NATURAL GAS BUYERS ARE BARGAINING FROM STRENGTH AND GETTING STRONGER
Larry Persily, chief of staff to Kenai Peninsula Borough Mayor Mike Navarre, spoke to the Alaska Support Industry Alliance on May 11. Persily is a former deputy commissioner of the Department of Revenue and was the coordinator for the Federal Office for Alaska Gas Line Projects. Must Read Alaska asked him for a copy of his speech, which those pondering our state’s massive proposed gasline project may find insightful:
It’s always a pleasure to talk with the Alliance.
Since I normally get up at 4:30 every morning, this is halfway to lunch time for me.
It gives me more time to read FERC applications and follow global LNG markets.
I’ll cover both this morning.
The Alaska Gasline Development Corp. has submitted its application to start the environmental impact statement process toward Federal Energy Regulatory Commission approval to construct and operate the North Slope gas project.
Submitting an application is an achievement.
Most of the work in the 12 resource reports accompanying that application was put together over four years by the producer-led team that disbanded last year.
Now as the project leader, AGDC has a lot of work ahead if it is to fulfill FERC’s requests for additional information and succeed with multiple federal and state regulatory agencies.
Until that is done, there will be no EIS.
AGDC knows that. Filling in the blanks, conducting more analysis of project alternatives, paying the bills of FERC’s third-party contractor that will help prepare the EIS and responding to other regulatory agencies will take time and cost a lot of money.
FERC will not publish its schedule for the EIS until it is satisfied it has enough information, enough details to set up a timeline.
And although AGDC in a press release announcing its application said “FERC will soon publish a schedule” for the EIS, I’d say “not all that soon.”
Of more than half a dozen proposed LNG projects in the Lower 48 submitted to FERC since 2011, not one received its EIS schedule “soon” after application — the average was one year.
And most were brownfield projects — adding to an existing LNG import terminal.
And none included an 800-mile pipeline and separate gas treatment plant in the Arctic.
Although AGDC in its press release said it expects FERC will take 12 months for the draft EIS and then six months more for the final impact statement, that depends a lot on how much detail regulators want AGDC to produce and how quickly AGDC responds and how long its limited funding holds out.
And whether national forces move in on the project. Pipelines are not real popular these days in the Lower 48. We haven’t a focus on the Alaska project by national groups yet – but it could happen.
The state corporation told FERC it wants a 2024 in-service date for the project and, as such, it would like federal approval “no later than December 31, 2018,” which is just shy of 21 months from today. That’s so construction can start in 2019.
My read of the FERC docket and familiarity with the EIS process, the massive undertaking of the Alaska LNG project from one end of the state to another and the lack of financial partners or customers for the project makes me skeptical of Dec. 31, 2018 and disbelieving of shovels in 2019.
FERC has questions, too. The staff cautioned AGDC in several conference calls in February and March to stay in pre-filing status as long as possible to ensure a complete application.
Just two weeks before the application, FERC staff recommended staying in pre-filing “due to the number of questions lingering.”
The lingering questions cover pipeline routing, construction methods, wetlands fill, river and stream crossings, dredging disposal, water and air quality, community impacts, even the fuels used in construction equipment — a long list of environmental issues.
FERC has until mid-July to set its schedule for the EIS — or request more information from the applicant. I expect the information request will be substantial.
For example, there are wetlands. In an April 4 conference call, FERC said the project’s proposal to put gravel fill in wetlands would require “a modification to the procedures of mitigation and restoration.” As such, “the applicant must provide evidence that the modification is either unavoidable or provides equal or better protection of the resource.”
I’m not telling you this to discount AGDC’s work. The people there believe in the project and are doing everything they can to make it happen.
But after listening to multiple pronouncements of unrealistic schedules over the years in Alaska — whether a gas line, Susitna dam, bridges, roads or trucked LNG to Fairbanks — I suggest you should invest in a few more years of wall calendars, because you’re likely going to need them.
I am concerned that the Alaska Gasline Development Corp.’s well-intentioned but unrealistic timeline for the EIS and starting construction of the LNG project, and for relocating a segment of the Kenai Spur Highway to enable construction to begin, could mislead property owners, contractors, jobseekers and others — or, at the very least, build up another round of false calendar hopes.
The corporation’s April 17 application to federal regulators calls for the Kenai Spur Highway relocation work to start in the first quarter of 2019. That’s less than 24 months away.
“The relocation,” AGDC said in its project description to FERC, “could only be accomplished by the State of Alaska.” Yet the project team and state Department of Transportation have not selected a preferred route, or even selected a limited number of preferred options. Land acquisition and design and permitting work has not started. Nor is there funding.
And yet AGDC is telling residents the road work could start in less than 24 months.
AGDC and the governor believe there is a good reason for the optimistic schedule – a window of opportunity for new LNG supplies to hit the market early- to mid-2020s.
