Alaska LNG – no lessons learned from Australia

Something is exciting up in the north. It’s big, it’s cool, it’s the new darling of the LNG world.

World – meet Alaska LNG.

Shall we be excited? For a second we might, but there is something strange creeping up our spines.

About 2 years ago I wrote about the Black Mamba effect in LNG projects. Remember – the rationale is simple. Spend too much money while building your project and you are toast in the long run as no market stays stratospheric forever.

We have seen it developing its full effect in Australia where LNG projects are already technically bankrupt before they are even commissioning.  Not smart and those “not smart” projects burn tens of billions of dollars.

Just take a look at Gorgon LNG or the Queensland adventures where double-digit, billions of Dollars have been burnt for some rather small output. If someone told me that I would get 50 million metric tons of LNG for a 50 billion-plus investment, then I would say that although the total numbers are big, the volume of LNG is very big as well and respectively I have some wares to play with.

The only remaining question would then be what effect so much LNG at once would have on the market. But I would still have all this LNG I can sell.
In Gorgon’s case, it’s much less than 50 million metric tons but rather closer to 15 million metric tons. This makes the produced LNG expensive.

Some might say, that it’s not fair to compare Australian projects with – let’s say the Qataris – as the conditions put in place by the Australian environmentalists are very expensive to fulfill and that there is no other way to exploit the gas reserve otherwise. But then I ask, since when is business fair and why is it that when a gas reserve has been found (even if it’s world-class) it must be exploited at all costs or efforts? Let me say this again just to push the point a bit.

Once a world-class reserve (I attach this quality only for size) then – as conventional wisdom seems to dictate – this reserve must be exploited no matter what the cost and other implications. Is this true?

When I was a gas freshman, I learned the notion of a stranded gas field. This was a field that although it contained gas that would be very nice to have in Europe or some other well-paying market, was either located at an impossible place or had things in the gas that made it expensive to refine or the stuff was hard to get out of the ground or hard to …

Do you get the point? Some gas reserves should never be touched as they contain a poison pill. Exploiting them usually contains a lot of wishful thinking and style: if this gas would not be in the Southern Atlantic but rather in Japan, it would be worth a fortune.

But the sad fact is, that it is located in the South Atlantic or some other impossible place, or that it does contain astronomic amounts of sulfur which makes it poison gas, or that it is placed in a permafrost setting that makes every move an economic pain, or that it needs special lifting techniques that make bringing it to daylight an arduous campaign and I am just counting examples here. Fill in your reason why it does not work.

Unless there is a shift in technology in business procedures or operational practice or a tectonic market shift, the extra effort is likely not worth it. High prices in some markets for some years are no such tectonic shift. The industrial use of horizontal drilling together with fracking and operational streamlining as in shale would be such a shift. But then again, everything has to be put in perspective.

Folks, everyone who knows me also knows that I am an unabashed methane fan and that I do fancy new LNG or another methane project. I like biogas despite its current problems, I love the shale revolution, I dig news on syngas and other exotic techniques, and I fight tooth and claw for the introduction of LNG as a trucking and shipping fuel as this is much better than diesel in many respects, I am a real methane aficionado but can’t we agree that no matter how much one likes the molecular compound or the business, some projects are just not worth it.

Back to Alaska LNG. One would be forgiven to think that destroying value (money) on such a scale cannot be repeated too many times. The market would watch and learn lessons. Shouldn’t we all have watched what happened and taken precautionary measures? Alarm bells should ring when cost estimates go out of the window by now.

But none of this.

It seems just like the world does not want to learn even in the face of looming disaster. Australia should have been a warning to everyone around but it’s not.

Just look around. LNG projects in Mozambique likely are so expensive that they can never turn a dime. Same for Tanzania. LNG export projects in the US that are only planned and built because someone did not want to admit that the original regasification terminals were as useful for the shale gas-independent Amerika as an asshole is right on the tip of the elbow.

To the casual observer, it would just look like the world is crazy on LNG, and the bigger and more expensive the projects are, the better. But many seem to have forgotten a fundamental truth.

Any project, from chewing gum production to LNG, needs to produce profits otherwise they should be shelved. And a profit they can only produce if they spend less for producing their wares than what they can reasonably expect to earn (thanks for this lesson Dad).

High-price markets have the unfortunate effect of luring project developers into believing that the Bonanza will go on forever but no matter how high prices go and no matter how long they hover there, in the long run, they always come down. High prices carry their demise within them as they are the strongest incentive for entrepreneurs and customers to look for alternatives.

And the higher prices go, the stronger the drug called the bull market becomes. Project developers easily get addicted to these high prices as they make many projects – that would otherwise never fly – worthwhile or sometimes even seemingly profitable.

For someone dealing in Orange juice, this would not be a problem. I don’t know anything about the orange juice market but I would be surprised if an orange juice producer would need 20 years of stable returns to make his investment worth it.

This exactly is the case in base-load LNG. If your project needs a 15 USD per mmBtu or more gas market price in the target market to be profitable, it would need this price level for 20 years. This means that if the market slumped for 5 years to 10 USD, the project would be in bad trouble as its losing money.

Someone will have to take the hit and that’s either the customer of the project who bought way too expensive and starts to subsidize its LNG purchasing portfolio with money from healthy operations or the project developer as he cannot generate enough income to cover his installments plus OPEX anymore.

Why then, should Alaska LNG be in this class? Couldn’t it be that the lessons have actually been learned and that they have already been absorbed in the Alaska LNG business case?

Let’s look at the high-level figures that have been communicated. Between 45 and 65 billion USD CAPEX to spend on a project that will produce up to 20 million metric tons of LNG per year. That’s a whopping 2.25 to 3.25 billion USD per million metric tons of capacity or 2250 to 3250 USD per ton of capacity.

Haven’t we been at somewhere around 400 USD per ton of capacity already or below in other projects? No matter how real they might have been or not, this is a 6 to 8-fold increase in capital costs and I will be dammed if OPEX in Alaska is on the cheap side. I expect the same environmental conditions as we have seen in Australia.

Another huge pile of money burnt. And I am not even talking about cost overruns right now. All the new Aussie projects have been plagued by runaway costs but cool Alaskans probably have hired Polar bears and keep them on an oatmeal diet to make them keep the numbers aggressively in check.