Consultant's new cost projections more favorable to Alaska LNG economics

The Alaskan government entity managing the state's struggle to build a multibillion-dollar LNG export terminal and pipeline system touted new supply cost projections that would make the project cheaper than US Gulf facilities for natural gas delivered into key Asian markets.

Alaska Gasline Development Corp. said in a report released Jan. 31 that it now estimates that the delivered supplies from the Alaska LNG project would be about $6.70/MMBtu, or about 43% lower than the $11.70/MMBtu cost estimated in 2016. This delivered cost compared to US Gulf supplies that are closer to $8/MMBtu, according to the report, which was prepared for the state organization by energy consultancy Wood Mackenzie.

AGDC released the report at a time when the developer is working to shore up the credentials of the project, which the state wants to turn over to private interests. The Alaska LNG export terminal in Nikiski on the Kenai Peninsula would be capable of producing 20 million metric tons per year of LNG. The project has faced persistent difficulties that include trouble securing customers and a high price tag for the project of about $38.7 billion, even after cost-cutting.

Revised costs

The new report partly attributed the drop in supply costs to revised capital expenditure costs and a lower estimated feedgas cost of $1.15/MMBtu instead of $2.09/MMBtu, a cost that would be subject to negotiation. Another factor in the lower estimate was a new project finance structure that would use 70% debt financing and cut supply costs by 29%, Wood Mackenzie said.

The research firm said federal loan guarantees made available to the project under the Infrastructure Investment and Jobs Act could further lower the cost of delivered supplies to Asia to around $6/MMBtu. The bipartisan legislation signed into law in November 2021 removed restrictions on around $26 billion in federal loan guarantees for projects commercializing North Slope gas to make them accessible to the Alaska LNG project. Getting a federal loan guarantee could lower the cost of debt, but markets observers have questioned whether the Alaska LNG developer will be able to do that.

The project would still have to be bankable to secure financing, which remains a major obstacle. Most of the loan guarantees would be accessible for the facilities connected to the export terminal component, which the report said was an estimated $16.8 billion of the overall cost.

Delayed dream

Building infrastructure to move stranded North Slope gas, amounting to about 35 Tcf of proven gas reserves, has been a goal of Alaska and the federal government for decades. AGDC has touted a shipping route to Asia that is about 14 days shorter from the Alaska LNG site than from the US Gulf. The developer has also promoted climate benefits of the project, releasing a study in October 2021 that said Alaska LNG could prevent 77 million metric tons of CO2 equivalent emissions per year if exported gas displaced coal-fired power generation in China.

AGDC's latest effort to market the project came almost a year after the developer said it would shift its focus toward developing a pipeline project that would move North Slope gas to the Fairbanks area in the central part of the state. The plan would be to use that $5.9 billion pipeline — one part of the proposed 800-mile-long, 42-inch-diameter line that would feed the planned LNG terminal in southern Alaska — as a first step toward the broader project. AGDC said it wanted federal clean energy infrastructure funding to cover about 75% of the pipeline costs and rely on a private partner to cover the rest of the project costs and spearhead the line's development.

In 2019, the state signaled that it planned to concentrate on getting the project through permitting instead of working to commercialize the project or managing it long term. The Federal Energy Regulatory Commission authorized the Alaska LNG project in 2020.