Amid plunging gas prices, how competitive is Alaska LNG?

In early December, the state committed to another year of work on the Alaska LNG project, the massive effort to pipe natural gas from the North Slope to the Kenai Peninsula for export to Asia.

But even as that decision was made, natural gas prices continued to plunge alongside oil. In the Asian spot market, gas is now selling for a third of what it did two years ago.

APRN’s Rachel Waldholz asks, should Alaska be worried?

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Larry Persily says it’s true: the global market for natural gas is not so good right now.

“It’s wretched, it’s miserable, it’s lousy, it stinks,” he said. “There’s way more gas than there is demand…it’s like oil.”

Persily is a former federal official who now advises the Kenai Peninsula Borough. Fortunately, he said, Alaska isn’t trying to sell gas into this market.

“If everything goes well, on schedule, no problems, no lawsuits, no big delays,” Persily said, then the first tanker of liquified natural gas, or LNG, wouldn’t sail from Nikiski until 2024 – or 2025. So the big question is, what will the market look like then?

“It’s certainly going to be much different than it is today,” Persily said. “[We] don’t exactly know how, but guaranteed it will be different.”

And precisely how you think the market will be different decides what you think of Alaska’s gas project.

The important thing to remember about Alaska’s massive natural gas pipeline is that, as of right now, it’s an imaginary pipeline. It’s an imaginary pipeline with a right-of-way and an export permit and the tentative backing of three of the world’s biggest oil companies and the state of Alaska – but, still, right now it only exists on paper.

But this imaginary gas line is eating up some very real money. In the next year, Alaska and its partners – ExxonMobil, BP and ConocoPhillips – will spend more than $230 million just on early design and permitting. Alaska’s share of that is about $60 million.

That’s on top of the $65 million the state spent to buy out a fourth partner, TransCanada, and reimburse its costs.

The state argues this is a good investment.

“Because if we don’t expend it, I can guarantee you, we will not have an LNG project,” said Marty Rutherford, Deputy Commissioner at the Department of Natural Resources.

Rutherford called the gas line essential for Alaska’s economic future.

“Is it risked money? Yes, it is very risked money,” she said. “This is the riskiest money that will ever be spent on any project: it’s before you know you’ve actually got an economic project…Is there absolute certainty? Can I warrant this project will happen? No. No one can. No one will.”

But, Rutherford said, the project has a lot going for it.

Alaska is closer to Asian markets than competitors in the U.S. Gulf Coast or the Middle East. It’s reliable. It has proven reserves – we’ve actually seen the gas, as it’s been re-injected in the North Slope oil fields. And Alaska’s project has the backing of three major companies, with all the resources and experience they bring to bear.

That’s enough to be competitive, Rutherford said But others say that’s wishful thinking.

“I’m laughing because I have been a supporter of the Alaskan LNG project [since] I still had black hair…long time,” said Charles Ebinger, senior fellow at the Brookings Institution in Washington D.C. whose hair, for the record, is now gray.

These days, he said, he doesn’t have such a rosy view.

The Asian market that Alaska is targeting is awash in natural gas, and Ebinger predicts it will be for a long time to come. That will keep prices too low to make an Alaska project economical, he said.

“I know the state argues differently, and their boosters are good diplomats, and they go to Japan and they go to Korea,” Ebinger said. “But I think the reality is, you’ve got to have LNG prices up [to] at least $16 per million BTU, and for a sustained period of time, for that project to get built.”

For reference, as of mid-December, LNG was averaging less than half that amount in the Japanese and Korean spot market.

Rutherford wouldn’t say what she thinks the state’s break-even price is  — those estimates are confidential. But Persily said he thinks Ebinger’s number is too high.

Meanwhile, when the International Energy Agency, or IEA, presented its 2015 forecast in London this fall, director Fatih Birol said that gas is being squeezed in Asia. On one side is cheap coal, and on the other, renewables, which are becoming more competitive with a healthy push from government subsidies.

The IEA does expect Asian demand for LNG to grow, Birol said. But every project in the world is scrambling to fill that demand.

“Everybody’s eyes are on this 400 bcm [billion cubic meters of increased demand]…the entire gas industry,” Birol said. “From Australia, to the U.S., to Russia, to East African exporters.”

Perkily agreed.

“There’ll be demand, the question is, is it going to be enough and can we be cost competitive enough,” he said. “Someone’s going to build an LNG project in the next 10 years – probably, half a dozen.”

The question is, whether one of those will be in Alaska.