$43 Billion China-Alaska Energy Deal Looks Shaky

By Nick Cunningham

China’s largest oil company, Sinopec, signed a deal last week to explore the development of a massive $43 billion natural gas pipeline and LNG export terminal in Alaska. The project would carry natural gas from Alaska’s North Slope to its southern coast, where it would be liquefied and exported.

The announcement was one among a flurry of putative deals inked as part of U.S. President Trump visit to China. But despite the hype, it is merely a non-binding vague agreement that lacks details regarding financing, offtake agreements, or timelines. Without those hard contracts, it is highly questionable whether the project moves forward. “This is a typical announcement that comes out of these big summits,” Jason Feer of energy consultancy Poten & Partners, told Reuters. “You really can’t build, or get financing for a big project, unless all those pieces are in place.”

The agreement calls upon all parties involved – Sinopec, China Investment Corp., the Bank of China, the Alaska Gasline Development Corp. and the Alaskan government – to explore different aspects of the project and meet in 2018 for a status update.

In theory, LNG exports from Alaska to China would make sense. China needs more gas supply, and the U.S. has a lot of gas. The North Slope is thought to have at least estimated 35-45 trillion cubic feet of natural gas. China is trying to clean up its air quality, and gas is set to play a central role in displacing dirtier coal plants.

“A combination of rising export capacity in the US, LNG import demand growth in China, and political cheerleading has underpinned an uptick in LNG exports to China this year via third party, spot trades,” Kerry-Anne Shanks, head of Asia gas and LNG, at Wood Mackenzie, told the FT. Alaska is also significantly closer to China than, say, the Gulf Coast, where U.S. LNG is currently coming from.

But the economics of building an 800-mile gas pipeline across the entire state of Alaska, over rough and remote terrain, are questionable, to say the least. There is a reason why several oil majors had already passed on the project.

After several years of consideration, ExxonMobil backed out of the Alaska LNG project in 2016. The decision came as a wave of LNG supply hit the market, sending prices for LNG in East Asia careening downward. A handful of truly massive LNG export terminals in Australia, for example, have come online in recent years, projects that are much better positioned at servicing China. Wood Mackenzie said in 2016 that Alaska LNG was “one of the least competitive” LNG projects in the world. Eyeing low prices that could stretch into the next decade, Exxon decided Alaska LNG didn’t make sense. BP and ConocoPhillips, two other partners in the proposed project, also backed out.

But the state of Alaska, worried about a fiscal crunch as oil revenues decline, was not ready to give up. It purchased stakes in the project, and Alaskan officials have been scrambling to find partners since. Alaska’s governor, Bill Walker, hopes China helps the project move forward.

Walker said the pipeline and LNG export terminal would generate $8 to $10 billion in revenue each year. He hopes to have more concrete agreements in place for the project by the end of 2018, with the goal of production starting up in 2024 or 2025.

The idea would be that China would purchase something like three-quarters of the LNG supply, although some analysts believe that Alaska would need to line up more customers before it could secure financing for construction.

The agreement between Alaska and China, like many of the other deals announced on Trump’s visit, amount to just words on paper. Sinopec will likely mull it over for a while, but could easily decline to move forward at any point.

Alaska is struggling in a world of $50-$60 oil – after Shell’s abandonment of oil exploration in the Chukchi Sea in 2015, the state has had a tough time attracting upstream investment. And with LNG spot prices below $10/MMBtu, it will be an uphill battle convincing companies to invest in a nearly $50 billion pipeline and export project when there is already plenty of supply and a long list of more attractive proposed projects elsewhere.

“We will see massive amounts of new LNG capacity coming to the market … so we will probably continue to have well-supplied markets into the middle of the 2020s,” Keisuke Sadamori, director of energy markets and security at the International Energy Agency (IEA), said in October.

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