The future of LNG shipping in the Arctic

As Alaska continues to struggle with jumpstarting construction on a massive natural gas pipeline project, Russia is marching ahead with plans to tap its own Arctic gas reserves.

But unlike Alaska, which is pinning its hopes on an 800-mile-long pipeline and terminal project that could cost more than $65 billion, Russia’s effort would involve icebreaker tankers transporting liquefied natural gas (LNG) from the Arctic’s ice-clogged waters.

In the Arctic, both Russia and Alaska hold trillions of cubic feet of natural gas. The theory has long been that pipelines would be needed to get the gas to markets. But with Arctic warming, shipping lanes are expected to open up, presenting a new approach to tapping natural gas reserves.

In the case of Russia, oil and gas companies Total and Novatek are looking at shipping the gas from the country’s prolific Yamal gas fields, on LNG tankers equipped to handle the ice, to Britain and northwestern Europe, according to Bloomberg News. From there, the LNG could be loaded on regular LNG tankers and shipped to lucrative markets. Meantime, Rosneft has teamed with Exxon to study bringing its own LNG plant online in Vladivostok by 2018.

For Alaska, the news that another Arctic state is looking at shipping LNG through the treacherous waters should be a wake-up call. Since the mid-1970s, Alaska leaders have pushed for the development of gas fields on its North Slope by building a pipeline.

One proposal — subsidized by up to $500 million in state subsidies — calls for Calgary-based TransCanada Corp. and partners BP, ConocoPhillips and Exxon Mobil Corp. to construct a pipeline from the North Slope to most likely the ice-free port of Valdez, where the gas would be loaded on LNG tankers. But after four decades of pipedreams, nobody is holding their breath that this mega-project will be built soon.

“These are the big boys that you are talking about in Alaska. They don’t have to make risky decisions. They are going to decide, ‘Can we make money at this or not?’” said Dr. Robert Brooks, president and founder of Los-Angeles based RBAC Inc., a company the serves the energy sector with computer software and database support.

The price tag alone — estimated at $65 billion or more — is reason to doubt it will happen in a world flush with shale gas and LNG. But what if you didn’t need a pipeline? What if you shipped the gas directly from the North Slope on LNG icebreakers? Would that cost-savings make a difference?

State leaders haven’t given the idea much thought, often dismissing it before conversation even begins. In 2011, for instance, Korea Gas Corp., the world’s largest importer of liquefied natural gas, was looking at the possibility of shipping LNG from the Canadian Arctic to South Korea and elsewhere. But Gov. Sean Parnell’s administration didn’t have much interest at the time of trying to champion Alaska’s natural gas to the South Koreans, let alone Arctic LNG.

As of now, the Parnell administration is committed to waiting for three global oil and gas companies and a Canadian pipeline builder to move along Alaska’s pipedream.

How would Arctic LNG work?

The proposals to ship LNG from Russia’s Arctic offer a glimpse of how such an effort could unfold in Alaska — should state leaders ever decide to move in a different direction.

In looking to diversify its LNG distribution corridor, Russia is counting on vessel shipments as an alternative to a pipeline it currently uses to supply European markets. The Novatek-Total LNG export plan calls for 14 ice-breaking vessels that can deliver gas extracted offshore in northwest Siberia to Europe, including in winter when the Northern Sea Route to Asia is impassable. From Europe, gas would be transferred to smaller, less costly LNG tankers and continue on to Asian markets

“The intention is to sell part (of the LNG) on the northwest European market and to export (the rest) through a terminal to more valuable markets,” Total’s Jacques Besse told Reuters last week.

Shipping LNG through the Arctic has the potential to shave thousands of miles off of longer routes, in theory reducing transportation costs with shorter voyages. Climate predictions call for reduced ice cover in the years ahead, opening up previously ice-clogged shipping lanes to marine traffic.

The Northern Sea Route along Russia’s northern coast is projected to be more passable than the Northwest Passage, located above Alaska and Canada, in the short term. But as the decades wear on, both may be feasible for more months out of the year, with a trans-polar route in international waters possibly coming into play for the largest of ice-hardened ships.

