AGDC president presents local case for LNG

With the state-owned Alaska Gasline Development Corporation officially the sole player in developing an export project for North Slope natural gas, its president Keith Meyer emphasized the project’s domestic utility in a speech to an industry and business audience in Kenai.

Meyer, who has headed AGDC since the state-owned company’s board appointed him in June 2016, presented his case for going ahead with the long-planned project of pumping methane 800 miles from extraction facilities at the North Slope’s Prudhoe Bay to a liquefaction plant and export terminal in Nikiski in a speech at the Kenai Peninsula Economic District’s Industry Outlook Forum on Wednesday.

That 800-mile stretch, “in the North American pipeline business is just sort of an average distance,” Meyer said.

“I really view this project as a gasline project that needs an LNG (liquefied natural gas) project for the market anchor,” he said. “As opposed to an LNG project that has to have a gasline. As you look at some of our global competitors, particularly the projects in Canada and Oregon, they’re LNG projects, but nobody really wants the pipeline. For this project, what the state really wants is this pipeline. It’s going to be critical infrastructure for the state to maximize that North Slope gas, encourage drilling and help remove the barrier that exists up there today.”

This year’s incarnation of the project previously known as AK LNG dropped officially from four partners to one. The three oil and gas companies that since 2012 were co-developing the plan with the state of Alaska — BP, ConocoPhillips and Exxon Mobil — became wary of it after a report in August 2016 by consulting group Woods Mackenzie identified it as uncompetitive. The companies officially transferred their project assets to the state of Alaska, represented by AGDC, in December 2016.

Meyer said that for major oil and gas companies, the Alaskan LNG effort may have a lower likely return on investment than other project options they have, but could be more attractive for other types of investors. He envisions the pipeline and export facility operating under a tolling model, in which the operator’s business is transporting the gas but never taking ownership of it — leaving production and marketing to gas buyers and sellers.

He described the investor-financed tolling model as “like a plain old infrastructure project, like the Lower 48 LNG projects have been done,” and said it is more usual throughout the industry than the previous arrangement between the state and oil and gas producers.

“We’re transitioning this not to something that’s brilliantly creative, but rather just traditional,” Meyer said. “A different way to look at it, but not all that unique.”

Immediate goals for the new approach including seeking a lot of third-party financing, supported by declared interest from prospective project customers, he said.

“I think there’s a fear that the state is just going to start writing checks to build this thing,” Meyer said. “It’s not going to happen. We need to find customers, solid, long-term customers, and that supports the long-term financing, supports the construction.”

Selling the project

Selling the project starts at home. Meyer presented the Industry Forum audience with his take on the basic economic rationale of the export project he said was necessary to bring about the pipeline’s in-state benefits.

The current market conditions — in which the global surplus of LNG creates low prices that may make Alaska’s project less viable — are a matter of timing, Meyer said. Looking beyond the current global surplus, he put longer-term faith in the appeal of the product itself.

“As the globe starts to demand cleaner fuel, they want a simpler hydrocarbon,” Meyer said. “Coal is dirty … Oil, also a complex hydrocarbon. Methane is the simplest hydrocarbon molecule on the planet: one carbon atom, four hydrogen. Burns clean. Lovely stuff. The world is demanding more and more energy. We can’t get it all from solar and wind. You need hydrocarbons, but the demand is for the cleaner hydrocarbon. Therefore you’ve got continued growth.”

He explained the present global LNG market glut with a narrative that begins with the 2011 tsunami that damaged Japan’s Fukushima Nuclear Power Plant and prompted the Japanese government to shut down all 50 of the country’s nuclear powerplants between 2012 and 2015. Japanese utilities compensated for the loss with LNG.

“All of the sudden there was a big demand for LNG, because Japan doesn’t have domestic gas, so they get their natural gas from LNG,” Meyer said. “They went into a panic.”

The rise in Japanese LNG buying drove up demand from the Chinese and European markets trying to compensate for the supply Japan was now absorbing, he said.

“That demand pull was met with the largest supply response in the history of the LNG industry,” Meyer said. “What’s really sad is that Alaska didn’t step in to meet that… So you had a big supply response. These LNG plants are huge capital projects. It takes about 60 – 70 percent of the capacity to be sold in order to really launch your project. This means a lot of those projects that got launched (to fill the demand spike) had about 25 percent of their capacity unsold. So what’s happening now is those unsold capacities are beating each other up, and bringing the price down.”

Based on the length of existing LNG contract terms, Meyer said the surplus is predicted to be exhausted in the early 2020s, creating another demand window Alaska could fill.

“Our window is 2023 to 2025,” he said. “I told the state and I’m telling you here, if we miss that window I think it’s going to be a long time for this project.”

Market prospects

Meyer highlighted reasons he believes Asian LNG buyers — Alaska’s nearest and most viable customers — might find the project an attractive investment. He said the Asian market is more attracted to “conventional” gas sources — traditional geological reservoirs such as those on the North Slope, rather than “unconventional” reservoirs in tight shale formations tapped with newer techniques such as fracking and horizontal drilling — because “security of supply is very important.”

“When they look at this project, they see a conventional resource, unlike the shale that you have to keep drilling every year just to maintain production,” Meyer said. “You’ve got a conventional resource. You’ve got a pipeline of reasonable length, you’ve got an LNG facility, and all of those components are in one state, the state of Alaska. We put it on the boats, and we’re seven days from Japan… They don’t have to go through a third nation like Panama or a physical constraint point.”

Domestic demand for natural gas isn’t high enough to justify the project alone, he said. If the export terminal can support it, Meyer said the pipeline would make North Slope gas “a stable source of energy for the domestic economic engine.” Mines would be a major beneficiary of this power source, he said — both those that presently exist in Alaska and those that an energy source could allow to come into being.

“Right now the mining projects that exist have to get their fuel in little trucks that come up with their oil, and they’ll never get off the ground because they’re competing with mines elsewhere in the world — Australia and elsewhere — that have natural gas supply,” Meyer said. “If we bring natural gas, a stable fuel supply, all of a sudden they can put that into their financing package and now their lenders, their equity investors, know this is what the fuel for this mine looks like. Next thing you know you’ve got a mining project.”

Reach Ben Boettger at ben.boettger@peninsulaclarion.com.

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