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Report Shows AK LNG Globally Competitive

by | Feb 2, 2022 | Government, News, Oil & Gas

LNG vessel

LNG tanker off the coast of Homer, Alaska.

ERICH GAEDKE | FERC

A North Slope natural gas pipeline will become financially competitive around 2028, according to a consultant’s report for the Alaska Gasline Development Corporation (AGDC).

Break Even, and Then Some

The Scotland-based research firm Wood Mackenzie provided AGDC with an update to a report completed in 2016. The goal is to estimate the market price of liquified natural gas (LNG) that would make a pipeline from Prudhoe Bay to tidewater at Cook Inlet feasible.

The report, released in January, anticipates peak LNG demand in 2040. However, analysts expect global LNG supply will fall short in 2028, creating a price environment that an Alaska gasline could satisfy.

At the time of Wood Mackenzie’s 2016 report, AGDC’s proposal, known as AK LNG, had an estimated cost of $11.70 per metric million British thermal unit (mmbtu), the standard quantity of energy in a fuel resource. Based on that report’s recommendations, AGDC amended its plans to reduce the cost to $6.70/mmbtu, at least for LNG shipped to Japan. The new report forecasts LNG prices in Japan of $8/mmbtu in 2030, which would allow AK LNG to earn a profit.

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Alaska Business June 2022 Cover

June 2022

AGDC has lowered the estimated cost of AK LNG by 43 percent since 2016. The biggest contributor was the introduction of a debt-funded third-party tolling structure for 70 percent of financing. That reduces the capital costs from $45 billion to $38.7 billion.

The breakeven cost of $6.70/mmbtu gives AK LNG a lower price tag than peer projects in the Gulf of Mexico. Those projects also face higher shipping costs for sending LNG to markets in the Asian Pacific rim.

One place where Alaska is not competitive with the Gulf of Mexico, the report notes, is the area of property taxes. In Texas and Louisiana, LNG facilities are taxed around 0.5 percent and zero percent, respectively. Wood Mackenzie suggests that, if AK LNG was subject to a midrange property tax of 0.2 percent, project costs would shrink to about $6.20/mmbtu.

Another way to reduce project costs is to access a federal loan guarantee in the Infrastructure Investment and Jobs Act (IIJA). The legislation enables a guarantee of up to 80 percent of capital costs, which would reduce the risk to lenders and therefore let AK LNG borrow at a cheaper rate. The IIJA also amends the Alaska Natural Gas Pipeline Act of 2004 to eliminate the requirement for LNG to be shipped only to West Coast ports for domestic consumption.

The report forecasts global demand for natural gas to drop after 2040, as countries implement measures to reduce dependence on fossil fuels. However, gas demand in Asia is expected to continue growing for another decade at least. The report concludes that, thanks to cost optimization and debt financing, the AK LNG project is price competitive starting in 2028.

Governor Mike Dunleavy welcomed the Wood Mackenzie report, saying, “The Alaska LNG project is well positioned for Alaska to realize the decades-old dream of bringing our natural gas off the North Slope for the benefit of Alaskans and worldwide markets.”

AGDC received authorization in 2020 from the Federal Energy Regulatory Commission to construct and operate AK LNG.

Alaska Business Magazine June 2022 cover

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