The Alaskan & Canadian LNG Sagas Continue Amid International Market TurmoilCommentary byDave HarbourFrom our mid-Atlantic oil and gas analyst friend comes his comment on two articles addressing the global LNG market.
As chance would have it, our Aussie oil and gas analyst friend also commented on the Bloomberg article noted column-right, and below is his comment on LNG competition.
These two observations from two different parts of the world, from two objective observers, should sober up some of our Alaskan and Canadian public officials.
We are referring to those elected officials who have looked at LNG not as a massive, good, free market project--but as a goose to cook before it could lay its golden eggs.
Over the weekend The Australian Financial Review (AFR) picked up on a Bloomberg story about the current woes facing the LNG supply market. As this blog has noted constantly, that market is currently very long.
The extent of this length was captured in this news story very effectively through the statistic that only one in twenty of the world's currently mooted LNG projects is actually required to meet market demand by 2025 (according to respected energy consultancy IHS).
To be one of those five, a project is going to have to very competitive. Given the usual competitive advantage that brownfield developments have, greenfield projects, particularly in higher sovereign risk locations, look like they will be pushed out for potentially decades.
All of our international references and commentary have as much relevance to our Canadian as to our US readers.This is true for several reasons: 1) Before the shale revolution (i.e. the worldwide abundance of gas), the North American gas market pretty much revolved around Henry Hub. International markets often used some market basket formula of oil prices upon which to base 20-year gas / LNG contracts. More and more, LNG has become the great equalizer and the current pricing standard in favor seems to be spot market pricing--in some cases based on Henry Hub. 2) Today's energy marketplace finds Asia-landed LNG prices this summer/fall that are half the prices 20 months ago--or less. 3) The gas shale boom resulted in an LNG project boom. Due to low prices, many of the projects are on hold or have been discontinued. Even so, a number of new plants are either now opened or soon to commence operations. 4) It is into this brave new world of international LNG competition that the Alaskan and Canadian LNG projects hope to compete and win. 5) The international turmoil extending from the Chinese South China Sea islands, to Russian hegemony in Europe and Syria along with Islamic terrorism everywhere adds an additionally concerning risk to all large, international capital projects. 6) Canadian projects have been plagued by demands of local stakeholders but helped by B.C. legislation. The Alaskan project is plagued by extraordinarily high capital costs. It also must consider an unsustainable state budget deficit that stimulates more "Tax Big Oil" populist rhetoric, and an administration which daily grows more hostile to its major investors: the oil & gas industry.Our conclusion: Alaskan and Canadian governments had better put minimal demands upon and maximum support toward LNG projects that could provide jobs and economic vitality to their regions for generations to come.We urge elected officials everywhere to remember the maximums that, "while he who has the gold may make the rules," it is also true that "100% of a failed LNG project is nothing."With these factors in mind, we think our astute readers will find more data points in our friend's observations, below. -dh
Our mid-Atlantic analyst friend first references a Bloomberg article, ("85 gas projects dying on the vine as LNG’s promise falls short"), that focuses on just how many projects around the globe are likely to be superfluous, if built. The biggest potential source of unneeded projects is in Canada, due in part to likely delays in completion if they are actually constructed. The second largest source of projects that are either shelved or uneconomical if built are in the US.· The second article, from this week’s Platts Gas Market Report, summarizes arguments by LNG export executives as to why the skeptics should be considered wrong. Maybe it is just a cloud in the mind of this writer, but the bases for their points appear sadly devoid of logic or substance. If we read them correctly, they have three main points:
1. The European market may provide a source of demand in the future. There may be some increased future demand (but far into the next decade), but only if the price stays abysmally low. And this is hardly the point of chasing market differentials.
2. Supply will create demand. But again, the price has to stay low, which means that a lot more cost has to come out of the average (not marginal) cost of production. And this will also be back-ended, and free of twenty- year contracts.
3. Analysts have been wrong in the past, so they must be wrong this time. Actually, the quote is: “ if you look back, there weren’t that many consultants th
at ever really forecast many things right when they happened.”
