Japanese firms eye Alaskan LNG project stake

Mitsui & Co. and Mitsubishi Corp. are seeking a 10% stake in a proposed project to export Alaska North Slope (ANS) liquefied natural gas to Asia.

The Japanese trading houses hope to negotiate a deal with Exxon Corp. and partners to import 7 million metric tons/year-an amount equivalent to about 15% of Japan's current LNG demand-beginning in 2007.

Mitsui and Mitsubishi want to invest more than 100 billion yen ($821.4 million) in the massive project, according to Japanese press reports.

If the companies arrange a 20-year contract, the value of the imports is expected to top 3 trillion yen ($24.64 billion).

ANS gas reserves-about 35 tcf-hold enormous market potential. For years, a group of U.S. companies has been evaluating and planning an Alaskan LNG export project based on those reserves. The group is led by Exxon Corp. Participants include ARCO Alaska Inc., BP Exploration Alaska, Yukon Pacific Corp., and, most recently, Phillips Petroleum Co. (OGJ, Sept. 1, 1997, Newsletter).

Total investment in the project, including the cost of a 1,300-km southbound gas pipeline and liquefaction facilities at tidewater on Alaska's southern coast, is estimated at $12-15 billion. Plans call for the rest of the estimated potential 14 million tons/year of ANS gas production to be exported to South Korea and Taiwan.

Casting about

ARCO confirmed that partners in the proposed Alaskan LNG project met with Mitsui and Mitsubishi during a recent trip to Japan. Purpose of the trip was to assess market demand, gain investor interest in the project, and lay the foundation for future gas contracts.

Press reports of a deal between the producing partners and the Japanese traders were overblown: "We do not have a gas sale contract in hand at this time," said ARCO's Ronnie Chappell.

He added that, if correct, the reports are an encouraging sign that the proposed project is being taken seriously. ARCO and partners are planning to form a "project sponsor group" in the next few months. This group will include utility, trading, and shipping companies. Chappell said ARCO sees the final project as one that will include equity interests of gas consumers and shippers.

Two steps are important in making the export project viable, said Chappell. These are reducing costs and developing a stable federal and state tax regime under which the project can be competitive.

Feasibility study

According to a project study completed early this year by Pedro van Meurs, Van Meurs & Associates Ltd., Calgary, total costs would have to be about $12 billion (in 1997 dollars) for the project to be economically feasible. In addition, said van Meurs, fiscal cooperation of federal, state, and local governments would be necessary to improve profitability, and risks would have to be reduced considerably.

Under the project plan analyzed by van Meurs, a gas price of $3.50/ MMBTU would yield a 10.8% rate of return (ROR) for a $12 billion project, compared with a risk-adjusted hurdle rate of 12%. Improved conditions, including the changes he said are necessary to improve profitability, would bring the ROR just past the hurdle rate, to 12.1%.

A shorter ramp-up time of 41/2-5 years (vs. the planned 2005-2010 start-up) would improve the ROR by about 0.5%, according to the study.

"An important provision that exists in the U. S. and is not available in Canada, Australia, or any of the other potential LNG producing countries is the fact that the state of Alaska can arrange for financing packages whereby the interest is not taxable on the part of the lenders," said van Meurs. "This could be a lever for the project that permits Alaska to support the project in a way that would not be possible in the competing countries."

Van Meurs suggested that Alaska could provide additional help by assuming some of the financial risk of the project. This could be done through detailed contractual arrangements with producers, he said.

"The combination of improved fiscal terms and risk reduction may result in an overall situation where the project would be considered profitable and attractive by the producers," said van Meurs. "From that point onwards, it would be the actual development of LNG market conditions that would determine when the project could be launched in the 2005-2010 time period."