Gas flares on the slope.

• Author: Tyson, Ray
• Position: Prudhoe Bay

Uncertainty continues to cloud the future for Alaska's natural gas. The changing economics of the North Slope are upsetting the relationship between the Big Three producers, and while everyone agrees that someday Alaska will sell LNG to the Pacific Rim, how and when this will happen is still in dispute.

After years of internal studies and debate, Prudhoe Bay owners Arco Alaska, BP Exploration (Alaska) and Exxon head to the Pacific Rim this month to begin laying the market foundation for what could lead to a major gas sale and perhaps the state's last megaproject.

But as the Big Three prepared to depart, questions remained as to the project's viability and ultimate success.

Many doubts were raised by producers themselves in July when they broke silence on the issue, declaring the $16 billion project to transport Prudhoe Bay natural gas via pipeline and ocean tankers to Asia commercially unworkable for at least another 10 years.

Arco Alaska president Ken Thompson and BP Exploration president John Morgan say an Alaska project that produces 14 million tons of liquefied natural gas (LNG) a year is simply unable to compete with similar world-class projects in Indonesia, Malaysia, Australia and Qatar, to name a few.

"That's like dumping on the market another 25 percent of the supply," Thompson says. "What happens when you dump that much LNG on the market at one time? (Gas) prices go south."

There are other producer concerns. Morgan and Thompson emphasize that before their companies OK a major gas sale, estimated project costs must be reduced, the state must assure a stable tax and royalty climate, and market demand must be confirmed.

"None of us is terribly keen to go into the next phase of engineering expenditure until we can demonstrate to ourselves and to others that those basic conditions are in place, or have a very good chance of being in place," Morgan says.

Oil vs. Gas

Meanwhile, industry observers are questioning producer motives at Prudhoe Bay, wondering how a growing conflict of interest between the principle owners of the field's gas rim, (Arco and Exxon) and the oil rim (BP) will affect the timing and success of a major gas sale in the Pacific Rim.

Arco and Exxon each own about 42 percent of the gas, compared to BP's 14 percent, while BP owns 51 percent of the oil, compared to Arco's 21 percent share and Exxon's 21 percent share. In effect, gas is increasing in value as North Slope oil production declines, a fundamental shift in...