To their credit, AGDC and the governor have pretty much said they will not spend too much more state money to hit that perceived window or proceed to blueprints and final design work unless they sign up customers for the pipeline and liquefaction plant, buyers for the LNG, and partners for the financing.
So let’s look at the market.
Yes, Alaska LNG has several advantages.
- Closer to Japan than many other suppliers.
- A dependable LNG delivery history between the Nikiski plant and Japan, going back almost 50 years.
- Liquefaction plants are more efficient in cold climates.
- Stable politics — other than Trump and other than Alaska’s seemingly annual battles over oil and gas taxes.
But it all comes down to the market.
Total global liquefaction capacity was 340 million metric tons in 2016, about 10 percent above 2015. That’s capacity, not production.
The Alaska project would add another 6 percent to that global capacity.
As for production, global LNG trade in 2016 reached a record 258 million metric tons, meaning there is a lot of surplus capacity out there.
The good news is 2016 LNG trade was up 5 percent from 2015, according to the International Gas Union. It had expanded by an average of only 0.5 percent a year over the previous four years.
But the problem for Alaska and other hopefuls dependent on long-term sales contracts is that short- and medium-term deals are approaching one-third of global trade as buyers enjoy low prices in an oversupplied market.
Adding to the market surplus, the International Gas Union estimates that 115 million tons of new capacity was under construction as of January 2017.
Most of that is in the Lower 48, in Texas, Louisiana, Georgia and Maryland, totalling more than 70 million metric tons a year of liquefaction capacity.
Not exactly Pacific Rim competitors to Alaska, but the more LNG floating around the Atlantic, the more other supplies can be diverted into the Pacific.
The rest of that construction is underway in Australia and Russia.
The last of six onshore mega-LNG plants in Australia is scheduled to start up in 2018.
A seventh Australian LNG project is smaller scale in capacity — about one-fifth the output of the proposed Alaska project — and will be offshore. The 1,600-foot-long Shell floating LNG production vessel is set to start production in 2018.
Yamal LNG in the Russian Arctic plans to start production the end of the year. At full capacity in a couple of years, it could be almost as large as the Alaska project.
The partners in two different oil and gas projects on Sakhalin Island in Russia’s Far East can’t decide between expanding the LNG plant that has operated there since 2009 or building a new project to serve the Asian market. Either way, it looks like more production capacity will be coming from the Russian Far East in the next decade.
And more from the U.S. Gulf Coast too. An ExxonMobil/Qatar Petroleum project in Texas at 16 million metric tons per year has all its federal approvals and is waiting on the partners to make a final investment decision.
Exxon is also a partner in the Papua New Guinea LNG project that started up in 2014 and is looking at a low-cost capacity expansion.
Qatar, the world’s largest LNG producer, is likely to lose its title to Australia and the United States. Not willing to stand still, Qatar has decided to lift its 12-year moratorium on new development of the world’s biggest gas field.
With 135 years of reserves at current production rates, Qatar can certainly afford to step up its output.
LNG export projects are in various stages of planning, negotiating, permitting, marketing and waiting in Mozambique and British Columbia.
A proposed LNG plant near Prince Rupert, B.C., promoted by a consortium led by Malaysia’s Petronas and its partners from Japan, China and Brunei, has all its government approvals – it just needs its partners to make the multibillion-dollar investment decision.
But even with all the new LNG making capacity coming online over the next several years, most market analysts acknowledge more may be needed later in the 2020s. Just no one can promise how much more.
It depends on two factors: Pollution and price.
If the world’s nations admit clean air is an economic, public health and political imperative, the world will burn more natural gas for power generation. If not, coal is cheap.
And if LNG can stay affordable — which it certainly is today at less than $6 per million Btu on the spot market — more buyers will take more LNG.
Low prices create more demand.
The win will be keeping the prices low enough to attract new customers, but letting prices move high enough to underwrite the cost of new LNG export projects.
It’s an intensely competitive market.
For example, Italian oil and gas company Eni won a bid in January to supply LNG to Pakistan for 15 years. But even though Eni was low bidder, Pakistan took five months to negotiate an even lower price before it signed the contract.
The LNG is linked to oil prices, and at $50 oil that gas will cost Pakistan under $6 per million Btu.
Buyers worldwide are bargaining from strength – and getting stronger.
Many of Japan’s largest gas and power utilities are banding together in LNG procurement joint-ventures to push for lower prices and better terms.
This the not the stable, boring, long-term binding contracts LNG market of decades past.
It’s a tough market on sellers.
Not impossible, and like I said Alaska has some significant advantages.
The North Slope producers want to sell their gas. The state wants the project.
But this is going to take time – and a lot more work and a better market.
I believe we’ll get there, but not a 2018 federal EIS and 2019 construction start.
Thank you for tolerating my skepticism so politely.