Should Alaska Export More LNG to Asia?

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 sparsely-populated state.

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 resources.
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 imports.

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 website of Pacific Energy Development Corporation.