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Japanese group offers fast-track on LNG

Posted: May 20, 2013 - 9:34pm

A Japanese consortium working on an independent Alaska liquefied natural gas project has completed a feasibility study and given it to state officials.

North Slope producers and TransCanada, who are pursuing their own LNG plant, have also been briefed on the proposal by officials with Japanese-owned Resources Energy Inc., or REI.

Gov. Sean Parnell’s support for the plan is critical to its success, said Shun-ichi Shimizu, president and CEO of REI in a May 13 interview with the Journal.

Parnell has so far supported a proposal by major North Slope producers and TransCanada, a pipeline company, for a gas pipeline and LNG project.

REI brings something new, however: Customers for LNG.

“This is the first time the market (LNG buyers) has come to the table,” Shimizu said.

The Japanese company’s team was in Alaska the week of May 13. Parnell was not available, but State Natural Resources Commissioner Dan Sullivan did meet with Shimizu and others on his team.

REI has also met with all three major North Slope producers as well as TransCanada, and with companies exploring for gas on the slope like Anadarko Petroleum.

A key difference between the plan developed by Japanese-owned Resources Energy Inc. and a large LNG project being pursued by North Slope producers and TransCanada Corp. is REI’s hope to fast-track it and be in operation by 2019, Shimizu said.

The project being pursued by the producers and TransCanada, in contrast, would not be constructed and operating until 2023 or later, those companies have said.

“We see 2019 or 2020 at the latest as critical for the entry of Alaskan LNG into the Japan market,” Shimizu said. “After those dates there will be major LNG supply coming into the market from other LNG projects now in development.”

REI also hopes to bring Alaska LNG to Japan for prices much lower than are now prevailing, in the range of $9 to $10 per million British Thermal Units, according to information REI provided to the state.

“Our study shows this project to be very feasible,” Shimizu said. “We feel strongly that the project can be developed in a timely manner, and will not miss the market window in 2020. In fact, we are hopeful that we can be in the market in 2019.”

Shimizu would not say what REI and its partners spent on the feasibility study other than it was between $10 million and $20 million, with part of it in-kind, or in services provided to the study. The next step, project engineering, will require between $50 million and $100 million, he said.

REI was formed in 2011 by Hyogo Prefecture, a regional government, and several small Japanese utilities in an effort to secure a source of imported LNG after the shutdown of most of Japan’s nuclear power plants following the devastating earthquake and tsunami that struck the country on March 11 that year.

Hyogo Prefecture, Mitsubishi Gas Chemical Co., Nippon Telephone and Telegraph Corp., Toyo Engineering, and Itami Industry helped finance the feasibility study, according to Mary Ann Pease, an REI vice president and its general manager.

Toyo Engineering and Air Products and Chemicals Inc. did the LNG plant feasibility study. Japan Marine Science Inc., the research unit of Japan’s NYK Line, did work on LNG shipping costs, Pease said.

REI’s primary focus for its feasibility study was on a large LNG plant at a Southcentral Alaska port, either at Valdez, now the terminus of the Trans-Alaska Pipeline System and site of the Valdez Marine Terminal, or at Nikiski, on the Kenai Peninsula south of Anchorage, where ConocoPhillips now has an LNG plant.

The study considered a base case of a plant at Valdez producing 5 million tons of LNG per year with one LNG “train,” or production module, at startup and 20 million tons per year with four LNG trains at full build-out.

A Valdez plant would be supplied by a 42-inch pipeline, as currently proposed by TransCanada Corp. REI has access to some of that information, Shimizu said.

The Nikiski alternative would be smaller, involving a startup at 3.5 million tons of LNG yearly with one train, a build-out to 15 million tons per year, and supplied by a 36-inch pipeline.

Alaska Natural Gas Development Corp., a state-owned corporation, has done engineering and cost estimates for a 36-inch pipeline to Southcentral Alaska. REI adapted AGDC’s information for its own modeling, Shimizu said.

Both pipelines, built from the North Slope, would be about 800 miles in length, operate at 2,075 pounds per square inch to be able to transport natural gas liquids like propane, and would have 8 compressor stations.

Estimated costs total $44.83 billion for the Valdez base case at full build-out. This includes the LNG plant estimated at $23.7 billion, the 42-inch pipeline moving 3 to 3.5 billion cubic feet per day at $10.43 billion, and a North Slope gas treatment plant at $10.7 billion.

The Nikiski alternative would total $37.83 billion at full build-out with the LNG plant estimated at $20.3 billion, a 36-inch pipeline moving 2.4 billion cubic feet per day at $8.83 billion, and the gas treatment plant at $8.7 billion.

Shimizu said the gas treatment plant and pipeline capital investment must be paid up-front in both cases but that the LNG plant would be built, and financed, in increments as it is expanded.

Ideally this would happen over four years, he said.

In comparison the project being pursued by North Slope producers and TransCanada would require a capital investment of $45 billion to $65 billion for a project that would produce 15 million to 20 million tons of LNG per year.

The producer/TransCanada group is still considering several sites in Southcentral Alaska for the LNG plant including Valdez and Nikiski.

A critical assumption in the REI analysis is that low-cost financing from the Japan Bank for International Cooperation would be available to Japanese companies making equity investments in the project.

REI’s analysis included borrowing costs for the pipeline and gas treatment plant ranging from 4.7 percent to 4.92 percent and at 3.125 percent for the LNG plant.

An advantage for the Alaska LNG project over competitive LNG supply from the U.S. Gulf coast is an estimated shipping cost of $1 per million British Thermal Units, Shimizu said, compared with $3 to $4 per million British Thermal Units for Gulf coast LNG, mainly because of a longer shipping distance from the Gulf and Panama Canal transit fees.

With the feasibility study done, REI hopes to create a consortium of Japanese utilities and local governments to take the project to its next stage of preliminary engineering.

The State of Alaska’s support, either as a part-owner of the project or a supplier of state royalty gas, will be critical, Shimizu said.

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