Alaska Natural Gas Pipeline Back on Front Burner (BP, XOM, COP)

Back in the day — about 4 years ago — when US natural gas production was falling and prices were rising to as much as $13/thousand cubic feet, two competing natural gas pipeline routes from Alaska’s North Slope were being proposed to transport natural gas to the Lower 48. Then came the shale gas boom, natural gas prices fell to below $3/thousand cubic feet, and the Alaska pipeline projects fell off the table.

Now, the state is in discussions with Exxon Mobil Corp. (NYSE: XOM), BP plc (NYSE: BP), and ConocoPhillips (NYSE: COP) for a $40-$50 billion natural gas pipeline and liquefaction plant project that would pipe the gas from Alaska’s North Slope to the state’s southern coast where it would be liquefied and put on ships for Asian markets. The first issue to clear up is the existing lease to gas fields on the North Slope, which dates back to 1977, and upon which the companies have never acted. The governor and the companies hope to reach an agreement on extending the leases as early as next week.

Alaska has proved reserves of 35 trillion cubic feet of natural gas and potential (undiscovered) reserves totalling another 236 trillion cubic feet. Right now, that gas is stranded and essentially worthless, both to the state and to the producers. A new pipeline and liquefaction plant would change that, provided that the companies can line up customers.

That will be harder to do, given the massive development in Australia and elsewhere of natural gas resources and liquefaction plants. Liquefied natural gas (LNG) currently brings about $15-$16/thousand cubic feet in Asian markets, but spending $40 billion or so demands that customers are locked into long-term contracts.

The big idea, of course, is China, which has a goal of replacing a portion of its coal-fired electricity generation with gas-fired generation, reducing the amount of carbon emissions by nearly 50%. The thing is, though, China is just getting started on developing its own shale gas resources, which are estimated to hold 1,275 trillion cubic feet of natural gas. With that much of its own gas, China may not be a market for Alaskan LNG long enough to repay the $40 billion investment.

Japan and Korea also import massive amounts of LNG and could offer alternative markets. But they have already committed to LNG supplies from Australia and Qatar and unless demand grows, they’re not big enough to support the Alaskan LNG project.

To make a guess at what might happen: Alaska and the oil companies will reach an agreement on extending the lease, but by the time all the studies and plans are completed (which could be never), the gas on the North Slope will still be in the ground, just as stranded as it ever was.

Paul Ausick