LNG Exports: the Alaska Wild Card
May 13, 2013 § 4 Comments
The President has another of his no-win decisions on his desk. If he says yes to Liquefied Natural Gas (LNG) exports he will be seen as caving to ExxonMobil. If he says no, he will be accused of pandering to the liberals. He could pull a Solomon and split the baby, although in this case actually do it: approve limited export. A recent AP story goes into the likely options. But nobody mentions Alaska. One wonders if they are unaware of the wild card that Alaska represents in this debate. More on that below.
LNG in the US has had an incredible five years. Around 2008 we fully expected to import large quantities of LNG and eleven re-gas terminals were permitted and in various stages of construction. Today we are debating being allowed to export the stuff. All this is, of course, due to shale gas driven abundance. This causal connection is what prompts environmentalist push back. Curiously, their bedfellows in this one are folks like Dow Chemical who currently enjoy an enduring competitive advantage against most of the world in chemicals derived from gas.
Unfettered LNG exports would certainly raise domestic gas prices. The permit to Cheniere Energy, already granted, is for 2 billion cubic feet (bcf) per day. This translates to about 700 bcf per year, against our current consumption of 25,000 bcf per year. So it is unlikely to have an impact on the price of gas. In fact up to about 10 bcf per day should prove pretty benign, particularly because production could pick up. This is precisely what bothers the folks who believe shale gas cannot be produced safely. However, a lot of the initial pick up will be in the dry gas wells that have already been drilled and shut in. Less new drilling. But none of this will happen for a while. LNG plants take up to 6 years to build, so there will be no quick relief to the beleaguered dry gas owners. Owners of import terminals do have an advantage on timing. The deep water berthing of the massive vessels, the containment tanks and piping, all these can be used. In fact such sites will have significantly lower new investment and the build time could be shortened by a couple of years.
LNG exporters, by definition, rely on the raw gas being cheap. This is why so much of it comes from Iran and Qatar. The liquefaction and re-gas adds up to about $3.50 per MMBTU and can be a bit more. Transport adds between $0.50 to 1.50 depending on distance. So, from the Gulf of Mexico the landed price in Asia would be the domestic price, say $4 plus about $5, maybe a bit more because of the long voyage around South America. If the Panama Canal widening does happen, the voyage would be shorter but there would be fees. Still, after all that, one could expect a landed cost of around $10 against a price of $17 or so. Hence the excitement, even if the US prices went up some.
There is also a political dimension. Relations with Japan would be strengthened if we guaranteed supply. Since the Fukushima Daiichi disaster they are incredibly reliant on LNG.
Alaska the Wild Card: Unnoticed in this debate is the role Alaska can play in all of this. Alaska has vast reserves of natural gas that are well and truly stranded from the Lower 48. The contemplated pipeline is on life support and ought to be allowed to die. They are forced to re-inject gas associated with oil production, to the tune of 8 bcf per day. If they were allowed to export this as LNG, there would be no material impact on US pricing because it never was on the market. Note that this would be four plants of the size of Cheniere. In fact an even higher rate would have no effect on our pricing absent a pipeline. All of this gas is produced from conventional reservoirs. The Sierra Club, the most vociferous opponent of exporting LNG, should have no beef with this because it would not increase shale gas activity. The US chemical industry ought to have no concern because they would continue to enjoy cheap gas.
This would be highly competitive with exports from the Gulf of Mexico or the east coast. The shipping distance ought to be nearly half even with Panama Canal passage. The raw gas ought to be priced extremely low because it has no market value and in fact a small cost is incurred to re-inject it. This would work especially well if the gas producer were to be a partner and the gas would have internal transfer pricing. This is certainly the case with the only current LNG exporter, which is ConocoPhillips/Marathon out of Alaska today. In case you are wondering, the source for that gas would not be sufficient for expanded export. The stranded gas referred to above is up at the North Slope. A pipeline would have to be built, although much of it could likely come down alongside the existing TAPS oil pipeline.
The US should be a net exporter of LNG, but the bulk of it ought to be from Alaska.