The future of natural gas in the United States will likely be augmented by the construction of a new pipeline in Alaska.
The potential for Alaskan LNG has been attracting attention in the LNG industry for some time. The short paper presents a few points of interest from an eye of a Japanese analyst.
It is a great step for Alaska. According to the latest announcement from the project sponsor, the Alaska LNG “pipeline will be built in two independent, financially viable phases.” The first phase of the pipeline is to supply gas to the domestic market. If the pipeline is developed, it would certainly serve as a solid foundation for a future LNG export project. Contributions to the local energy supply, as well as improved stability and security are important ingredients for a successful gas resource development project around the world.
Alaskan LNG Would be Advantageous
The Alaska LNG project is a project located in the strongest partner country for Japan. The project — if the export phase is developed — can enhance diversification of the energy supply — security of supply — for an LNG-importing country. The project would be advantageous in terms of marine transportation, as it is much closer to the Japanese and other Asian markets than projects in other parts of the United States. It also does not have to go through difficult marine transportation routes.
Alaskan LNG Also Has Risks
Construction delays and cost overruns are risks that the project’s backers should carefully take care of, especially because the project is located in a relatively difficult area for engineering and construction.
As it is an environmentally sensitive area, proper management of this project’s development is even more important, including proper management of greenhouse gas emissions from upstream gas production, treatment and processing to refine the gas, gas transportation to the LNG plant, LNG liquefaction, and LNG transportation by tankers.
Key Factors Potentially Driving up the Cost
Gas reserves for the proposed LNG are located in the northern part of Alaska. The gas would have to be transported to a port in southern Alaska to be processed and shipped out to the international market. The project would have to build an 800-mile, or 1,299 km, pipeline to transport gas from northern to southern Alaska. In addition to the long-distance, the pipeline would have to travel through the harsh and sensitive arctic environment. This would be expensive to build and operate. As the latest announcement states, the first phase of the pipeline for the domestic gas supply is to be built ahead of the LNG phase, hopefully providing visibility regarding the pipeline cost.
Cost is an Issue, Uncertainty is Another
Although the cost may look huge, it could be manageable so long as it is a certain and reliable number. The second most important question is how sure this number is. The actual number, which is to be expected after more detailed engineering study is conducted, may be greatly different from the currently widely touted number. Although commercially sensitive information does not have to be disclosed, basic knowledge on how the current number has been calculated would help. The project has to face the challenges of taking care of the big costs, as well as to manage and mitigate further cost escalation.
The latest approach seems to involve developing the pipeline in two phases. By making each phase independently financially viable will likely provide better economic returns for the project. With pipes in place for the domestic gas supply arrangements, it would certainly be less complicated to develop the LNG export portion of the project.
The Project Needs to Prove Its Competitive Advantages
As there are many other LNG production projects around the world, especially in other parts of the United States and North America, it is essential to evaluate the economic viability and competitiveness of different LNG projects. The Alaska project is just one of them. Companies — as well as potential investors and purchasers of LNG — should closely and objectively watch the individual projects to decide which one is suitable.
The timing of the project’s fruition — the start of regular LNG cargo deliveries to the overseas markets — is also important, especially in the LNG industry. LNG buyers prefer to see reliable timelines of project implementations rather than uncertain timelines.
So, in conclusion, while the LNG pipeline has promises, other things have to be taken into account as well before coming to a hasty conclusion.
About the Author: Hiroshi Hashimoto
Hiroshi Hashimoto has been a Senior Analyst – LNG at the Institute of Energy Economics, Japan (IEEJ) in Tokyo since April 2010. Previously, Hiroshi worked on energy and natural gas issues for four years since 2006 at the International Energy Agency (IEA). Prior to these, Hiroshi worked for Tokyo Gas for 20 years, assuming positions in LNG procurement (strategy, project development, and contracting), business development (infrastructure development), the New York Representative Office (liaison and research), and the Sodegaura LNG receiving terminal (LNG receiving, storing and sending-out operation management).
Image: Shutterstock/Wojciech Wrzesien
