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Chasing contracts for TAGS.

Yukon Pacific Corp., which has spent nearly 10 years pursuing a dream of transporting North Slope gas to the Pacific Rim, is hoping its latest project analysis will help convince Japan the Trans-Alaska Gas System (TAGS) is workable. For without a major gas contract from the Land of the Rising Sun, the multibillion-dollar TAGS project is bound to collapse.

A subsidiary of U.S. transportation giant CSX Corp., Yukon Pacific says it's making headway on several marketing fronts, including Taiwan and Japan, two of three Asian nations (the third is Korea) the company must have commitments from to consummate the world's largest and most ambitious liquefied natural gas (LNG) project. In June, however, the firm laid off half of its staff, attributing the cuts to the lack of sufficient market and producer commitment to meet its projected 1997 starting date.

The energy source is huge - at least 26 trillion cubic feet of natural gas - yet so distant from the marketplace that TAGS will require an expensive transportation network consisting of an 800-mile pipeline from Prudhoe Bay to Valdez, numerous compressor stations, a plant to liquefy the gas, a marine terminal and a fleet of ocean tankers.

As the most populous and dominant player among Yukon Pacific's chosen markets, Japan is considered to be essential to the project's success. In the mid-1980s, however, Japan participated in a study which concluded that TAGS was not viable. The study projected a lack of LNG demand and questioned whether Yukon Pacific could compete with producers closer to the Pacific Rim markets. The company has spent the past five years trying to dispel that view.

Says Yukon Pacific President Bill McHugh, "In 1989, the people in Japan were saying there really wasn't a need for a project this size. Now they are not only saying there is a need, but there's a positive reaction to the Alaska project."

McHugh says the Persian Gulf crisis reinforced Japan's concern about its dependence on foreign sources of energy. "Part of the positive attitude (toward Alaska) stems from the gulf war, but whether that is going to sustain itself over the next two or three years time is going to tell. Right now there's a heck of a strong feeling in Japan for the need to diversify its energy sources," he says.

"Japan is reaching a point where 70 percent of its oil comes from the gulf. They're also in a situation where 80 percent of their gas is coming from the South China Sea. Our market strategy has come to the point where today's Kuwait may be tomorrow's Malaysia or Indonesia. You've got a concentration in a region that does not have a history of political stability over the long term."

Yukon Pacific released its own study in 1987 demonstrating that TAGS production could be phased in over a period of years, from 7 million tons to 14 million tons of LNG. The Japanese did not participate in the study, however. "What we finally realized last year is that we had better go out and get something that takes that 1986 study off the shelf," says McHugh.

In late May, Yukon Pacific distributed its latest study - a complete evaluation of the project as of April to its prospective Japanese customers. McHugh says the study addresses technical and environmental concerns and legal issues regarding the export of natural gas. He adds, "We wrapped all those developments up to say, 'Here is what the project really is today, as opposed to the concept in 1986.' After we did all the engineering work, we said, Here is the cost estimate."

The price tag on TAGS has increased from about $11 billion to $13.1 billion, but McHugh says the cost is actually less than initial estimates when adjusted for inflation. He says average costs are down by 3 percent but that Alaska costs alone are down by 7.5 percent. Explains McHugh, We've had a pile of ups and downs. For what we gained in Alaska, we had to give some of it back to (the increased cost of) ships."

Yukon Pacific has run into another Japanese snag. While Japan now acknowledges it will need more LNG than initially thought, it won't be needed until after TAGS' projected 1997 startup date. McHugh says that's a condition Yukon Pacific can live with.

We're pleased to see buyers in Japan are now saying yes, they want the Alaska project, and that they are arguing with us over timing," McHugh says. Whether it's 1998, 1999, 2000 or 2001 is just something we're trying to hammer away at."

Meanwhile, McHugh says Yukon Pacific is closing in on a market commitment from Taiwan for annual LNG deliveries of about 2 million tons, the same pledge Yukon Pacific has received from South Korea, the third nation in the company's LNG portfolio. Because Taiwan lacks political clout among sellers in the Pacific Rim, however, the tiny country is being cautious.

Says McHugh, Taiwan has to worry about the implications of any move they make. They are the tail wagging the dog. If they were to make a commitment to Alaska and the Alaska project never materialized, they would have to go back ... and face an audience that says, You didn't want to buy from us, you wanted to buy from Alaska, and now you've got your tail between your legs."

