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Long term view of LNG market needed
Energy consultant takes positive view of the market but warns that it would take a long time before NS pipeline completion
Alan Bailey for Petroleum News
In a presentation to the Alaska Legislature's Senate Resources Committee on March 5, Nicholas Fulford, senior director for LNG and the energy transition for consultancy firm GaffneyCline Energy Advisory, talked about the global liquefied natural gas market and its implications for the potential to build a gas pipeline from the North Slope to an LNG export facility on the Cook Inlet.
While expressing a positive view about the current global LNG market, Fulford stressed the importance of taking a long-term view of an LNG project such as the concept of exporting North Slope gas into the world market. It typically takes a long time to arrive at a commercially sustainable structure for a project and then the LNG export facilities take a long time to build, he said.
"So, they're not quick wins, but when you have got them in place, they can transform an economy," Fulford told the committee.
The global LNG market Fulford said that the current global LNG market amounts to about 400 million tons per year, equivalent to about 20 trillion cubic feet of natural gas. By comparison, when LNG exporting from Nikiski on the Kenai Peninsula using Cook Inlet gas began in 1969, that involved the exporting of about 1.5 million tons per year, Fulford said.
Currently the three main LNG exporting countries are Australia, Qatar and the United States, Fulford said. Looking into the future, Qatar and the United States will likely dominate the market, he added. Qatar, in particular, can produce gas at very low cost.
Curiously, however, a map showing global LNG carrier traffic on March 3 only depicts five vessels in the whole of the eastern Pacific. And an LNG trade from Alaska into the Pacific could potentially avoid many of the risks involved in transportation from other LNG sources. Also, with current problems associated with the use of the Suez Canal, many LNG tankers are transiting to Asia by passing around the southern coast of South Africa, Fulford said.
In terms of LNG pricing, the last few years have seen unprecedented LNG price volatility, because of factors such as the COVID pandemic and the Russian invasion of Ukraine. However, one lesson from this is that the LNG industry is much more robust and flexible than previously thought, Fulford said.
Forecast scenarios Fulford said that his company has considered 10 different scenarios for forecasts of future LNG demand, with predicted demand levels varying greatly, depending on factors such as the extent to which decarbonization of the energy industry will happen. On the upside of the forecast many international energy companies, including oil majors, are basing their growth plans on an anticipated expansion of the LNG market. Lower demand forecasts assume rapid decarbonization. Overall, however, market signals support a core assumption that there will be continuing growth in the LNG market.
"A lot of that demand is coming from parts of Asia, countries like Vietnam, a rapidly growing economy, which will be based on LNG largely as a fuel," Fulford said.
At the same time, although a significant increase is anticipated in LNG delivery from the Gulf Coast, legal and regulatory challenges have delayed some projects. Thus, anticipated LNG production in 2030 is now somewhat more balanced than the production glut that had previously been forecast.
And, so, by the 2035 timeframe an increase in LNG demand could work to Alaska's benefit, Fulford suggested. Fulford also commented that one advantage of the LNG industry is its ability to flexibly switch the destinations for LNG supplies.
A costly project On the other hand, the envisaged Alaska LNG project would be relatively costly, involving a processing plant on the North Slope to remove carbon dioxide from the gas, the pipeline to the Cook Inlet and the LNG plant. Also, an Alaska project would be vulnerable to inflation in capital costs -- essentially, the high cost associated with Alaska is the high capital cost of an Alaska project.
Fulford also commented that, while in the 1970s and 1980s LNG projects often linked LNG suppliers and sellers, today's market is much more flexible, with, for example, a buyer being able to switch suppliers at short notice.
Different business models Fulford said that there are typically three different business models used in the LNG industry. An integrated LNG project involves the gas producers participating in the gas pipeline, the gas liquefaction and the delivery of LNG to customers. This is a straightforward structure that can save time in terms of negotiating gas supply contracts and dealing with other factors.
A "merchant project," on the other hand involves the gas producers selling gas to the LNG liquefaction business. This arrangement could work in Alaska, depending on a dialogue with North Slope producers that want to put gas into the project, Fulford said.
The third model, referred to as a tolling model, involves investors putting money into the project and then, in return, receiving a steady income from the project over many years.
A recent twist on these approaches has been to have a company purchase the LNG for transfer into its LNG trading affiliate, with a portfolio of suppliers and customers.
The key to success is to use a model that best aligns the entities involved, Fulford commented.
Cost uncertainty A current problem in assessing the viability of the Alaska LNG project is the major uncertainty over the likely project costs. Moving the project through the front-end engineering and design stage could reduce that uncertainty to around minus 20% to plus 25% of the anticipated cost level. That cost estimate could be further refined once the project is put out to bid, Fulford said.
In general, LNG projects completed over the past decade have experienced cost overruns to some extent. On the other hand, the use of modular liquefaction trains, built off site, has brought improved cost certainty. And the facilities have tended to perform better than had been envisaged. Also, after two or three years of operation, efficiency improvements tend to be made to the facilities, Fulford said.
In addition, the state could gain significant income from an operational LNG export business from, for example, royalty payments. But, given the time required to bring LNG exports into operation, this income would not appear until a somewhat distant time in the future.
Comparison with Gulf Coast industry Fulford also emphasized the major differences between the LNG industry on the Gulf Coast and the potential Alaska LNG industry. There are abundant gas resources for supplying Gulf Coast LNG production, but gas pricing on the Gulf Coast is driven by the Henry Hub gas market. And, while North Slope gas would be relatively cheap and shipping costs from Alaska could be relatively low, Henry Hub pricing will likely rise. On the other hand, Alaska LNG would be subject to significant costs associated with North Slope gas processing, and the transportation of the gas through the gas pipeline.
But the pricing of Alaska LNG could be competitive, depending on the capital cost of the project. Alaska could also benefit from other factors such as a federal carbon sequestration tax credit and a federal loan guarantee.
Fulford also pointed out that LNG projects tend to seek fiscal stability, given the scale of capital investment involved. Consequently, some form of tailor-made legislation would likely be required to ensure this stability while also providing some form of risk sharing arrangement involving the government and investors, he suggested.
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