For Alaska (and Qatar and Mozambique and Russia) China is the hub of hope

What do you do if you have the natural gas equivalent of 6 billion barrels of oil, and no way to get it to a market? And what if you are uncertain that there will ever be a profitable market for this stranded treasure, at least in the coming couple of decades?

If you are Alaska and the Big Oil companies drilling there, you check the numbers, and check them again, but know that ultimately you will be gambling based on the following calculus: In the glutted U.S., natural gas prices are at their lowest in a decade, under $2 per 1,000 cubic feet; in Asia, the same volume of gas is selling for up to ten times that sum, or $20.

So it is that BP, ConocoPhillips and ExxonMobil are contemplating spending $40 billion for a liquefied natural gas system to emancipate their natural gas riches on Alaska’s North Slope, and shipping it on to Asia, as I have written at EnergyWire.

If they proceed, which seems likely, they will be locked in battle with far-flung gas sellers — Qatar, Russia, Australia and Mozambique among them — who are already piling in to take advantage of Asia’s high prices and voracious appetite. In particular, they are piling in to China.

Call China the Hub of Hope, the 800-pound gorilla in the whole of the big energy shakeup we are witnessing around the world. Oil demand is contracting in the U.S. and Europe, but it is soaring in China. Natural gas demand is ticking up gradually in these same developed markets, but China’s is going up at double-digit annual rates.  

It is this Chinese demand — and not just political risk associated with Iran — that is propping up oil prices at over $100 a barrel, as well as Asian gas prices. As long as these conditions keep oil at approximately such levels, you will continue to see a boom in the production of U.S. oil shale and Canadian oil sands, in addition to the excitement in ultra-deep water around the world. Lower those prices substantially, and at least some of the eagerness will go too.

On the surface, it looks like the same slope will continue. Wood MacKenzie, the oil consultant firm, estimates that Chinese demand will quadruple in the 2020s, to some 500 billion cubic meters of gas a year. But a question mark arises not too long after that — what will happen to China’s LNG import appetite if it strikes it big in its own shale gas fields? Some industry analysts think that its interest in imports will soften, and that LNG competition will become fierce.

Yet, for Alaska, there remains the matter of those 6 billion barrels of oil equivalent, bottled up on the North Slope, and perhaps much, much more. I spoke with Daniel Sullivan, the state’s natural resources commissioner, who is marketing Alaska to Asian gas consuming countries as a crucial supply source. Not only does Alaska have the proven equivalent noted above, he says, but many tens of billions of oil-equivalent barrels more in potential gas reserves, in addition to shale gas. "You could say that Alaska is limitless," he said.