Alaska editorial: All-Alaska route to export is not the best

Posted: Friday, June 06, 2008

The following editorial first appeared in the Anchorage Daily News:

I n reviewing TransCanada's gas line proposal, the Palin administration had to consider whether the state would be better off pursuing a line to export liquefied natural gas from Valdez. Gov. Sarah Palin, whose supporters include fans of the LNG option, has good reasons for concluding "no, not right now."

The most attractive market for LNG is in Asia, where buyers now pay a premium price for the clean, reliable fuel. But with today's high energy prices, there would be a huge political opposition in the U.S. to block any export of Alaska gas to Asia - just as there was to prevent the export of Alaska oil to Asia. The long odds against winning that fight are one reason no serious private investor has proposed to risk its own capital on a stand-alone North Slope LNG project. (Those touting the LNG option are not businesses; they are essentially extensions of local governments in Alaska.)

In addition to the export problem, Commissioner Tom Irwin told last week's gas line conference in Anchorage, the LNG option is more expensive. Building a gasification plan in Valdez, along with several cryogenic ships and a regasification plant in Asia, costs more than the extra 1,000 miles of pipeline. LNG's operating costs are higher, too - more gas is eaten up in the process of liquefying and transporting it, Irwin said.

Perhaps most important to Alaska, an LNG-first line will not encourage rapid expansion of the North Slope gas basin.

The TransCanada plan encourages exploration by committing to expand pipeline capacity for explorers that find new gas. Once the line is running, expanding it by up to 30 percent is cheap and easy. All you have to do is add more and bigger compressors - no new pipe is needed. With early-phase expansion, average shipping rates for all customers will actually go down.

Physically, it's not easy to make room at a liquefaction plant for new gas from new producers. That's why companies that own a lot of their own gas are generally the moving force behind LNG projects. "No LNG project has been established by a third party company building a liquefaction plant offering third party access," says Gas Strategies' report.

There are access problems with the pipeline to the liquefaction plant, too. "In general LNG project proponents have resisted third party access requirements on the pipeline," according to Gas Strategies.

What about selling Alaska LNG on the West Coast of the U.S.?

Several difficulties, says Gas Strategies' report: "Re-gasification capacity is very limited" in that market. The West Coast market is smaller and the price of natural gas is more likely to drop when a big new supply is brought in. Gas shipments bound for the U.S. would have to comply with the Jones Act, which requires more costly U.S. crews on U.S.-flagged ships.

For all those reasons, the economics of LNG proved to be much weaker in the state's analysis. In some price and cost scenarios, Commissioner Irwin told the conference, "an LNG project can go negative" financially.

Building the TransCanada line does not preclude the future export of LNG from Valdez. TransCanada has told the state it will commit to build a spur line to Valdez, known as a Y-line, if no other party comes forward to do it. An LNG export line actually makes more sense as a follow-on project, rather than as the first pipeline out of a large gas-producing basin. The best possible outcome for Alaskans would be to get the TransCanada line built, and for that to spur a flurry of gas exploration and additional production, which could justify the addition of an LNG project.

An All-Alaska pipeline carrying gas to an LNG port still enjoys a lot of populist appeal in Alaska. Unfortunately, so far that enthusiasm is not shared in the marketplace. TransCanada's approach has better odds of success - and if it does succeed, backers of LNG exports will be about 400 miles closer to their goal of getting gas to Valdez.

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