Daily Archives: August 31, 2010

Estimated Alaska North Slope Netback Values (using closing prices for August 30, 2010)


Day Oil Gas (AGIA) Gas (Valdez LNG)
8/30/2010 $67.51/BOE Minus $3.15/BOE Minus $2.11/BOE

This page has started reporting netback values for Valdez LNG Gas.  For a discussion of the methodology and potential implications, see “What about those ‘premium Asian LNG markets …,’” (Aug. 31, 2010) http://bit.ly/bOw4rz.

What about those “premium Asian LNG markets” …

Turns out the “premium” revenues are consumed by higher costs …

The proponents of the Valdez LNG project often talk about “premium Asian LNG markets,” and the ability of those markets to help Alaska cope economically with declining oil production. The theory is that revenues from LNG sales to Pacific Rim markets will produce sufficient revenues to offset the impact of declining (and ultimately, ending) oil production. Among other things, this logic is used to justify the continuation of the ACES (“Alaska’s Clear and Equitable Share”) tax structure, by arguing that even if ACES causes producers to stop investing in new oil development, the Alaska economy will be fine because the Valdez LNG project will result in replacement revenues from sales of gas.

The argument always has created a sense of unease. Generally speaking, Asian LNG markets operate at price levels above those in the Lower 48. The analysis, however, has not captured the entire story. Pipeline facilities and LNG liquefaction plants are expensive to construct and operate. As the economic consultants to the State summarized when comparing the Valdez LNG project to the Trans Canada’s proposed AGIA (“Alaska Gasline Inducement Act”) pipeline to the Lower 48, LNG projects both have higher capital costs and significantly greater fuel consumption that comparably size pipeline projects. As a result, the unanswered question has been are the “premium” Asian LNG prices sufficient to absorb the higher costs of the Valdez LNG project and still produce revenues comparable to those produced from oil.

The answer turns out to be no. In an effort to assess whether a Valdez LNG project would produce net revenues sufficient to offset the impact of declining oil production this page has developed and started reporting the estimated netbacks to Alaska if either the AGIA pipeline or the Valdez LNG project were operating today. The results, using yesterday’s closing prices as an example, are reflected in the following chart.

Estimated Alaska North Slope Netback Values

Day

Oil

Gas (AGIA)

Gas (Valdez LNG)

8/30/2010

$67.51/BOE

Minus $3.15/BOE

Minus $2.11/BOE

Continue reading