I suppose this also goes for the analysts that forecast a huge growth in global LNG demand a few years ago. Enough said on this sad support comment for their position.Our opinion is that the Bloomberg article actually understates the amount of capacity currently being considered that will be excess, if built, for at least the first few years it hits the market. The big question, in our mind, is just how overbuilt the market will become over the next ten years? If, in fact, twenty-year take-or-pay contracts are no longer the norm, how many LNG developers will find a way to fall victim to a variant of the Orlando Hotel Syndrome?
Alaska Governor Continues Career-long "Brawl" With Alaska Oil Industry
ADN, Op-Ed by Paul Jenkins, Anchorage Daily Planet. If reasoned leadership in this state sold for $1 billion a gram, we would have to scratch like chickens in a dusty barnyard to come up with a penny’s worth. If we could peddle ineptitude for a dime a ton, we would be rich.
Let’s review: Our Swiss cheese fiscal ship is belly-up and sinking like a stone. Alaska suffered a $3.5 billion deficit last year; it faces $3 billion in red ink next year. Oil pays the bills. Its prices are skidding and may crater. Credit-rating agencies are circling like vultures. There is talk of taxes, using Permanent Fund earnings, almost anything to raise money. There is little -- make that no -- good revenue news on the near horizon. In short, we are well and mightily hosed.
The only glimmer: Alaska is partner to ExxonMobil, ConocoPhillips, BP and TransCanada in building a proposed $65 billion Alaska LNG Project. The idea is to pump North Slope gas through an 800-mile pipe to Nikiski for liquefaction and shipment to Asian buyers. The project is in its earliest phases, and even if completed, will not pull the state’s fiscal fat out of the fire. In fact, according to Larry Persily, former federal Alaska gas line coordinator, it likely would generate only $1.5 billion in net revenues annually to the state general fund when operational -- not enough to fully fund state government, but a nifty start.
Gov. Bill Walker has apparently spent so much of his professional life as a lawyer brawling with the oil industry he sees conflict as de rigueur. Since election, he seemingly has spent as much time and energy trying to sink the LNG project as he has trying to make it fly.
Hey, he announces in a commentary published in Alaska Dispatch News, let’s expand the $10 billion Alaska Stand Alone Pipeline to compete with the LNG project -- just in case the companies do not do what we want. He wants to bleed off $100 million or so from the Constitutional Budget Reserve, buy out TransCanada, expanding Alaska’s ownership -- and risk -- to 25 percent of the entire project, not just 25 percent of the LNG plant. Now, he wants to expand the project’s pipeline diameter to 48 inches, adding $40 million to the price tag for studies and possible delays.
His kibitzing finally set off ExxonMobil Chairman Rex Tillerson, who fumed Alaska is its own worst enemy, changing horses in the middle of every stream it crosses.
For his part, Walker says it is unthinkable producers may not market their gas and he demands “project certainty” from them, ignoring business reality: It must make economic sense no matter what he wants. (Regardless of the governor’s skepticism, an Alaska Oil and Gas Conservation Commission filing by BP and ExxonMobil last month seemed to indicate they are dead serious about the project.)
Yet, there is his most recent insanity -- the call for a reserve tax on gas not earmarked for the project.
“It’s time Alaska acts like the sovereign that we are, and make sure we have some leverage and act as an owner state,” Walker told The Associated Press.
Look at it from the companies’ perspective: The state is a partner in the project -- until it wants something. Then, it becomes a sovereign taxing authority and steps back to flex its muscles. Afterward, it comes back to the table as a partner. How is a company with fiduciary responsibility to its shareholders supposed to deal with that?
Alaska, indeed, is a sovereign state, but Walker is not king. He cannot muscle private companies -- any companies -- into something uneconomic. Threats, heated rhetoric, taxes, bullying, state-funded competition -- none of it gets us closer to a gas line. It may, in fact, get the state closer to losing partners....
Paul Jenkins is editor of the AnchorageDailyPlanet.com, a division of Porcaro Communications.
