Alaskan LNG prospects remain uncertain [Gas in Transition]

There has been speculation recently that Alaska’s prospects of becoming an LNG exporter have improved. This comes against the backdrop of recent volatility in global gas markets, and follows the Biden administration’s re-approval of exports from the proposed 20mn metric ton/year Alaska LNG project to countries with which the US does not have a free-trade agreement (FTA). However, the project still faces significant hurdles, and the prospects of Alaska becoming an LNG exporter anytime soon remain uncertain for now.

Stranded gas

Alaska’s North Slope is thought to hold some of the largest natural gas resources in the world. The region contains around 35 trillion ft3 of proven gas reserves and a potential resource of another 200 trillion ft3, according to the state-owned Alaska Gasline Development Corp. (AGDC). The agency also believes that technological advances would open up a further 590 trillion ft3 of shale and tight gas, as well as methane hydrates.

Currently, though, most of Alaska’s gas supply remains stranded owing to a lack of infrastructure.

“Nearly all of Alaska’s natural gas supply comes from the Prudhoe Bay and other North Slope fields located in the northernmost part of the state,” Rystad Energy’s vice president of North America gas market research, Emily McClain, tells NGW. “Only about 1bn ft3/d of this dry gas production is marketed gas, with approximately 90% of produced gas reinjected due to lack of infrastructure,” she added.

“Total natural gas production in Alaska has remained relatively flat in recent years,” McClain said. “Little growth has been seen in the region where oil reserves are declining. However, the potential exists for natural gas as oil declines have led to increasing gas-to-oil (GOR) ratios amid maturation of the base output.”

Alaska’s gas reserves could be used to meet local demand as well as overseas LNG demand. However, either option would require a new gas pipeline from the North Slope. Indeed, the Alaska LNG proposal includes an 800-mile gas pipeline across the state.

“Supply constraints and rising demand in the state signal the need for additional marketed gas,” said McClain. “If Alaska LNG were to be built, the project would export primarily to Asian markets given its proximity.”

However, the project could also help meet local demand thanks to the pipeline. On its website, the AGDC says in-state distribution would also be part of the project, with multiple interconnection points along the pipeline ensuring that local gas needs are also met.

Potential revival

The Alaska LNG project has been planned for a long time, but various changes along the way have led to expectations that the proposal was doomed. Indeed, producers BP, ExxonMobil and ConocoPhillips pulled out as partners in the project in 2016 amid concerns over the high costs involved, low natural gas prices and a global supply glut.

As a result, development of the project has been left to the AGDC. However, significantly more funding is required to move Alaska LNG forward, despite the costs of the project having been reduced in recent years. In early 2022, Wood Mackenzie released a report in which it cut the estimated cost of supply from Alaska LNG by 43% compared with an earlier analysis it had carried out in 2016. The consultancy estimated that the capital costs involved in the project had been reduced from $45bn to $38.7bn, including for the pipeline from the North Slope as well as the LNG facility itself.

Nonetheless, this still represents a hefty price-tag that continues to act as a deterrent.

Now, though, Alaska hopes to position itself as a source of reliable gas supply against the backdrop of the war in Ukraine and the resulting upheaval in global gas markets. And it received a boost in April with the Biden administration’s re-approval of Alaska LNG’s export authorisation to non-FTA countries.

An AGDC spokesperson tells NGW that the company is in discussions with LNG developers about the funding necessary to complete front-end engineering design (FEED) and that a final investment decision (FID) could come next year. However, there is still scepticism over the project’s ability to reach the FID stage.

“We still see Alaska LNG as a speculative project, even with the recent re-approval from the Biden administration, since the project has been heavily scrutinised for its environmental impact,” says McClain. “The region faces political and environmental hurdles, which have made new infrastructure approvals a challenge. Additionally, the proposed project has a hefty price tag of $38.7bn and funding remains unclear,” she added.

“The reapproval of exports from Alaska LNG is a positive sign but likely not enough to get this project and others in Alaska off the ground,” McClain continues. “There is still too much risk and uncertainty in our view considering environmental, regulatory hurdles, infrastructure buildout and high costs associated with these projects to make them competitive.”

The major North Slope producers, having pulled out of Alaska LNG previously, now only appear to support the project insofar as providing feed gas.

A ConocoPhillips spokesperson tells NGW that the company supports selling gas at the wellhead for the Alaska LNG project but that it has nothing further to add at this time. ExxonMobil has previously signed an agreement to sell gas to Alaska LNG. Hilcorp, which took over BP’s Alaskan assets in 2020, has not commented publicly on the matter, but it was reported in mid-2022 that the State of Alaska was in talks with both Hilcorp and ConocoPhillips over gas supply for the LNG project. In the meantime, Hilcorp was among three companies to sign a memorandum of understanding (MoU) with the AGDC on assessing the potential for producing zero-carbon ammonia using North Slope gas.

Risks

More will be known soon if the discussions the AGDC is currently participating in come to anything. In mid-May the project also received a further boost when a US appeals court rejected a lawsuit filed by environmental groups challenging its federal approvals. While legal challenges from opponents of Alaska LNG are likely to continue, the rejection of that lawsuit represents at least some reduction in risk for potential investors.

On the other hand, the Biden administration’s recent move to crack down on extensions for LNG export authorisations puts pre-FID LNG projects under pressure to move towards construction faster. McClain agreed that stricter guidelines would result in a higher degree of risk for proposed Alaska projects moving forward.

Competition

Alaska LNG is not the only project trying to capitalise on the relative proximity of Asian markets and the plentiful availability of gas on the North Slope. Qilak LNG is also currently under development, and proposes to export gas directly from the North Slope, thereby eliminating the need for a long-distance pipeline.

The Qilak project would be considerably smaller than Alaska LNG, at 4mn mt/yr in its first phase but with the potential to add further capacity in subsequent phases depending on demand. Qilak LNG has also signed a preliminary gas supply agreement with ExxonMobil, covering the entire first phase of the project.

It will take time for Qilak to move ahead as well, though, and its start-up date has been pushed back from 2027 to 2030 owing to the effects of the COVID-19 pandemic. An FID could come in 2025, depending on certain conditions being met.

Like Alaska LNG, Qilak LNG is also aiming to position itself as a reliable source of supply in a volatile global gas market. It has also talked up the fact that it is closer to Asian markets than its main Arctic competitor, Yamal LNG in Russia.

The developers of both Qilak LNG and Alaska LNG hope that a desire among Asian countries to diversify their sources of gas supply while locking in future volumes to meet growing demand will work in their favour. However, especially in the case of Alaska LNG given its size and cost, getting the project over the line remains a considerable challenge.