Alaska needs options for its natural gas

Alaska needs options for its natural gas

Some Alaskans look askance at Gov. Bill Walker’s continued quest for a gas pipeline, particularly one led by the state. It hardly seems like the thing to do, given our multibillion-dollar budget deficit.

Walker points out, rightly, that finding markets for North Slope gas is hugely important for the state’s economy. Gas production will help produce more oil, potentially extending our industry for decades.

For now North Slope producers have stepped back from the big Alaska LNG project given the lousy market for liquefied natural gas, or LNG, but they encourage the state, who was a partner in Alaska LNG, to continue the effort.

Harold Heinze, a former ARCO Alaska president and state resources commissioner, thinks having the governor out waving the flag is the best sales effort Alaska can have, particularly in Asia where official status is important.

Heinze knows this because he was Gov. Wally Hickel’s chief gas marketer back in the 1980s and he saw how this opened doors. In fact, Heinze landed the state’s only hard-dollar offer ever made to buy Alaska gas, from Taiwan. The offer was 50 cents a thousand cubic feet, the equivalent of about $2 today. Hickel turned it down, though, believing the price too low for the state’s gas.

It’s good for Walker to be out there hustling, Heinze says, but it’s a tough market. LNG prices are about half of what is needed to make the big $45 billion LNG project pencil out. With cheap shale gas likely to continue there’s no telling when things may turn up.

Given this, Alaskans should start thinking about what else can be done with the gas, Heinze and others say. There’s a time clock on this. For now, gas in the Prudhoe reservoir helps produce more oil. After 2025 the lack of gas “offtake” from the reservoir begins to undercut oil production.

What are the alternatives? Heinze thinks gas-to-liquids might be one. This process manufactures liquid products from gas which can be shipped through the trans-Alaska oil pipeline, now running three-quarters empty.

Another idea out there, less far-fetched now than it was just a few years ago, is shipping LNG from a North Slope plant into ice-strengthened LNG tankers.

Both of these ideas avoid the huge cost burden of an 800-mile pipeline. That is the biggest economic challenge, besides LNG prices, facing the Alaska LNG project.

Gas-to-liquids, or GTL, is not liquefied natural gas, which is gas super-chilled to liquid form that must be regasified. Rather, GTL turns the gas, through a chemical conversion, into liquid products that can be used for several purposes.

The major North Slope producers have looked at this, ExxonMobil being the most interested, but the sheer scale of the plants and their huge costs are a barrier. Among large companies only Shell and Sasol have built and operated profitable GTL plants.

But Heinze says a technology revolution is in the works with GTL.

Small, entrepreneurial technology companies are developing ways to shrink the kit so that less expensive, more versatile plants can be built. This is similar to the way small technology companies — modern-day wildcatters — upended the industry with shale gas and oil.

Tech companies, borrowing an approach from the space and computer industries, have miniaturized GTL technology so that plant units that were multistory tall with the old approach now fit on the back of a truck. They can also operate at much smaller volumes.

On the North Slope a small plant like this could make specialized liquids for use on the slope or a synthetic crude oil to ship through the oil pipeline. To make products, small refining units are essentially bolted onto a GTL plant.

Heinze thinks the most interesting applications could be “designer” fluids to mix with heavy oil, allowing this large, untapped North Slope resource to be shipped through the pipeline (this won’t move without being mixed with something), or special fluids for enhanced oil recovery in producing fields.

Richard Peterson, an Anchorage-based gas project developer, says the value of these projects can be much greater than the natural gas shipped as it is. To illustrate this, the 35 trillion cubic feet of proven natural gas on the slope would be worth $95 billion if sold as gas at present prices and $210 billion if sold as synthetic crude oil shipped through TAPS and sold at $50 per barrel.

Tech companies at the leading edge of the new GTL include Primus Green Energy and Velocys PLC, firms Peterson is working with. Others include CompactGTL, INFRA, Gulf Process Gases and Extiel. Another is Greyrock Energy Inc., Heinze said.

Velocys has the first of its commercial plants about to start in Oklahoma City, making 300 to 400 barrels a day of products from a mixture of landfill methane and conventional natural gas.

On direct-loading of LNG on the North Slope, even five years ago, the idea of ice-strengthened LNG tankers navigating Arctic ice would seem crazy. No longer, given the fast melting of the Arctic ice sheet, Heinze said.

Mead Treadwell, a former lieutenant governor and director of a federal Arctic research commission, says Russia is already doing this. Tankers from LNG plant in Russia’s Arctic already transit the Bering Straits.

Alaskans had better keep an eye on this, Treadwell said. Interestingly, the shipping distance from Prudhoe Bay to Tokyo about the same as from Cook Inlet to Tokyo.

Heinze says a small LNG plant at Prudhoe could begin, prove the feasibility, and then, like gas-to-liquids, be expanded as markets develop. A handicap for the Alaska LNG project is that it must be big and sell 17 to 20 million tons of LNG yearly to be feasible. A smaller plant could easily start at 1 million tons and grow.

Treadwell and Heinze both support a large gas pipeline and LNG project and the governor’s current efforts, but both say alternatives are needed in case the LNG project, in the end, just doesn’t fly.

Heinze also raises the constitutional responsibility that whatever is done with the state’s royalty gas maximizes benefits to Alaska’s people. The gas must be sold for the highest possible value. Hickel understood that when he nixed Taiwan’s offer to buy.

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