Petroleum News by Steve Quinn. House Speaker Mike Chenault (NGP Photo) says he’s ready to come back to Juneau for a special session addressing two developments on the state’s pursuit of a natural gas pipeline and an LNG export facility. But the Nikiski Republican adds that he remains in the dark on Gov. Bill Walker’s plans.... (Comments: Citizens should be embarrassed for and ashamed of a governor that calls a special session of the legislature and does not accompany that call with proposed legislation. Even if the governor provided draft bills addressing to the two subjects of the 'call' Monday morning, he has denied lawmakers at least a week's worth of planning time. In essence, he has used his Constitutional power to order them to take a hike but does not provide a map to the destination. If I were a legislator, my propensity under such conditions would be go go into session, call for a vote to adjourn and do so immediately. Alternatively, legislative leaders could use the time to focus the public's attention on the great risk citizens face, were the governor's ideas converted into law of the land. (See yesterday's commentary on "risk", including our radio interview. -dh)
|Quote of the day from our Aussie O&G analyst friend:
...from an anonymous letter circulating in Saudi Arabia, said to be written by an unhappy faction of princes:
“We will not be able to stop the draining of money, the political adolescence, and the military risks unless we change the methods of decision making, even if that implied changing the king himself.” (Our Note: between this, Amerca's poor leadership and Russia's Mid-East adventure, oil and gas prices may not be in a week what we believe they will be today. -dh)
Today: Doyon, Limited, a major Alaska landowner, describes its aggressive exploration program for oil and gas in an accessible area west of Fairbanks, in Interior Alaska. Read more (thanks to Doyon's James Mery)....
A president leading his nation toward disaster
When one considers the Administration's passive-aggressive opposition to virtually all fossil energy projects, he reveals himself to be an enemy of American public interest.
We have described these and many other attacks on the U.S. economy by this administration.
The pattern is undeniable.
Were the Congress not so lacking in self-confidence and determination to defend the Constitution against all enemies, both foreign and domestic, they should have authored impeachment charges long ago.
So now, just consider that one important result of denying the export of plentiful American oil, is to minimize international demand for U.S. oil shale and other energy projects--that could improve national security, dramatically increase employment of American citizens, neutralize much of the balance of payments deficit, reduce the national debt and improve U.S. leadership in the world power vacuum now being filled by a Russian leader-- a man with fire in his belly and traditional leadership skills, no matter how badly perverted they may be.
Denying American energy exports is a frontal attack on the free market, on the wellbeing of American companies and citizens.
It is yet another act that comforts America's enemies and denies benefits to allies and other friends of the United States.
It is another sign of a leader coaxing his flock to follow him to a cliff overlooking a very deep canyon, from which there is no returning.
“It is unfortunate that the White House fails to understand the national security and geopolitical benefits of lifting the ban on oil exports. Ask Poland, which is 96 percent reliant on Russia for its oil, or Japan, which must continue to rely on Iran, if U.S. oil ‘is not needed at this time.’ The veto threat reveals a fundamental misalignment within the administration. These policy contradictions merit further attention. Regardless of what the president’s advisers may tell him, congressional legislation has become necessary: even though he has the authority to act, he has not – even though the time is right, the need is clear, and the global dividends promise to be significant.”
In July, the U.S. Senate Energy and Natural Resources Committee, chaired by Murkowski, reported favorably her bipartisan bill, the Offshore Production and Energizing National Security Act (S. 2011). If enacted, the bill would fully repeal the outdated restrictions on exporting American oil, while preserving the emergency authorities of the president to act during emergencies.
Here is a piece we have posted in the last 24 hours on our NGP Facebook and Twitter pages re: Alaska's economic future.
Today's Wall Street Journal Editorial: "A new report takes apart the EPA’s veto of a mining project" (Thanks for the tip, Dan Kish.)
In an accompanying piece the WSJ notes:
Our columnist Bret Stephens writes that at the President’s Friday press conference, Mr. Obama described alternatives to his Syria policy as “mumbo-jumbo,” “half-baked ideas,” and “as-if” solutions. “So it is with this president. It’s not enough for him to stake and defend his positions. He wants you to know that he thinks deeper, sees further, knows better, operates from a purer motive. His preferred method for dealing with disagreement is denigration,” says Mr. Stephens.
One for the annals of overbearing bureaucracy—the EPA issued a rejection of an Alaskan mining project before the mine’s owner had even applied for permits. A Journal editorial says that a report due to be released today finds that the EPA’s decision to ignore regular procedure led to basic scientific flaws. As a result, other government agencies refused to cooperate with the Beltway regulator.
