The Governor of Alaska reportedly met this week with officials from the South Korean national gas company to discuss exports of liquefied natural gas (LNG). Ever since crude oil production on Alaska's North Slope ramped up in the 1980s, industry observers have speculated about the ultimate disposition of the significant associated natural gas reserves found with the oil. In a letter filed with the state of Alaska, BP, ConocoPhillips and ExxonMobil, the three main North Slope producers, together with pipeline company Transcanada, recently confirmed their plans for a potential liquefied natural gas (LNG) project, instead of the long-mooted pipeline to deliver the gas to America's lower-48 states. The contemplated megaproject would validate both the scale of Asia's future LNG market and the long-term nature of the US shale gas revolution.
Alaska's North Slope has already yielded 15 billion barrels of oil. Production peaked at over 2 million barrels per day in 1988 and
subsequently declined to less than 600,000 barrels per day last year. With
around 6 billion barrels of remaining reserves, it's still a very significant field but
well past its prime. While the public has focused on its oil output, the
producers and the state have long had their eyes on how best to harvest the
value of the 35 trillion cubic feet (TCF) of gas dissolved in the oil. In fact, the North Slope
complex has produced several TCF per year of gas for years, ranking it among the largest gas fields in
the world, but almost all of that gas has been reinjected into the formation to
aid oil recovery--and for lack of a market in an isolated and
For decades the default assumption was that a pipeline would eventually be built across Alaska and Canada to link this gas to the existing network feeding the contiguous
US. That idea gained traction when US marketed gas production stalled around 2000 and then began to decline. The economics of
an Alaskan gas pipeline compared poorly with gas produced along the Gulf Coast,
but competing with rising LNG imports looked much more feasible. Then along came unconventional gas,
starting with coal-bed methane and culminating with the surge of shale
production since 2005. The US gas market now has enough domestic supply to
shrink coal's contribution to US power generation by 7% since 2008 and revive gas-intensive industries.
If shale gas were only a short-term phenomenon, as some have suggested, it
would be of little relevance to the plans of the North Slope producers. All
they'd need to do would be to delay their pipeline for a few more years, and
the market would come to them. However, estimates put US shale gas resources at
between 482 and 686 TCF--a 60-90 year supply at current shale production rates. And the fact that all three of the main North Slope producers
have invested in significant acreage positions and production in US shale basins surely gives them insights into the longevity of those
Nor is time on the side of the Alaskan producers. As oil production declines
the economics of the North Slope operation will deteriorate, while keeping the
Trans Alaska Pipeline full becomes more problematic. Finding an attractive
outlet for the North Slope "gas cap" wouldn't just provide a new
revenue source; it could keep oil production going for additional decades.
The LNG option offers several advantages, despite its estimated $45-65 billion price tag and technical complexity. For starters, it cuts
roughly 1,000 miles of difficult terrain off the distance that the gas must be
pipelined, in this case to a site on the southern Alaskan coast. That location
is much closer to Asia, the world's largest LNG market, than export projects
intended to ship LNG from the US Gulf Coast. The Asian market is also growing,
thanks in part to Japan's post-Fukushima reassessment of nuclear power. The
Japanese government has backed away, at least for now, from plans for a firm nuclear phase-out, but
it seeks to diversify its energy sources. Among other steps taken in the
aftermath of the Sendai quake and nuclear disaster, it has instituted the
world's most attractive solar power incentives. Yet Japan's solar resources provide just a few hours of peak output per day, on average,
requiring substantial fossil fuel generation to fill in the gaps. Power plants
burning LNG are well-suited to that task.
China presents a more complex picture, with its own significant shale gas potential and an energy market expected to add as much natural gas demand by 2035 as all the world's developed
countries put together. Considering the scale of eventual demand and the
infrastructure necessary to bring China's shale gas to market, it seems likely
that the growth of the market in the interim must depend heavily on LNG
Assuming that the state of Alaska presents no obstacles and that US export
permits would be forthcoming, because Alaskan LNG exports wouldn't impact US
natural gas prices, the main questions that will determine the future of this
project can't be answered definitively today. Among these are whether the
numerous competing LNG projects being planned and built around the Pacific Rim
and elsewhere will saturate the global market in the meantime, and whether the
market will provide an attractive price for Alaskan LNG, influenced more by
crude oil prices than by US shale gas. The North Slope producers are already
immersed in these issues via their other activities, including ConocoPhillips'
small LNG plant in Kenai, Alaska, which has been shipping LNG to Asia for more than 40 years. The project timeline provided to the state includes at least three go/no-go
decisions along the way as the answers to these questions unfold.
A slightly different version of this posting was previously published on the
of Pacific Energy Development Corporation.