Members of the State of Alaska's Legislature Resource Committee got the bad news August 24 when their energy consultant reported, "The Alaska LNG Project, in its current form, is one of the least competitive natural gas fields vying for large multi-year contracts with Asian cities." The options appear to be to put more cash into LNG, through more State ownership, or bring the cost of investment down.
These options will be discussed in Juneau, but the right answer is to look at new technology and value added. The new technology is Ultra High Voltage Direct Current (UVHDC) transmission and the value added is creating and shipping power rather than a condensed form of methane.
Forty years ago I took a class at MIT named Resource Allocation. It was a new requirement to the engineering curriculum, replacing Surveying as a required course for graduation. I was a little more than upset as my dad, Franklin Jordan, was an Alaskan surveyor in the Territory of Alaska and somehow the world minimized the profession in favor of the concept of Time Value of Money (TVM).
Dad spent time running through his yellow waterproof field book rechecking all the calculations at the kitchen table after work to ensure the cipher was correct. I was lucky in the sense that technology replaced the slide rule with a four-function calculator while I was at MIT and I learned engineering before 1980. This story is important as we need to remember that technological changes happen and we need to adapt overnight. The other thing to remember from my mentor, Dennis Nottingham, is that an engineer should solve the problem using $1 for every $2 used by the "other guy."
A similar story is unfolding today in Alaska. Oil prices and oil production are down. Alaska has a huge reserve of methane gas at Prudhoe Bay and maybe the solution for the State of Alaska is to move that gas to tidewater and reap the reward. Alaska's proven reserve of approximately 40 trillion cubic feet (cf) of gas might sell for $3 per thousand cf if it were at Henry's Hub in Louisiana. A $120 billion prize, minus the cost of transport from the North Slope and production: neither the transport nor the production is inexpensive. Technology and TVM will change the equation.
MIT forced its engineers into TVM to help them understand that the prize is not captured today, but over time. Time will erode that prize at a discount rate. Using a discount rate of 5 percent over thirty years, compounded annually, changes the prize to a PV of $77 billion in 2016 dollars. Against this prize, someone has to invest the costs of delivery to market. If that cost were $40 billion invested over five years with an expected return of 15 percent compounded annually, that investment becomes $80 billion and sums to a net negative investment. This is vastly oversimplified economics and the results change with different rates, value of prize money, and importantly, the cost of transport.
Before we discuss making the movement of gas to Southcentral Alaska or a gas pipeline network in Mid-Canada, we need to consider our experience with Cook Inlet gas. A trillion cubic feet of natural gas was found in the Inlet, and Southcentral needed power. The Chugach Electric engineers could have shipped gas...