Oil producers balk following new study calling Alaska’s LNG project uneconomic

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A picture taken on May 5, 2016 shows the construction site of the port of Sabetta in the Kara Sea shore line on the Yamal Peninsula in the Arctic circle. Yamal LNG -- which is set to be launched in 2017 -- is a liquefied natural gas plant with a planned capacity of 16.5 million tonnes per year and is valued at $27 billion. (KIRILL KUDRYAVTSEV/AFP/Getty Images)
A picture taken on May 5, 2016 shows the construction site of the port of Sabetta in the Kara Sea shore line on the Yamal Peninsula in the Arctic circle. Yamal LNG — which is set to be launched in 2017 — is a liquefied natural gas plant with a planned capacity of 16.5 million tonnes per year and is valued at $27 billion. (KIRILL KUDRYAVTSEV/AFP/Getty Images)
Even as Alaskans were digesting a new report asserting that Alaska’s liquefied natural gas project wouldn’t be competitive with other projects in the world, one of Alaska’s partners in the project dropped its own bomb Thursday: ExxonMobil said in an interview it’s not planning to invest in its next big phase, preparing the final engineering and design plans.

Meanwhile, ConocoPhillips and BP indicated that as things stand, they’re also not likely to move into the detailed engineering phase of the project’s complex facilities, such as an 800-mile pipeline and a plant in Nikiski to turn natural gas into a liquid for shipping.

“It’s not economic right now,” said Darren Meznarich, Alaska LNG project integration manager for ConocoPhillips, citing the economic winds buffeting the oil companies after a long stretch of low oil and LNG prices.

No FEED for now

The executives spoke on the second day of a state House and Senate Resources Committee hearing held this week in Anchorage.

That next phase, known as FEED, or front-end engineering and design, was set to start in 2017. It was expected to cost up to $2 billion.

“We don’t want to rush into the largest energy project in North America only to end up losing lots of money for all of us. So right now is not the time to make that commitment (to enter FEED),” said David VanTuyl, BP Alaska’s regional manager.

The producer parties said they’re collaborating with the state to hand leadership of the project over to the Alaska Gasline Development Corp., or AGDC. Their hesitation raises large questions about how the project, estimated to cost $45 billion to $65 billion, will survive once that hand-off occurs.

Keith Meyer, head of AGDC, the state corporation representing the state’s interest, has said the agency wants to take over the leadership of the project by January, and has said the oil producers are welcome to remain as partners. He has suggested looking for additional investors in the project, including  possibly gas buyers in Asia or pension funds that might support rates of return lower than the oil companies expect.

On Thursday, the companies did not commit to continuing as investors under a new, state-led structure. All said they’d sell their gas at reasonable terms to the state.

Bill McMahon, ExxonMobil’s senior commercial advisor for the project, said ExxonMobil isn’t planning to provide funding for the FEED phase.

Among the items not completed was a fiscal agreement with the state that would provide long-term financial stability on taxes.

“And we need to drive down the cost of supply to be competitive,” McMahon said in an interview.

Backing up their view is a new study by energy consulting firm Wood MacKenzie that found that even if all taxes were removed from the project’s pipeline and plants, Alaska LNG would still lose money at today’s prices, because the cost of getting that gas from the North Slope to Asian customers is so high.

“The competitiveness of Alaska LNG does not rank well compared to other peer projects that could supply North Asia,” said David Barrowman with Wood MacKenzie, presenting the study at Wednesday’s hearing.

Silver lining

But there was a big upside to the study, commissioned by BP, ExxonMobil and AGDC.

A project with a new structure — the state owning all the pipes and plants — could greatly reduce the cost of supply. One benefit is if the state can secure tax exemption from the federal government, a step that tax advisers on Thursday said will require a determination from the IRS that won’t be easy to get.

“The $45 billion case is pretty much starting to break even at today’s prices, so it is certainly something worthy of consideration,” Barrowman said.

“Alaska LNG in terms of global competitiveness is quite challenged, but there are levers that can be used,” he said, including a debt-financed project that lowers upfront costs and allows debt to be paid back over time.

He added that buyers aren’t necessarily looking for the cheapest natural gas. Some also want to diversify their portfolio of LNG sellers, and they also value reliability and longevity of supply to combat possible disruptions that may occur in conflict-ridden regions supplying LNG.

Gov. Bill Walker touted the study’s findings in a statement issued on Thursday.

“Alternate ideas such as third party investors, project financing and other advantages resulting from a state led project could make the difference,” Walker said.

He said the project has other benefits, including low-cost energy to help Alaskans and support mining projects.

“What is most needed now is a collaborative cooperative spirit by all decision-makers and stakeholders to adapt to changing conditions and work together to determine if there is a viable path forward,” he said.

VanTuyl said in an interview BP will keep working with the state to see if a state-led project can be “commercially viable.”

BP wants the gas produced to benefits its bottom-line and Alaska’s, he said. BP’s portion of the gas is equivalent to 1 billion barrels of oil, the largest undeveloped resource in BP’s portfolio.

Asked if BP would invest in a state-led project, he said: “We need to know a lot of facts before we make those decisions.”

Related stories from around the North:

Canada:  Energy challenges in Canada’s North, Eye on the Arctic

China:  Chinese mega-deals in Yamal LNG, The Independent Barents Observer

Norway: OMV finds more oil in Barents Sea, The Independent Barents Observer

Russia: Big interest in new Arctic LNG: Novatek, The Independent Barents Observer

Sweden:  Sweden to have 100 percent renewable energy by 2040, Radio Sweden

United States: Governor fends off criticism over Alaska LNG, Alaska News Dispatch

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