LNG

Alaska pitches security, diversity in hunt for gas buyers

When Dan Sullivan, Alaska's bare-knuckles natural resources chief, stands before a decisionmaker from China or Japan, he whips out a 14-slide PowerPoint and minces no words: You may be currently buying natural gas from Russia, Qatar or Australia, but take my advice. Get some security in your energy portfolio -- add Alaskan gas.

The stakes in Alaska are high for the three major companies that own leases to North Slope gas fields: BP PLC, ConocoPhillips and Exxon Mobil Corp. have the gas equivalent of 6 billion barrels of oil in the state, and perhaps much, much more. But as of now, all of it is effectively stranded.

Yet Sullivan's hard-sell tactics -- not just with potential Asian buyers, but with executives of the three major producers -- reflect the even greater risks for Alaska: After three decades of relative affluence as a prime global oil supplier, the state is running out of petroleum. If Alaska is to avoid a hollowed-out economy, along with a hole in the state budget, it must advance the long-postponed development of its natural gas reserves.

For the companies and the state, Asia may be the last chance, at least for a long time, to unlock this bonanza.

Talk of exporting the North Slope gas goes back more than three decades: Since the 1970s, a succession of Alaskan and oil company officials have advocated the construction of a 1,700-mile pipeline to consumers in Canada and the United States. But the state groused that company money was never committed, and the companies argued that the state failed to produce reliable tax terms. The latest effort was aborted last year, when the companies shelved two competing plans to ship gas to the lower 48 states despite a $500 million state subsidy for one of them.

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Sullivan fills an unusual role in the state -- as commissioner of the state Department of Natural Resources, he is Gov. Sean Parnell's point man to finally deliver Alaska's natural gas to market. But, armed with his PowerPoint, that amounts to performing a job normally carried out by the oil companies themselves, which is selling their product.

From whichever vantage point, Sullivan's job is seriously hobbled by market conditions -- a world increasingly awash in the fuel. Alaska's nearest potential consumers, the lower 48, appear to have more than a century of gas supplies at current consumption rates, thanks to the development of shale gas. The continental United States has so much shale gas, in fact, that producers are seeking federal permission to ship surplus in the form of liquefied natural gas to Asia, the world's fastest-growing regional economy, specifically to China.

But in Asia, too, a glut may be on the way. Wood MacKenzie, the Aberdeen, Scotland-based industry consultant, concludes in a recent report that any new U.S. LNG project not already shipping to Asia by 2018 will face serious competition: Australia, Qatar and, most recently, the east African nation of Mozambique are all either already delivering LNG to Asia or intending to. The report's authors say Alaskan LNG faces some of the greatest difficulties, including high expenses and a tardy arc to the market. "The most challenging thing for Alaska is the timing. It is not likely not to happen before 2020," Amber McCullagh, one of the report's authors, said in an interview.

The WoodMac report diverges from the prevailing industry opinion, which is that as long as gas can be transformed into LNG at a reasonable cost, it will find a buyer in China's voracious appetite for natural resources. But no one can be certain -- while the oil market can be highly volatile, it is relatively stable compared with gas.

Four years ago, gas sold for more than $13 per 1,000 cubic feet in the United States; yesterday, gas futures traded at $2.03 per 1,000 cubic feet. Similarly, China appears today to be a willing customer for almost any fuel that comes its way, but in the 2020s many analysts expect it to have developed its own shale gas, and to be possibly turning away foreign suppliers.

Alaska vs. Russia, Qatar

Hence, you have Sullivan's gloves-off approach to his job. When he is talking to potential gas buyers in Asia, his slide deck contains beautiful Alaskan landscapes and paeans to the state's environmental credentials. He talks up the bonanza of Alaskan gas and what he estimates will be a cheap delivery price of $10 per 1,000 cubic feet of gas, against a current price in Asia of up to $20 per 1,000 cubic feet.

But Sullivan also unabashedly undercuts the competition with a pitch for what he calls "strategic diversification": Alaskan gas is "wet" and produced using conventional methods -- not hydraulic fracturing, the controversial drilling practice required to drill for shale gas in the lower 48 states, he tells them. Qatar? Situated in "a very tough neighborhood," he says. "I'm not sure I'd be doubling down on my Qatari gas, either."

As for Russia, Sullivan is savage. "You don't have to be a rocket scientist to realize that if you are already getting a lot of gas from Russia, you don't want to double down on those supplies given that, let's just put it mildly, they are not the most reliable suppliers," he says. "Mr. Putin gets mad at your country, and the next thing you know, your supplies run dry. You can ask the Ukrainians about that one." Sullivan is referring to Russia's repeated gas disputes with neighboring Ukraine, rows that have resulted in the temporary cutoff of gas supplies to Europe.

That Sullivan gets so tough is a picture of a competitive market. But he says the technique is effective. "Diversification is a huge interest with the people I am talking to," he says.

Perhaps, but Sullivan must also persuade the oil companies, which will have to spend an estimated $40 billion to develop the necessary pipeline and LNG infrastructure. Alaska's Parnell is pushing the companies for a serious draft working plan for LNG export, along with an aggressive construction timetable, by September. Given the level of planning and preparation required for such projects, a rapid effort would have the LNG facility completed in about 2019, Sullivan estimates. If the companies can promise all that, Sullivan says, the governor is prepared to put a reasonable long-term tax and royalty deal before the state Legislature for approval in its next session, which begins in January.

While neither Parnell nor Sullivan appears to talk as tough to the oil companies as he does when the subject of Russia arises, one senses an implicit threat: If the companies cannot produce such an export plan, there could be trouble. One can only guess what kind of trouble.

What one sees is the companies behaving with unusual collaborative rigor. In January, the CEOs of all three companies traveled to Alaska for a meeting with Parnell. On March 30, they signed and released a two-page letter to the governor pledging to tackle the LNG draft plan he seeks, while also noting that they "cannot do it alone," an apparent additional push for attractive tax terms for the infrastructure.

The companies say they need time to study the Asian market. "We are going to get together on a dedicated, focused effort and see if that is a real opportunity to ship the LNG from Alaska," said Steve Rinehart, a spokesman for BP. "We are taking a good close look at logistics, at costs, at the market and at risks, and seeing, 'Is this as good an opportunity as it appears?'"

No one can possibly guess Chinese gas demand with accuracy decades in advance, so in the end the LNG decision will be a product at least in part of intuition. Sullivan is keeping the long view. "It has been an elusive goal for Alaska for decades," he said. "We are hoping that the stars are starting to align, with the events of [March 30] and the indications that our hope has some promise."

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