Companies are already testing the waters. In November — the month which traditionally marks the end of the ice-free season — Russian oil and gas giant Gazprom made what Reuters has called “the first ever shipment of LNG through the NSR — from Norway’s Snoehvit plant, currently the world’s most northern LNG export plant, to Japan.”

At nearly 3,000 miles shorter than routes through the Suez Canal, the cost savings in shipping starts to make Arctic LNG projects more attractive, Reuters reported.

Reality check

In Alaska, to move LNG from the state’s North Slope oil and gas fields without using a pipeline would require loading the gas in the Arctic, sailing west and south through the Chukchi Sea and Bering Strait, and onto the northern Pacific.

But the economics of getting Alaska LNG to foreign buyers would hinge on many factors.

Alaska is positioned close to Asia in shipping terms, but is it enough of a savings in distance to favor Alaska gas over the supplies coming from Russia or even British Columbia? What if shale gas from the U.S. Gulf Coast ends up undercutting the price of Alaska gas so much that the greater transportation distances from the nation’s southernmost states ends up a better deal for foreign buyers?

Alaska has hoped to capitalize on LNG exports to Asia, but no work, let alone guarantees, are in place for its current plan of building a giant pipeline through the state and exporting the LNG from a terminal along its southern shores. The pipeline itself would take years to build, coming online after international projects already in the works are estimated to begin production and enter into long-term sales agreements.

For his part, Gov. Parnell has given some thought to creating capacity for LNG storage within Alaska’s Aleutian Islands, the southwestern exit from the state to the Great Circle shipping route and a gateway to the Arctic if ships head northward through the Bering Strait. In September during a visit to the fishing community of Unalaska, Parnell suggested LNG might be a fix for the region’s high energy costs. That’s if, according to the Dutch Harbor Fisherman, tankers bound for Asia from Alaskan ports stopped there en route.

But the governor, himself a former oil company lobbyist, hasn’t made much mention of the possibility of using icebreakers to get Arctic LNG from the North Slope to the state’s year-round gateway ports in the south.

Alaska has already had one precedent-setting winter voyage through the ice when the U.S. Coast Guard escorted a Russian-flagged ice tanker loaded with fuel through thick winter ice to Nome in January 2012. LNG exports would mean sending ships in the opposite direction. And under current winter conditions, the navigational challenges the ice poses may not be worth the effort. But the historic voyage of the Russian vessel Renda, a one-time event launched to solve a winter fuel shortage in the Nome region, proves it can be done.

If Arctic-based LNG production and shipping are as successful as Russia predicts, Alaska may find itself having to play catch-up. One obstacle: Moving LNG from the North Slope would require ports and infrastructure in the Arctic.

Alaska has bandied about over the best location for a deepwater port on its Arctic coastline. But no funding is in place. What’s more, in the U.S. the Arctic marine environment remains a politically contentious frontier, with environmentalists set on protecting the ecosystem from potential harm from oil and gas development.

Then there’s the risk of operating in a challenging environment like the Arctic, when other sources of gas in the Lower 48 and Canada are more certain endeavours.

“A few years ago, it made sense to invest in more difficult conditions. The decision that big oil and gas companies have to make now in North America is where do you invest your dollars?” Brooks said.

One thing playing to the U.S. and Alaska’s favor is reliability, Brooks said. In addition to cost, buyers want stability. Politically unstable regimes, problematic labor issues and regulatory costs can shift the risk-reward balance between buyers and consumers. LNG projects in Australia are already ailing from labor problems, and Brooks wonders if similar projects coming out of Canada might be at risk for some of the same cost pressures.

Still, in the end Alaska would need buyers for its gas, and Asian nations — the likely market for gas from the 49th state — are starting to have many new choices.

“What kind of deals are these companies willing to make with the Asians? The Asians are tired of paying these super high prices for LNG,” Brooks said.

Contact Jill Burke at jill(at)alaskadispatch.com