NATURAL GAS

Signs of life appear for long-delayed Alaska pipeline

After decades of delays and false starts, Alaska's North Slope energy giants are again signaling a willingness to build a multibillion-dollar natural gas pipeline from the state's Arctic oil and gas fields to an export terminal in southern Alaska.

Exxon Mobil Corp. officials recently laid out the economic pros and cons of building an 800-mile line to commercialize the 34 trillion cubic feet of natural gas that the federal government says is available on Alaska's northern coast. That represents roughly a tenth of all U.S. natural gas reserves.

"Based on our view of this market and all of these considerations, we still see the Alaska LNG project to be economically viable in this environment," Richard Guerrant, Exxon Mobil's global vice president for LNG, said at a recent Alaska Resource Development Council conference.

Exxon Mobil is heading up a pipeline coalition that includes BP Alaska, ConocoPhillips Alaska and TransCanada.

State government officials and oil industry executives are hinting that 2014 could mark the turning point for action on gas pipeline construction. They pledge that a pipeline can make Alaska a major player in foreign energy markets, while also providing revenue for the state and a long-term source of fuel for local residents.

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Sounds good, but Alaskans have heard such promises before.

State residents have been waiting for a pipeline to be built since the 1950s, when the Navy discovered a small field of gas in the Gubik fields near Fairbanks. In the 1970s, workers building the Trans-Alaska oil pipeline were told their next jobs would be building a separate gas line. Neither opportunity ever materialized.

Today, Alaskans are likely to remain skeptical until the companies make tangible progress. "For Alaskans to really get excited about this project, they're going to need to see more specifics," said Larry Persily, federal coordinator for Alaska Natural Gas Transportation Projects.

Residents won't be popping Champagne corks until the producers take a big step forward, whether it is setting up a corporate structure for pipeline construction, applying for federal construction permits or beginning the next generation of engineering work.

"If any of those happens soon, that would be an indication that this is seriously moving forward," Persily said.

Alaska state officials say they've intensified their negotiations with the producers to establish the ground rules for operating the pipeline and selling gas. The companies have repeatedly said they need favorable fiscal terms covering state royalty and tax payments.

Any financial pact would have to be approved by the state Legislature. Alaska Gov. Sean Parnell (R) said he currently has no plans to send pipeline legislation to state lawmakers this session, which begins in January.

But state House members are already talking about drafting their own bills in anticipation of movement on the pipeline project.

Exxon officials predict the pipeline will give Alaskans plenty to cheer about.

"We're going to create a lot of jobs, a lot of economic benefits," said Steve Butt, Exxon Mobil's manager for the Alaska LNG project. "We think there's 9,000 to 15,000 construction jobs. Five thousand to 6,000 of those will be building the pipeline.

"When you build this infrastructure, somebody's got to run it," he added. "We think there's going to be about 1,000 jobs there."

LNG exports could also produce $10 billion per year in state revenue by 2035, according to a recent study by Virginia-based consulting firm ICF International. That report was conducted for the American Petroleum Institute.

'We are in a unique and critical period'

For several decades, Alaska state officials have worked with a variety of oil industry partners in a frustrating effort to tap North Slope gas for residential use and export (EnergyWire, May 22).

Parnell launched the most recent campaign in his 2012 State of the State speech when he outlined a series of deadlines for industry action on the pipeline.

In October 2012, the producers and TransCanada released a study predicting that the complete LNG project would cost a whopping $45 billion to $65 billion.

The full infrastructure would consist of a gas treatment plant on the North Slope and an 800-mile, 42-inch pipeline with up to eight compression stations and at least five off-take points for in-state gas delivery. It also would include a liquefaction plant that would produce 15 million to 18 million tons of LNG each year and an export terminal in southern Alaska.

Since that report was released, the multinational corporations appeared to be slow-walking their proposal, although their representatives insisted that they were laying the groundwork for more detailed engineering and design work.

In June, the companies announced a small summer work plan that drew the ire of disappointed state officials. In October, the companies proposed a location for their potential future gas liquefaction plant and export terminal: the Kenai Peninsula town of Nikiski.

Last month, Alaska officials stepped in, suggesting that they may seek an equity position on the project and might kick in $9 billion to $13.5 billion to help pay for the pipeline operation (EnergyWire, Nov. 20).

Now Exxon Mobil's Guerrant says the time is ripe to move forward.

"We are in a unique and critical period in the development of the project," he said. "It is time that we come together and work together to make sure that this project has its place in the global LNG market."

But Guerrant warned that bringing the proposal to fruition would face serious challenges. Alaska would be competing for customers and financing with LNG export proposals from around the world, all of which are likely to be less expensive and take less time to build.

Recent studies have estimated that 60 other LNG projects already on the drawing board are scheduled for completion between 2020 and 2030 -- the same time the Alaska LNG facility is forecast to come online. For each unit of demand, there could be more than two units of potential supply competing to sell gas abroad.

"That will lead to healthy competition between new LNG supply projects in Alaska, the lower 48 [states], western Canada, East Africa and Australia," Guerrant noted.

The other LNG operations are forecast to be built in four years and to cost roughly $20 billion each. By contrast, Alaska's natural gas facilities would be built on a five- to six-year timeline and with a price tag two to three times higher.

Guerrant blamed the heavier construction time and cost on the technical challenges of working in the remote Arctic environment and the need to build a pipeline across the length of the state, he said.

"We're working to squeeze the schedule as much as possible," he added.

The Exxon Mobil official said the Alaska LNG venture "is likely to be the largest private-sector project ever financed in the world. As such, it's going to require a broad range of lenders and potentially a complex financing and commercial structure to underpin it.

"So which projects are considered the most economically viable?" he mused.

"In our business, this is the multibillion-dollar question. The free market will ultimately determine how to sequence and place this LNG in the world's gas marketplace."

'This time it's different'

Despite the negatives of building in Alaska, the project has remarkable advantages.

The North Slope has a vast supply of natural gas waiting to be shipped. Prudhoe Bay oil companies regularly find dry gas at their Arctic oil fields, re-injecting it to boost oil production.

Historically, the oil companies have not explored for natural gas because they had no way to move it to market. But that would change once a gas pipeline is in place.

"There's plenty of growth potential as we learn more about that gas resource base there and what is technically recoverable," Guerrant suggested.

In addition, Alaska is close to the Asia Pacific markets, where demand for natural gas is skyrocketing. The state also has a history of reliably shipping gas to Japan from ConocoPhillips' small-scale LNG facility now mothballed in Nikiski. The company recently applied for a federal permit to reopen that facility (EnergyWire, Dec. 13).

The producers assert that Alaska's LNG operation would attract foreign investors and potential customers simply because the four corporate giants involved are respected internationally.

"BP, ConocoPhillips, Exxon Mobil, TransCanada are not only committed to this project but also have the resources and capabilities necessary to successfully execute a project of this size and scope," Guerrant said.

"The experience and expertise that we have will prove invaluable in developing innovative solutions to getting Alaska gas to these overseas markets."

Project manager Butt said he recognizes that Alaskans are dubious about the energy industry's pipeline predictions.

"What I think has happened is because the project has started and stopped so many times, everybody expects that every time you start, it's going to stop, because that's what it's always done," he said. "This time it's different."

Butt said the four corporations involved in the venture have "done every one of these pieces of this somewhere else on a bigger scale. We've built big pipes other places. We've built big LNG plants. We've built gas treatment plants."

"We've never done it in Alaska, and we've never pasted them all together," he conceded. "But we've done this work, and I have a lot of confidence that with the kind of team that's working on this, it can be done very well."

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