Wood Mackenzie: Competitiveness of Costly Alaska LNG Project Ranks Poorly

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Researched by Industrial Info Resources (Sugar Land, Texas)--Global consultancy firm Wood Mackenzie Limited (Edinburgh, Scotland) recently produced a report regarding the competitiveness of the Alaska liquefied natural gas (LNG) project in which BP plc (NYSE:BP) (London, England), Exxon Mobil Corporation (ExxonMobil)(NYSE:XOM) and ConocoPhillips (NYSE:COP) (Houston, Texas) are partners. Wood Mackenzie's findings for the project, which is estimated to cost between $45 billion and $65 billion, were less than heartening.

With such a hefty price tag, the project is a substantial undertaking and includes a $5.5 billion natural gas pipeline from Alaska's North Slope to the Kenai Peninsula, where the $15 LNG production and export terminal will be, as well as a $7.5 billion gas treatment plant. The project would produce 18 million tonnes per year of LNG to be shipped across the Pacific to markets in Asia.

However, Wood Mackenzie writes, "Currently the competitiveness of the Alaska LNG project ranks poorly when compared to competing LNG projects that could supply North Asia, specifically Japan, South Korea, China and Taiwan," finding that the project has amongst the highest break-even costs of supply when compared to similar peer projects. The study was commissioned by BP, ExxonMobil and the Alaska Gasline Development Corporation.

In Asia, the price of natural gas (and therefore LNG) is linked to the price of oil, making the current low oil prices a particularly challenging one for LNG suppliers and potential suppliers, many of whom began the financial reviews of their projects at a time when Asian spot and contract prices were much higher than they are at the moment.

Wood Mackenzie's study found that not only would the Alaska LNG project not make sufficient returns for investors in the current $45-per-barrel market, but would struggle even if oil rose to $70 per barrel. The study did provide some alternative solutions, such as having the State of Alaska take on full ownership of the project to help lower federal taxes, but even this would not make the project viable at current oil prices.

ConocoPhillips, BP and ExxonMobil must decide by the end of the year whether to move forward on the front-end engineering and design phase of the project, and the study could perhaps throw a wrench into the works, unless current oil prices or conditions of the project drastically change. However, officials with the three companies have already signaled an unwillingness to move forward on the project under the present circumstances, according to Alaska news media reports.

For more information, see August 1, 2016, article - ExxonMobil's 10 Top-Valued Projects Chained to Sinking Prices of Commodities, LNG. As the project nears significant milestones, we should expect to hear more about whether it will move forward or not.

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