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Clock running out on TAGS.

Yukon Pacific's president says buyers and suppliers need to pick up the pace on what may be Alaska's last great project, the Trans-Alaska Gas System.

Time is running out on what could be Alaska's last great megaproject, Yukon Pacific's proposed $14 billion Trans-Alaska Gas System, as TAGS' overseas competitors position themselves to capture future liquefied natural gas (LNG) markets in the Pacific Rim.

To meet financing and construction deadlines for delivery of North Slope gas beginning shortly after the turn of the century, Yukon Pacific's own schedule calls for purchase and sales agreements to be in place by the end of this year. But that has become a moving target that now appears to be a few years off, at best.

For one, North Slope gas owners Arco Alaska, BP Exploration (Alaska) Inc. and Exxon still are not prepared to move on an LNG project, a situation that has the generally upbeat president of Yukon Pacific, Bill McHugh, champing at the bit.

"They have more people working on this than Yukon Pacific has employees," McHugh says. "All I am saying is that you need to start fast-tracking some of this stuff. I'm concerned about the pace."

Moreover, the all-important Japanese, representing about 70 percent of the world LNG market, will not negotiate an Alaskan contract until the producers are ready to deal, McHugh says.

He explains, "The buyers in Japan will not commit to a project until the project's structure is defined -- who is going to play the game, what the price is going to be, when the project is going to start."

VANISHING OPPORTUNITY

And, McHugh emphasizes, the next and perhaps last "window of opportunity" to market North Slope gas -- the years 2000 to 2005 -- is rapidly closing as Alaska's major overseas competitors -- Qatar, Natuna and Sakhalin -- continue their vigorous pursuits of post-2000 markets in Asia.

"My view of the marketplace is that some project is going to come in before 2005. And that project probably is going to sap the demand available through 2010," McHugh predicts.

Meanwhile, John Morgan, president of BP Exploration (Alaska), says it will be "two or three" years before the producers "have a project formed and mature and able to be locked into as this is the way it's going to be."

He adds, "I'm enormously sympathetic with the frustration people ... have with this project. I mean the gas is there, the market is there. So ... why can't we get after it and do it? But with the best will in the world, you actually do have to have a viable project to make it work."

McHugh warns that a two- to three-year delay in an Alaskan LNG project "could easily turn into a 10-year delay in market entry for Alaska." He adds, "We certainly know more about the demand and the competition for demand in the 2000-to-2005 period for Alaska than we know about competition and demand after 2010. That uncertainty worsens the risk profile for TAGS."

The North Slope has tremendous natural gas reserves -- an estimated 26 trillion cubic feet in the Prudhoe Bay field alone. But re-injection of that gas to maintain reservoir pressure currently plays a critical role in oil recovery. The producers also have indicated they will not sell large amounts of their gas until it exceeds the value of the oil.

Nonetheless, Morgan recently told the Anchorage Chamber of Commerce, "My assessment of the probability of gas export from the North Slope happening is that it is a certainty. I'm absolutely certain that with the amount of gas that exists on the North Slope of Alaska, it will be developed, it will be brought to market, and it will be a major natural resource for this state in the future."

TIMING IS EVERYTHING

But Morgan also told chamber members the "time is not right" to conclude an LNG plan, adding that "if we tried to push too fast, too hard on a project of that kind, we would damage its eventual coming together by creating the wrong kind of climate for it."

Morgan insists the producers are hard at work on the issue, saying in an interview that although an in-house study indicates costs are still too high for a viable gas project, there has been a "significant development."

He explains, "For the first time, we can begin to explore possible alternative project shapes -- different roles for consumers, different roles for producers -- in terms of organization, financing, investment programs -- those kinds of issues."

It's that kind of talk that has McHugh on edge these days. He believes the producers are wasting valuable time working ground already plowed by Yukon Pacific, a subsidiary of the U.S. transportation giant, CSX Corp.

"I don't dispute the need for careful planning, but I do think that what has been portrayed as careful planning is late, redundant, misdirected and, unfortunately, does not recognize and take advantage of all the work that has already been done," McHugh laments.