Before Taiwan commits to TAGS, it wants more assurances that Japan will come on board. As McHugh points out, "Japan is 70 percent of the world market, and nobody is going to snub Japan." He notes that while South Korea is not as populated or as big an LNG market as Japan, the nation's "rate of growth in gas is just phenomenal ... and there aren't a lot of sellers out there who are going to take a buyer like that and tell him to jump in the lake."

McHugh says there's been much confusion in the press over exactly when Yukon Pacific must begin deliveries to meet its so-called "window of opportunity' for future LNG demand in the Pacific Rim and how much production is required for the project's economic survival. For years the company has been aiming to begin pipeline construction in 1993 to start deliveries in 1997.

LNG production can begin with annual deliveries of 7 million or fewer tons and ramp up to 14 million tons within a five- to six-year period. But McHugh emphasizes that pipeline construction cannot begin until Yukon Pacific receives market commitments for the full 14 million tons. He explains that because the costs of financing and operating such a large project are so great, Yukon Pacific must have orders for at least that much gas.

McHugh points out that there are actually two critical time periods. He says the first window of opportunity is when the market can use the gas; the second is defined by the inability to predict long-term future impacts. "I'm not uncomfortable with any start date getting to 14 million tons after 1997, but I do have a problem if somebody says 2010," he adds.

McHugh says it's a matter of time before nuclear energy takes a bigger hold in Japan, one of the most energy-dependent nations in the world. "Somebody could find a way to make cold fusion work economically. Time adds uncertainty," he explains.

What's also uncertain is when the North Slope producers - Arco Alaska, BP Exploration and Exxon - will be ready to sell their gas. And there's every indication that that won't occur until after the year 2000, primarily because of the importance gas plays in recovering oil from the declining Prudhoe Bay reservoir.

Says BP's Paul Laird, "We don't expect conditions to change until after the turn of the century. The only commitment we've made to Yukon Pacific is to work with them because we want to sell the gas."

For years, the gas has been reinjected into the Prudhoe Bay formation to help maintain reservoir pressure. As the field ages, however, more and more gas surfaces with the oil, which actually inhibits oil recovery because of the difficulty in handling the huge volumes of gas. To help solve the problem, the producers are investing some $1.5 billion in the GHX project, which includes powerful turbines to force gas into the field at a much greater rate. The investment in GHX has demonstrated producer commitment to squeeze oil from Prudhoe Bay before turning to natural gas as the principal commodity. But trying to determine when the value of gas exceeds the value of oil is a complex issue. For one, oil companies likely would have to find a substitute for the gas, such as the injection of more water into the oil-bearing formation, which would require additional investment in production facilities to separate oil, gas and water. Future oil prices also will play a major role.

Says McHugh, We understand the producers have an economic equation, and we're hoping to be able to work with them to find out the most realistic answer to that question about when to sell the gas. But there's a lot of pieces to that puzzle.'

Adds Jeff Lkwenfels, vice president of Yukon Pacific, "There is a continuing dialogue with the producers, the likes of which I haven't seen for 10 years. We recognize that it's their reservoir and their gas. But all three producers have told us that when you can demonstrate that it is economic to sell this gas and that there is a market there, we will sell you the gas."

Lowenfels emphasizes that Yukon Pacific has not been tied to a 1997 start date for the TAGS project. "That target date served more purposes than just saying to Alaska, 'Get excited - we're going to build a pipeline.' And one of the purposes was obviously to demonstrate to the producers that this project could be done."

Yukon Pacific now accepts that neither Japan nor the Alaska producers will be ready to buy or sell North Slope gas until after the year 2000. That admission forced the company in June to cut back on spending and to reassess the project.

Says Peter DeMay, Yukon Pacific's senior vice president, "The project is not being abandoned. If the market bounces back, we're flexible and we'll bounce back. But why spend money in advance if you don't have to?" He adds that the company will proceed with permitting and other things that will continue to move the project forward, but at a slower pace."

Says McHugh, "What we're doing is trying to narrow the gap to where these compendiums of knowledge regarding the respective pieces of the puzzle start working together. It's a moving target, and we're the most flexible organization in the world."
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Title Annotation:Yukon Pacific Corp. hopes to convince Japan that Trans-Alaska Gas System is viable
Author:Tyson, Ray
Publication:Alaska Business Monthly
Date:Aug 1, 1991
Previous Article:Skagway ore terminal.
Next Article:Lisa Haas: woman entrepreneur & environmental consultant.

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