Thoughts on Alaska Oil & Gas

(Revised to reflect the addition of an estimated netback value for “Bullet Line Gas.”)

The purpose of these estimates is to provide an indication of the relative value of Alaska North Slope (“ANS”) oil and gas to the Alaska economy.  The estimates provide values, netted back to the field, for ANS oil, and ANS gas delivered through three outlets – through an overland pipeline through Canada to the Lower 48 (“AGIA Gas”), through a pipeline to Valdez, Alaska, for conversion to LNG and ultimate sale in the Pacific Rim (“Valdez LNG”) and through a pipeline to Southcentral Alaska for conversion to LNG and ultimate sale to the Pacific Rim (“Bullet Line LNG”).  These estimates attempt to provide field netback values because that is the starting point used to calculate royalty and production taxes which, together, fund a large portion of Alaska state government.

To be clear, none of the market outlets for ANS gas actually exist today.  The reported value for the Alaska Gasline Inducement Act (or “AGIA”) market estimates what the current netback to the ANS would be for gas transported initially to the Canadian AECO hub through a pipeline yet to be built, and then on to the Lower 48 through either existing pipeline systems or additional pipelines yet to be built.  The second value, for “Valdez LNG,” estimates what the current netback to the ANS would be for gas transported initially by pipeline yet to be built to Valdez, Alaska, then liquefied at an LNG liquefaction facility yet to be built, then transported by ship and sold in markets in the Pacific Rim.   The third value, for the “Bullet Line,” estimates what the current netback to the ANS would be for gas transported initially by a pipeline yet to be built to Southcentral Alaska, then liquefied at the existing LNG export facility located near Kenai, Alaska, then transported by ship and sold in markets in the Pacific Rim. Continue reading →

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

Continue reading →

The purpose of these estimates is to provide an indication of the relative value of Alaska North Slope (“ANS”) oil and gas to the Alaska economy. The estimates provide values, netted back to the field, for ANS oil, and ANS gas delivered through two outlets – through an overland pipeline through Canada to the Lower 48 (“AGIA Gas”), and through a pipeline to Valdez, Alaska, for conversion to LNG and ultimate sale in the Pacific Rim (“Valdez LNG”). These estimates attempt to provide field netback values because that is the starting point used to calculate royalty and production taxes which, together, fund a large portion of Alaska state government.

To be clear, neither of the market outlets for ANS gas actually exist today. The reported value for the Alaska Gasline Inducement Act (or “AGIA”) market estimates what the current netback to the ANS would be for gas transported initially to the Canadian AECO hub through a pipeline yet to be built, and then on to the Lower 48 through either existing pipeline systems or additional pipelines yet to be built. The second value, for “Valdez LNG,” estimates what the current netback to the ANS would be for gas transported initially by pipeline yet to be built to Valdez, Alaska, then liquefied at an LNG liquefaction facility yet to be built, then transported by ship and sold in markets in the Pacific Rim.

Simply because the facilities for those market options have yet to be constructed, however, does not mean that current estimated netback values for gas using those market outlets cannot be constructed. A current market price for gas available at the AECO hub (named for the Alberta Energy Company facilities first used as a pricing point), for example, is reported for each weekday by publicly available sources. Similarly, a current netback price for LNG delivered to the port of Sodegaura, Japan, from the terminus of an existing LNG liquefaction facility of comparable distance from Valdez to that port is periodically reported by the Oil & Gas Journal. In addition, substantial public information has been developed and made available over the last two years regarding the cost, and likely tariffs, of the facilities necessary to deliver gas from the ANS to those points, enabling the construction from public data of an estimated netback value from those pricing points to the ANS. Continue reading →