General view of the Trans-Alaska pipeline terminal at Valdez, Alaska, July 29th 1977. (Photo by … More UPI/Bettmann Archive/Getty Images)
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The North Slope of Alaska contains a large unexploited natural gas resource, primarily associated gas in the Prudhoe Bay oil field where it is currently being reinjected to maintain field pressure. Ever since 1977, various proposals have been made to commercialize the gas, ranging from Carter’s suggested Alaska Natural Gas Transportation System (yes, ANGTS) to a fleet of LNG-carrying submarine tankers.
Numerous stakeholders would like to see the gas exported; taxes and royalties would accrue to the state and unions would set high-paying construction jobs. A pipeline to southern Alaska could also provide local customers with gas, supporting some industries there that have been in decline. The Alaska Town at the Center of Trump’s $44 Billion LNG Push – The New York Times
The Trump Administration, with its focus on America’s trade deficit, promotes the project as a way to reduce our trade deficit and has urged some allies to either invest in the project or agree to buy its output. Which is hardly new: promoters of an LNG export project in the 1980s argued it would help reduce the U.S. trade deficit with Japan, then a top political issue.
This reminds me of an old economist’s joke. A king asked his alchemist to develop a method to turn lead into gold and gave him a research grant. After some months, the alchemist returns and announces that he has succeeded, upon which the king instructs his treasurer to give the alchemist whatever funds he needs to make a pound of gold. The treasurer returns the next day and informs the king that the alchemist asked for funds worth more than a pound of gold. Upset, the king summons the alchemist and asks why he would spend more than a pound of gold to create a pound of gold. The alchemist, offended, replies, my job was the engineering, not the economics.
The point is that the natural gas reserves on the North Slope of Alaska are large and, in theory, valuable. But the cost of delivering them, not politics or nimby-style opposition, has always been the obstacle to their development. In the 1980s, Yukon Pacific worked to develop a lower-cost pipeline from the North Slope to an LNG plant in southern Alaska which they argued would allow for profitable exploitation of the resource. The economics of their proposal, the Trans Alaska Gas System or TAGS, were appealing when oil was $80 a barrel in 1985 (adjusted for inflation), which would have translated into an LNG price of about $12/Mcf landed in Japan, making it roughly viable. Sadly, the oil price dropped by half in 1986 and didn’t recover for nearly two decades. LNG prices followed along as the figure shows, making the project’s economics unattractive.
LNG Price In Japan (2020$/MMBtu)
The author from Energy Institute data
The project has now been revived for a number of reasons, including in response to the recent spike in LNG prices. Prices soared after European countries’ lost access to Russian gas supplies and went scrambling to find replacements. Earlier, the 2011 closure of Japanese nuclear power plants after the Fukushima accident also saw a spike in demand for LNG, with prices going well above historical norms.
It is risky to expect short-term price spikes to persist; peace in the Ukraine could bring global gas prices down significantly, for example, if Russian flows to western Europe resume. On the other hand, the growing demand for clean natural gas as replacement for coal usage could keep LNG markets tight and prices elevated in coming years, but many LNG analysts expect growing supply from Qatar and the U.S. to keep the market in surplus for the next few years.
There is a long history of countries paying above-market prices for LNG supplies, where ‘market prices’ are a hazy metric. The Carter Administration encouraged pipeline companies to sign import contracts with LNG suppliers like Algeria at a price of $4.94/Mcf (about $20/Mcf in 2020 dollars) at a time when the average U.S. price was about $4/Mcf in 2020 dollars. With price decontrol, and changes in regulations, U.S. production soared and those contracts were mostly cancelled.
Similarly, in the 1980s, the French government offered Algeria a price premium as a form of foreign aid, with the expectation that Algeria would spend the revenue on French goods. After a brief period, the weakening European gas market encouraged Gaz de France to rescind the price premium.
Utilities in Asia might be willing to pay a premium for diversification of supplies, especially after recent turmoil in LNG markets related to the Russian invasion of Ukraine. And countries like South Korea and Taiwan might encourage their utilities to buy gas to appease the Trump Administration, even if prices are not strictly competitive. Given that most potential buyers are state-owned or regulated monopolies (gas or electric power companies), governments can allow them to pass the additional costs through to customers.
Doubtless, a project that relies on political pressure is riskier than one which is economically viable regardless of the party in power or the nation’s foreign relations. Which takes us back to the issue of the project economics. These are somewhat uncertain because it involves building a major pipeline in the Arctic, an environment different from most modern pipeline projects.
The table below compares cost estimates made for four proposed projects in the 1970s, one in the1980s and a current one, and there is significant disagreement among them. Largely that reflects different project design: the 1970s versions were mostly intended to traverse to the lower-48 United States, including connections to northern Canadian gas.
Estimated Alaskan Gas Pipeline Cost
The author from works cited.
