Alaskan LNG project gains momentum: distance, temperature, and reliability are winning factors.

• Author: Persily, Larry
• Position: SPECIAL SECTION: Oil & Gas

Is it possible that Alaska North Slope gas will be sailing to Asian buyers by the middle of the next decade? Is it possible that the state will make money by owning a piece of the multibillion-dollar project, while also bringing affordable energy to Railbelt communities?

Or could the hopes and dreams of an Alaska gas line project come up short again, just like so many times before?

Yes, to all of the above.

But there are a lot of reasons why it could work this time.

Energy analysts worldwide expect global natural gas demand to grow at a strong rate--especially in Asia--for years to come. They differ only on the rate of growth. But even taking the conservative estimates, the world could need a dozen new, large-scale liquefied natural gas (LNG) export projects by 2025 to supply that demand.

Alaska has a shot at being one of the winners. The biggest reasons are distance, temperature, and reliability:

* An LNG cargo ship from Alaska can travel to Japan three times faster than a delivery from a US Gulf Coast export plant and twice as fast as a ship running from Qatar in the Middle East. At $75,000 or more for a daily charter rate, saving time means saving money on LNG deliveries.

* The liquefaction machinery would operate more efficiently in Alaska's cold climate, making significantly more LNG than the same equipment would make in the Gulf Coast or Middle East.

* Prudhoe Bay has proven itself. Buyers like that fact. Prudhoe Bay has been running since 1977. There is no question about its gas reserves; the producers have brought the gas to the surface with the oil and then reinjected it to pressure out more oil and to safekeep the gas until the economics of a project look better. This gives an Alaska LNG project a significant advantage over others around the world where developers will have to spend a lot of money to explore and prove up their gas reserves.

Of course, any Alaska oil and gas project must overcome the reality of the high costs of construction and operations in the far north, which is exactly what the LNG project team has been doing the past couple of years.

Project Description

The major North Slope oil and gas producers--ExxonMobil, BP, and ConocoPhillips--with pipeline partner TransCanada have been working since early 2012 to put together a commercially viable Alaska LNG project. Early this year the state announced it wanted to get in on the deal, with Alaska lawmakers this spring working through legislation that would start negotiations toward a deal for state investment in the project. The full contract would come back to the Legislature in 2015 for a vote.

The project--estimated at $45 billion to $65 billion in 2012 dollars--includes:

* Field development costs to produce the gas, especially at the Point Thomson field east of Prudhoe

* A fifty-eight-mile pipeline to bring in gas from Point Thomson

* A huge gas treatment plant at Prudhoe Bay to remove carbon dioxide and other impurities from the gas stream

* About eight hundred miles of forty-two-inch-diameter steel pipe and at compressor stations along the route

* A liquefaction plant, LNG storage tanks, and marine terminal at Nikiski, where the fuel would be loaded aboard specially designed ships to keep the LNG cold for the voyage to overseas customers. The plant's output is planned for 15 million to 18 million metric tons of LNG per year, or about 2 billion to 2.4 billion cubic feet of natural gas a day.

Development Schedule

The companies are in what is called pre-FEED, or front-end engineering and design. It's the early work figuring out what and how to build and where--early, but not inexpensive. An agreement signed by the four companies and the state and released in January put the pre-FEED stage at $400 million or more to be shared by all the parties.

Pre-FEED could take them through the end of 2015. If the project still looks feasible at that point, the next step would be FEED, which the January Heads of Agreement document says would cost in the billions. The state estimates at least $2 billion.

By 2019, according to the state, the project sponsors could have enough detailed cost information, sales contracts for the LNG, and confidence in the project to make what is called a final investment decision. That's the critical point; the time when project developers decide whether to start ordering steel, production modules, pipe, and everything else to build the project.

Getting through the FEED stage is necessary to reach an investment decision, but it's no guarantee the decision will be "yes."

If the answer is yes, after four or five years of construction, the first...