Gov. Sean Parnell caused a stir when he announced support in a speech in Anchorage Oct. 27 for taking a new look at a pipeline across Alaska to a liquefied natural gas (LNG) project in a “southern Alaska” port (note there was no preference for Valdez or Kenai.) While the governor’s comments were significant as a long-delayed deviation from his support of the 48-inch pipeline to Alberta being worked by TransCanada  and ExxonMobil, a close reading of what the governor actually said makes us question whether this really has substance or whether it is just political.

If the latter, it’s a shrewd move for Parnell because he has been getting a lot of heat about his backing for the TransCanada project, which is perceived to be bogged down. If no LNG project materializes from this he can at least say he tried. He can also blame lack of progress on the producing companies.

What Parnell actually said is that he’s asking the producers, TransCanada and the state-owned Alaska Gasline Development Corp. to take a new and hard look at LNG exports. He said TransCanada is making no progress in lining up customers. Parnell is not proposing any new financial support for this initiative, although he did say he would work with the producers on a new gas tax regime before the 2012 session if the companies came together on LNG, he also said, in comments following his speech, that this would have to be under the existing AGIA terms. That’s not much different, we believe, from what Parnell has said in the past, that if the companies get together on one project he would talk a tax deal. Remember also that the fiscal provisions in AGIA, a 10-year deal on taxes set in statute, isn’t enough for the producers, who will want terms that match 20-year or 25-year capacity contracts they will have to sign.

Another part of the fiscal deal, the royalty administration terms provided for under AGIA and set out in regulations, are basically nonstarters for the producers. Coming up with acceptable administration terms will be a drawn-out process. Who remembers the Amerada Hess lawsuit over the oil royalty terms? That took years to settle, and it’s a big reason why the gas producers want these matters agreed-to up front.

But, could there really be something afoot? Parnell is right in saying that the Lower 48 gas markets look poor and Asia LNG markets look better. Also, ConocoPhillps’ decision to buy out Marathon’s 30 percent interest in the Kenai LNG plant is causing a lot of talk. This was done, ConocoPhillips has said, to preserve its options to restart the plant with new Cook Inlet gas or North Slope gas. Some think ConocoPhillips is talking to the governor about taking capacity in the AGDC “bullet line.” If that’s so the 24-inch pipeline would likely have to be expanded to handle higher volumes of gas, maybe to 35 inches. The Kenai LNG plant may have to be expanded, which would be costly. So, in theory this could work.

TransCanada is making a very low-profile response to this, noting that it will abide with its contractual commitments under the Alaska Gasline Inducement Act contract with the state. Those include filing resource reports with the U.S. Federal Energy Regulatory Commission in January and filing an application for a FERC certificate in the fall of 2012.

 

Federal gas pipeline coordinator Larry Persily said Asia LNG markets may look good for now but things may be different in 10 years. There is more Pacific rim LNG capacity coming on line that will be less expensive than Alaska, Persily said. Also, China is getting more gas by pipeline from central Asia that is less costly than Alaska gas would be.

TransCanada is obligated to assess new markets every other year in the AGIA contract with the state, and will do so in 2012. If there’s interest in LNG from Asia buyers that is when it would show up.

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