It is by now beyond dispute that the Environmental Protection Agency went rogue when it halted Alaska’s proposed Pebble Mine project. And yet, there’s more.
The more comes via an independent report that criticizes the agency for its pre-emptive 2014 veto of Pebble, a proposal to create the country’s largest copper and gold mine in southwest Alaska. Under the Clean Water Act, the Army Corps of Engineers evaluates permit applications for new projects. The EPA has a secondary role of reviewing and potentially vetoing Corps approval. Here, the EPA issued a veto before either Pebble could file for permits or the Corps could take a look.
Pebble CEO Tom Collier didn’t take this lying down. He filed a lawsuit. Then he asked former Senator and Defense Secretary William Cohen to conduct an outside investigation. Mr. Cohen agreed, as he writes, “on conditions of independence. I would follow the facts wherever they may lead, and any conclusions would be mine alone.” His 346-page report, released to be Tuesday, is a straightforward yet withering takedown of EPA’s conduct. Read more, here.
Alaska's Economic Survival. Certainly part of the State's economic survival rests on the outcome of federal treatment of Alaska natural resources, as in the recent Pebble and Shell matters. But a big part of Alaska's future rests in the judgment of Alaskan public officials.
Some, like me, will say, "Alaskans, their governor and legislature need to help our biggest investors become MORE competitive in a low price environment."
Others will say, "We need to take more from our biggest investors in a low price environment NOW so we don't suffer."
The first group is dedicated to the long haul and to a sustainable economy. The second seeks maximum transfer of wealth "from them to us" NOW, at the expense of the long term, at the expense of our kids' generation.
The first approach offers an economic spiral up, leading to a brighter future for all. The second leads to an economic death spiral down, wherein the hope of the future is mortgaged for the temporary pleasures of the present.
The same principle of a sustainable and hope-filled future applies to national taxing, spending and economic sustainability issues.
Dave Harbour, former Chairman
Alaska Council on Economic Education
Faithful readers know we are dedicated to building and maintaining the most thorough archive existing anywhere, documenting the history of Alaska and Northern Canadian natural gas monetization efforts.
Herb Butler's contribution today helps bring us to the current era.
However, we provide here for your reference, links to the long and more detailed history of Alaska and Canadian northern gas pipeline and LNG projects.
We are indebted to Herb Butler and the Fairbanks News Miner for providing this Alaska gas project commentary and timeline. -dh
1976: The U.S. Congress passed the Alaska Natural Gas Transportation Act in an effort to encourage the construction of a gas pipeline from Prudhoe Bay to the Lower 48.
1980: A Right-Of-Way license was issued by the Federal Energy Regulation Commission to the Alaskan Northwest Natural Gas Transportation Company. In 2008, that license was voluntarily withdrawn. There are many conflicting opinions why this effort failed to deliver fuel gas to a large U.S. market. The primary reason was the refusal of the oil field producers to provide marketable (high quality) natural gas from the Prudhoe Bay field.
1999: The Alaska Gasline Port Authority was formed. AGPA is comprised of the three boroughs, Valdez, Fairbanks North Star and North Slope. The mission of this group is to develop a liquefied natural gas export system based in Valdez. The source of fuel gas is from the Prudhoe Bay oil field.
2003: The state of Alaska formed the Alaska Natural Gas Development Authority, whose mission is to develop a natural gas pipeline from Prudhoe Bay to Valdez and a spur line to Southcentral Alaska.
2004: The U.S. Congress passed the Alaska Natural Gas Pipeline Act to resolve or clarify many issues attendant to the permitting of an interstate Alaska natural gas pipeline. ANGPA also provided an $18 billion loan guarantee and some tax relief.
2007: The state of Alaska passed the Alaska Gas Inducement Act. AGIA would provide a $500 million matching contribution to the construction of a gas line from Prudhoe Bay through Fairbanks, Delta Junction, Tok Junction and into Canada following the Alaska Highway. Notice that the matching contribution seems to be the only inducement in this vehicle.
2008: TransCanada, a gas pipeline company, was awarded the only AGIA license. TransCanada states their pipeline would not be completed until 2018. Denali Pipeline was created by British Petroleum and Conoco in competition with TransCanada for the AGIA license and continued on with their project after TransCanada was selected by AGIA.
