Alaska LNG looks for buyers as pre-FEED begins

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Alaska’s Governor Sean Parnell this month welcomed the signing of a formal commercial agreement between the Alaska Gasline Development Corporation (AGDC), BP, ExxonMobil, ConocoPhillips and TransCanada to advance the Alaska LNG project.

The project has now entered the pre-front-end engineering and design (pre-FEED) phase – a milestone no previous Alaska gasline project has achieved, according to Parnell. Meanwhile, the producers and the state of Alaska are to begin marketing the LNG that the project will produce.

Fuelling home demand and exports: “Environmental and pipeline engineering fieldwork has officially begun,” said Parnell. “All parties continue to make progress on building an Alaska gasline project that will create thousands of Alaska jobs and fuel Alaska homes and businesses. This milestone marks the historic progress we have made on a gasline.”

During the pre-FEED phase, the producer parties have committed to spending hundreds of millions of dollars on design and engineering. In coming weeks, the project will begin to work to secure an export licence with the Department of Energy (DoE) and continue permitting work with the Federal Energy Regulatory Commission (FERC). It is expected that the DoE will process the Alaska LNG export licence application separately from the process under way for the numerous projects proposed in the Lower 48 states.

“Enabling legislation”: In early May, Parnell was joined by hundreds of Alaskans, including pipefitters, skilled workers, apprentices, welders, and legislators as he signed into law  signing Senate Bill 138 (see photo above). SB 138, introduced by the governor, advanced the concept of a large-diameter Alaska natural gas pipeline project to supply gas to Alaskans and the LNG export project, and empowered the state to become an owner in the LNG project.

Map showing position of LNG plants and pipeline in Alaska

SB 138 was essential for the five-party deal that will govern designing, permitting, building and operating the project. The pre-FEED work that is now progressing is expected to continue through next year. Full engineering, design and permitting will follow, with a final investment decision possible by 2019, and gas flowing four or five years after that.

The legislation allows the state to take ownership of about 25% of the gas produced for the project in lieu of receiving payments for its royalty share and production taxes. The state would then sell its 25% of the gas and use the proceeds to pay its processing, pipeline and liquefaction expenses, depositing the balance in the state treasury. The state would take an ownership stake in the LNG plant equal to its percentage of gas flowing down the line and would contract with TransCanada for the company to take the same percentage ownership on behalf of the state in the pipeline and the North Slope gas treatment plant.

Signing a deal with TransCanada to stand in for the state on the pipeline and treatment plant would save the state from having to come up with about $6-7 billion for a 25% stake in those components at the same time that it would be funding $6-7 billion for its 25% stake in the LNG plant. In return for signing on for the pipeline and treatment plant, TransCanada would be allowed at least a 12% return on its equity investment, built into the tariff it will charge for moving the state's gas.

Under a plan outlined by Parnell in January, state and company negotiators will present the contract and other commercial terms to legislators next year, probably in a special session in the second half of 2015. Though pre-FEED is now under way, the project would not proceed to full engineering, design and permitting until law-makers approve the contracts, and the various parties feel more comfortable about the project's economics.

$45-65 billion investment: The producers and TransCanada estimate construction costs of the Alaska LNG project at $45-65 billion (in 2012 dollars) to cover:

  • One of the world's largest gas treatment plants on the North Slope to remove carbon dioxide and other impurities.
  • About 800 miles of pipeline and eight compressor stations to move the gas to a liquefaction plant at Nikiski on the Kenai Peninsula, about 60 miles south of Anchorage.
  • The liquefaction plant, which would consist of three trains with a total capacity of 15-18 million mtpa of LNG – about 2-2.4 Bcf/d of gas.
  • LNG storage tanks and two tanker berths at the Nikiski site.

The pipeline would have at least five points along the route where Alaska municipalities, utilities and commercial customers could take gas for local distribution. The state will decide the locations of those offtake points later.

Under the terms of SB 138, the state's production tax share of gas is set at 13%. When added to the state's royalty share of produced gas, generally 12.5%, the state will take about 25% of the produced gas. Any additional leases that feed gas into the project in future years will be subject to their own negotiated terms.

Will the dream come true? Alaskans have long dreamed of a pipeline to move North Slope gas to market and have seen multiple proposals come and go over the past 40 years. High development costs and a lack of gas buyers to pay those costs have been the main obstacles, but expectations of rising demand for LNG in Asia may create enough of a market opportunity for an Alaska project to succeed.

However, developers in the US, Canada, Russia, East Africa, Australia and elsewhere are targeting the same markets, while Asian buyers are pushing for lower prices. We are still a long way from seeing these ambitious proposals become reality.

By Alex Forbes