logistics of the project should be solved within a year, so the only possible obstacle will be a political one if US politicians think its smarter to reinject gas back into the ground rather than selling it on the world market. Hopefully, the politicians will just stay out of the way on this one.

This article was originally written for the Motley Fool Blog Network. Make sure to read all my daily articles for the Motley Fool at http://blogs.ffol.com/tdalmoe/.

3 comments:

  1. I'm sure these contracts with eager Asian buyers will make the project a profitable one for the companies involved and their shareholders.

    ReplyDelete
  2. Your blog is so informative. I will definitely come back for more.

    ReplyDelete