Break the Ice - Could an Alaska North Slope LNG Project Undercut Gulf Coast Competitors?

A number of proposed liquefaction plants and LNG export terminals along the U.S. Gulf Coast are racing to secure regulatory approvals and line up sales and purchase agreements, all in the hope of reaching final investment decisions before their rivals. Yet, these Texas and Louisiana projects now face competition from a facility that would be sited more than 3,000 miles away, in the icy waters just off the North Slope of Alaska. Qilak LNG would use a “near-shore” liquefaction plant in the Beaufort Sea off Point Thomson, AK, to supercool the region’s nearby, abundant and now largely stranded supplies of natural gas, load the resulting LNG onto ice-breaking carriers, and use these carriers to make shuttle runs to and from LNG customers in Asia. Today, we review the Qilak LNG project and the economic and logistic rationales driving it.

The state of Alaska and producers along its North Slope near Prudhoe Bay have a crude oil and natural gas problem on their hands. On the crude side, production from the Alaska North Slope (ANS) region peaked at 2 MMb/d in 1988 — 11 years after the 2.1-MMb/d Trans Alaska Pipeline System (TAPS) from the North Slope to Valdez, AK, was completed. Since then, ANS oil output has been declining steadily; in 2018, it averaged only 464 Mb/d, according to the Energy Information Administration (EIA), and in the first eight months of 2019, ANS production fell to less than 450 Mb/d. In A Change Is Gonna Come, we explained that as flows through TAPS ratchet down below 550 Mb/d, more and more mitigation is needed to keep the oil moving through the pipe due to freezing, wax buildup and other problems that come with lower flows. Worse yet, if and when volumes on TAPS fall much below 350 Mb/d, all bets would be off on whether the pipeline could continue to operate without a major re-do.

Then there’s the gas conundrum. North Slope oil fields also produce large volumes of associated gas, and while mixed NGLs can be removed from the gas stream and sent down with the crude on TAPS, there’s no way to market the remaining natural gas. The ANS gas is stranded. Literally stuck in the middle of nowhere because plans for a big gas pipeline from the North Slope to the Lower 48 never gained traction. Fortunately, there’s been a good local use for the gas: every day, about 8 Bcf is re-injected into the ANS oil fields to help maintain pressure and force more oil to the surface. Enhanced oil recovery, in other words. But for reasons too complicated to get into here, the re-injected gas does less and less good as the amount of oil still in the ground declines.