Sources: Mead et. al. (1977); Adelman and Lynch (1985); Developer Glenfarne Buys Most of Alaska LNG Project Estimated at $44B | Engineering News-Record
I have calculated unit costs for the pipeline as 20% of capital costs, reflecting a 15% cost of capital/discount rate and 5% for operating costs. Cost of gas at the wellhead, royalties and property taxes are not included but would presumably add $2-4/MMBtu to the delivered cost. Other costs, such as $9.3 billion in contingency costs that the Alaskan project developers have estimated are not included. Alaska LNG Project Seeks Investors
The much lower cost estimates made in the 1970s might reflect several factors, including the fact that much of the length of these longer pipelines would not be in Arctic terrain. Also, environmental regulations and increased public opposition to large-scale developments were less of a factor then. The possibility that the earlier estimates were optimistic so as to make the projects more appealing cannot be ruled out. The same could be true of the recent cost estimates, but construction technology has advanced in the past half century, so that lower costs per mile are not unreasonable.
Even if the current estimate of $11 billion for the pipeline is accurate, gas at the plant gate will cost upwards of $5/MMBtu. This is more than plants on the Gulf Coast have paid in recent years, but lower shipping costs to Asian customers mostly offset that. The cost of a liquefaction plant in Alaska will no doubt be more than that in the U.S. Gulf Coast, but the project’s developers estimate it would be $13 billion for 20 million tons per year capacity. Alaska LNG Project Seeks Investors Compare this to the $4 billion that Commonwealth estimates an 8.4 mtpa project in Louisiana would cost FERC Makes Decisions on Pair of US Gulf Coast LNG Projects and the additional 30% does not seem excessive.
Still, it appears that delivered prices of $10/MMBtu would just make this project viable but certainly it would be one of the higher cost projects currently under consideration.
On the plus side, LNG prices rarely reflect the cost of the delivered gas. Since the 1970s, most international trade has been conducted using crude-oil-price indexation, that is, the LNG is priced at the same level as crude oil, converting according to the relative energy content of the two products. Roughly speaking, divide the price of crude oil per barrel by six to yield the natural gas price in MMBtu. So, if oil prices are $60 a barrel, LNG prices would be $10/MMBtu.
The reliance on this pricing clause originated in the 1970s when LNG markets were immature and essentially an oligopoly. Many buyers were power companies that were substituting LNG for oil and thus willing to pay equivalent prices for a cleaner fuel. Nearly all were regulated or state-owned utilities and could pass the prices on to customers, so had little incentive to try to drive prices lower, even assuming such was possible. The advent of more aggressive U.S. LNG exporters has seen that model break down, but the major Asian buyers still accept it for much of their supply.
Overall, the economics of the Alaskan LNG project are not bad but not great, primarily because of the high cost of the pipeline to the south coast. However, as long as most non-American projects have pricing clause that tie LNG prices to oil prices, and as long as OPEC+ maintains oil prices near $65 a barrel, the supplies will probably find customers.
The three biggest risks to the project are cost overruns making it uneconomic, changes in the political environment and lower oil and/or LNG prices globally. The projects promoters appear to have allowed for the first in their proposal, which includes $9.3 billion for ‘contingencies. Alaska LNG Project Seeks Investors That amount is not reflected in my cost estimates above. And since the project probably won’t be completed while the current Administration is in office, there is a chance that a new administration would pause a partially complete project, adding to costs.
The political risk also involves the extent to which customers are paying above-market prices solely or primarily to appease trade demands from the current Administration. Once a new administration takes office, importing governments could conceivably pressure their utilities to demand lower prices. To the extent that the prices are close to those prevailing elsewhere and are being paid by government-owned or regulated utilities, that risk will be ameliorated.
Should OPEC+ or some subset decide that the current oil price of around $65/barrel is indefensible because of shrinking demand for their oil, as in the early 1980s, a price collapse of 25% or more would threaten the Alaskan LNG project’s economics. This is a possibility although at this point it does not appear likely, at least for the medium-term future. (A brief price war in the near-term cannot be ruled out, but would not last as long as it takes to develop the pipeline and LNG project.) The IEA has suggested that weak demand due to the energy transition would lower LNG prices over the long term, as the figure shows, but the IEA’s track record of price forecasting does not create confidence in these scenarios.
Japanese LNG Prices, Actual and Forecast (2020$/MMBtu)
The author from works cited.
Sources: IEA World Energy Outlook 2024, p. 90. STEPS is the Stated Policies Scenario, NZE 2050 is the Net Zero Emissions Scenario. Numbers are interpolated. Actual from Energy Institute op. cit.
Ultimately, this project has the potential to provide a large quantity of low-carbon fuel at something close to competitive prices. However, investors face the risk that the economics might prove marginal due to lower oil prices, cost overruns and/or the withdrawal of political support. Buyers risk being locked into prices that prove uncompetitive if they accept some or all of the risk of cost overruns, or if oil prices drop significantly. Sharing and spreading the risks will enhance the project’s appeal, but careful control of costs seems likely to be the ultimate factor in success from the point of view of the investors.
Sources: Adelman, M. A. and Michael C. Lynch, with Kenichi Ohashi, “Supply Aspects of North American Gas Trade,” In “Final Report on U.S.-Canadian Natural Gas Trade,” Center for Energy Policy Research, M.I.T., October 1985. Canadian-US_Natural-Gas-Trade-1.pdf
Mead, Walter J., with George W. Rogers and Rufus Z. Smith, “Transporting Natural Gas from the Arctic: The Alternative Systems,” American Enterprise Institute, 1977.