2009: The Alaska Gasline Development Corporation is created by the Legislature to advance the plans for Alaska Stand Alone Pipeline, another plan with no forward momentum.
2011: Denali Pipeline discontinues their pipeline project.
2014: TransCanada terminates the AGIA license but expresses an interest in building a pipeline from Prudhoe Bay to Southcentral Alaska (Nikiski) because of the work already accomplished under the AGIA plan. It is this position that Gov. Bill Walker wants to purchase for $100 million. A definitive plan or project does not exist to deliver high-quality natural gas to the LNG port in Nikiski. The Alaska LNG Project is added to AGDC’s responsibilities.
The Cook Inlet natural gas supply is dwindling at a continuous rate. Fairbanks Natural Gas buys its gas at Point Mackenzie in the Matanuska Valley from Enstar. FNG has had to pass on increasing prices to the local customers in Fairbanks. FNG is unable to expand its distribution in Fairbanks because of Enstar pricing and allocation. The expected shutdown of Cook Inlet natural gas sources will happen by 2020 unless a new gas field is found. At this point, there is no alternative source other than Prudhoe Bay.
FNG is trying its best to acquire quality natural gas in Prudhoe Bay, to no avail. The Prudhoe Bay gas is of extremely low quality because it contains 12 percent carbon dioxide (CO2) and approximately 76 percent methane. FNG cannot produce LNG (frozen methane) at Prudhoe Bay without extracting all of the CO2. This is because CO2 freezes much sooner than methane and therefore causes all kinds of freezing cycle stoppages. FNG and/or their producer must build an extraction system before a freezing system. Then there is the disposal issue. What do you do with all the CO2 that is extracted? FNG was purchased by AIDEA in 2015. AIDEA is spending a large amount of money to build gas storage and distribution systems in North Pole and Fairbanks without a guaranteed source of natural gas.
This is good news to the refineries and the liquid fuel distributors. They have some positive future expectations. We consumers in Alaska are facing a dilemma though. We must contend with a status quo situation well into the next years and maybe even longer. Large fuel oil bills will become even larger in size there is no doubt about that. The natural gas users are facing a grim future. They must think of reverting back to liquid fuel.
Two facades are in place in Alaska.
1. AIDEA has spent a large amount of money on a natural gas supply system in the Fairbanks and North Pole area without any guaranteed source.
2. Gov. Walker wants to pay TransCanada pipeline $100 million dollars for their interest in a pipeline project that does not exist. The Alaska LNG Project is only a plan, just like all the other plans before it. A schedule and budget does not exist. The media has reported proposed costs as high as $65 billion.
Herb Butler is a retired oilfield and refinery engineer who spent decades working in the oil and gas industry in Alaska. He lives in Fairbanks.
More about Timeline
More about Transcanada
- ARTICLE: Alaska governor plans to call for company buy-out in gas project
- ARTICLE: Companies file export application for Alaska LNG
- ARTICLE: Itemized work on Alaska gas line confidential
- ARTICLE: Feds: No more false starts on Alaska gas pipeline
Today, Facebook friends were mulling over the possible benefits of government ownership of Alaskan energy projects. Norway was sited, as it often is these days, as a place where government ownership has produced wonderful results. In fact, it seems that Alaska's governor, based on recent statements, may well be considering using Norway as an example of how Alaska should approach the monetization of its oil and gas resources.
We wrote the following piece today:
"Are Norway and Alaska Identical Twins, or Are They Apples and Oranges?"
"Norway is a sovereign country that, along with its ownership of companies, can and does eliminate costly appeals and delays by activists.
"Alaska is a quasi sovereign state whose energy activities are subject to federal regulatory delays and federally permitted (if not encouraged) due process, sue and settle tactics and "endless" judicial challenges.
"Yes, Norway can balance some of the inefficiency of government ownership by sympathetic government regulation.
"Socializing Alaskan industry produces all of the dangers of crony capitalism and all of the risks of hostile federal government regulation, augmented by costly and in many cases, frivolous social, political and legal activism.
"Norway and Alaska share some things in common, including a northern climate, majestic landscapes and bountiful natural resources.
"That does not mean this state and that country are alike in every way.
"Once again, we are cautioned about comparing apples and oranges.