OPINION: Imported natural gas may be less costly than many expect

My latest Enstar bill showed I paid about $9 per thousand cubic feet (mcf) for natural gas. That is not exactly a bargain; it’s about twice the national average. With the prospect that Southcentral Alaska may soon be importing liquefied natural gas (LNG), there may be an opportunity to procure inexpensive Lower 48, or Canadian, gas, at prices cheaper than what many people are expecting.

Why are prices here so high? Back in 2012, as part of Hilcorp acquiring Marathon’s Cook Inlet assets, the State of Alaska and Hilcorp entered a consent decree, which tied Cook Inlet gas prices to expected future Lower 48 prices, subject to periodic adjustments for general inflation. This was before the shale revolution fully kicked in, eventually driving Lower 48 prices way down. Here, subject to the consent decree, the elevated gas prices only went up. The price here has nothing to do with production costs.

Low-cost, Lower 48 gas could be imported here. For example, Sempra, the large Lower 48 utility, is currently building an LNG export terminal in Baja California, about 90 miles south of San Diego, for LNG export to Asia. It is expected to start up in 2026 and will have spare capacity.

The gas supply source for this LNG would be the giant Permian Basin in the Southwest U.S. The Permian currently supplies 25% of all U.S. gas production, more than 20 billion cubic feet per day, and has 300 trillion cubic feet of reserves. The basin has been a big beneficiary of fracking technology, and production costs are low. In addition, lots of gas is produced as a by-product of oil production, and to extract valuable gas liquids.

Permian Basin gas is priced at the WAHA supply hub in West Texas. It is in the center of an extensive infrastructure network of pipelines and storage facilities and is a central trading location where buyers and sellers can exchange natural gas at a posted price. For several years the market has been so oversupplied, gas can be purchased there for under $2/mcf, and this is expected to continue.

There is a similar situation in Canada. An LNG export project out of Kitimat, British Columbia, will be starting up next year. It, too, will be anchored by large gas volumes, and the local hub price there has also been low for many years. And, of course, it is much closer to Southcentral Alaska than Mexico.

Most LNG sales to Asia are priced either tied to oil prices or other spot LNG prices. Asian buyers generally prefer this, because they want their purchases to be competitive with diesel for their power plants, or they do not want to forego low spot prices if they occur. Oil is priced higher than gas, and most spot sales occur in the winter when demand is up. These can result in high LNG prices.

This Asian pricing model is what many people are thinking of when they look at importing LNG here, and this has engendered fear of large price increases in their utility bills. However, the prospect of U.S. suppliers selling to Alaska creates the opportunity for a different pricing dynamic, which could be beneficial to both sides. Southcentral could procure long-term supplies at delivered prices similar to what it is paying today, and Lower 48 suppliers could get a stable cash flow while reducing their inventory. Also, major expansions in LNG export capacity from the U.S. Gulf and Qatar in 2027 are expected to drive down international prices. Transactions could occur in the summer, when other demand is low and prices are down, and gas could be placed in storage. (A recent report to the utilities showed that Hilcorp has 544 billion cubic feet of gas storage capacity — or 7 years of total Southcentral demand.)

Obviously, there would be additional costs to just the price of gas in getting LNG up here. There would be the cost of piping gas to the LNG plant, liquefying, shipping, receiving docks, regasification and storage. There are a range of reasonable estimates for these such that the total delivered gas price could be less than what we pay now, or, at most, probably not much more; the high price here is a sizable benchmark.

The ultimate arrangement may not play out exactly like this, but I anticipate utilities will get consumers the best deal. Policy driven by fear of high prices may be premature and cost the public.

Roger Marks is an economist in private practice in Anchorage. From 1983-2008, he was a senior petroleum economist with the State of Alaska Department of Revenue Tax Division. He has no financial ties to the oil industry.

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