Yukon Pacific has spent more than a dozen years and untold millions of dollars studying and developing TAGS, which calls for an 800-mile gas pipeline from the North Slope to tidewater at Valdez, a gas conditioner on the slope and a LNG plant in Valdez, compressor stations along the pipeline, and a fleet of ships to transport products from Alaska's Prince William Sound to Pacific Rim markets.

Over the years, Yukon Pacific also has managed to acquire all of the major government permits needed for the project, securing the pipeline corridor and even obtaining a rare presidential finding favoring the export of North Slope gas. The company's environmental impact statement has been approved. Basic engineering and design work on the project has been completed.

And though not enough to make TAGS a go, Yukon Pacific also has obtained letters of intent from Taiwan and Korea to purchase up to 8 million tons of LNG a year. McHugh himself has made numerous marketing calls on Pacific Rim countries.

CLOCK TICKS AWAY

Says McHugh, "I think there is a way to manage the process and get the job done building and benefiting from what's gone on before you, rather than starting out ... from ground zero, doing it over again. I, quite frankly, find that wasteful. And given the time clock we see out there, I find it dangerous to Alaska's opportunity."

McHugh has spent hours on the podium attempting to dispel the so-called "seven myths" of the TAGS project: Alaska is too far from the market; TAGS' price for LNG will be higher than the market price; if LNG is too expensive, buyers will switch to oil or coal; environmental opposition will stop TAGS; the project can't be financed; gas cannot be sold without a major oil loss at Prudhoe Bay; TAGS' costs are higher than Yukon Pacific's estimates.

Fundamentally, McHugh says, LNG markets are different than oil markets, involving long-term contracts in which buyers often participate financially in a project. He points out that the current $15 billion annual Asian trade has only six projects selling to 12 buyers, each of whom has a different negotiated price for LNG.

"The point is that buyers are as much a part of LNG project development as sellers and, in fact, can play a major role in lowering the price of LNG for Alaska," McHugh adds.

MAKING GAS COMPETITIVE

McHugh insists there's still "a deal to be made out there," believing TAGS would be competitive with any grassroots project in the world, in part because increased facility and transportation costs will require higher LNG prices for all future projects. He emphasizes that Alaska gas is not competing with today's markets and prices.

Says McHugh, "If buyers commit to a different grassroots project, that project is likely to be expanded before buyers commit to a second, new grassroots project. Expansion economics for all of us are much more powerful than start-up economics."

McHugh says the TAGS production target of 14 million tons of LNG a year could be doubled at minimal cost to meet future market demand simply by adding compressor stations to the gas pipeline, which would roughly parallel the existing oil line.

"Our message is that there is no reason to delay, there's no reason to sit back and whine about current oil prices," McHugh says. "There's no reason to sit back and say we're not sure the buyers will pay that price. Those are bogus arguments."

BP's Morgan says the producers are well aware of the competition but adds, "We need to be very clear in understanding their competitive positioning in the market. They may well have some advantages in terms of cost, and there may be some issues in terms of politics."

Addressing McHugh's concerns about the critical Japanese LNG market, Morgan concludes that country is in "some confusion" today as to how its "incremental energy policy will unfold." He adds, "I certainly see no way, that with the economics we have at this time, anyone out there -- Japanese or otherwise -- would be prepared to pay the price that would be required to develop Alaskan gas as we see the project today."

Morgan also makes it clear that although TAGS is a leading candidate, it's not the only project under consideration to move North Slope gas to market. He was not specific.

"I think TAGS is a major potential export route because of the state of maturity it's in," he acknowledges. "But that doesn't mean there aren't other possible routes that could be examined and should be examined. I think we should look at any option that might provide us access to lower costs."

Responds McHugh, "If there are other routes to be explored, why have 16 United States and Alaska agencies concluded that only Cook Inlet and Prince William Sound are viable routes? Again, talk and studies are nice, but when facts indicate a determination has already been made, I can see only waste of time and money."

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Title Annotation:Yukon Pacific Corp.'s proposed Trans-Alaska Gas System
Author:Tyson, Ray
Publication:Alaska Business Monthly
Date:Oct 1, 1994
Words:1760
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