ConocoPhillips (NYSE:COP), along with Exxon Mobil (NYSE:XOM) and BP (NYSE:BP), stands to gain from the Alaskan government’s decision to export liquefied natural gas (LNG) to Asian markets. Alaska wants a $50 billion pipeline and export complex to be built to develop natural gas that is stranded on its icy North Slope. These companies have been given time until the end of this month to come up with a plan to pipe the gas southward to an Alaskan port and condense it into LNG, for export. 
What Has Triggered This Plan?
There are two factors at play here.
The first is the booming, almost insatiable demand for gas from Asian markets like China, Japan, India, and South Korea. By 2025, these four countries will be the largest consumers of LNG , according to a presentation by BG Group Plc. In 2011, the top four countries were Japan, South Korea, U.K., and Spain. According to the IEA, the Chinese gas consumption in 2017 would equal about 28% of the reserves identified on Alaska’s North Slope.
China imports vast quantities of crude oil besides using humongous quantities of coal to keep its economic engine humming. However, given the current discourse surrounding climate change and its own residents’ constant complaints about the heavily polluted air and water, China is keen to move to cleaner fuels. Gas is a logical choice owing to its low carbon content. According to the EIA, Chinese consumers used 39 billion cubic feet a day of natural gas in the first quarter of 2012. This demonstrates ample market demand for gas. ((China Considers Shale-Gas Potential, WSJ))
Having made a policy decision to replace nuclear power with other sources of energy in the wake of the Fukushima disaster, we believe that Japan will opt for LNG as one of the alternative sources. As nuclear energy is replaced gradually, demand for LNG will increase. India has also been increasing LNG imports to meet the energy demands of a fast-growing economy. With gas output from the much-hyped Krishna-Godavari basin, located on its eastern coast, not meeting expectations, it will be forced to import more.
The second factor is the explosion in gas output in the U.S. caused by the shale gas boom. It dashed Alaska’s hopes of building a pipeline to the Lower 48 U.S. states which no longer need the relatively expensive North Slope gas. The next logical step is to liquefy the gas and ship it at significant price premiums to Japan, China, and other countries across the Pacific Rim. In July this year, Asian gas buyers paid almost six times the futures prices in the U.S., where gas prices have been driven low by the shale boom. It is estimated that Alaska may be able to generate as much as $20 billion annually in gas sales.
Is It Feasible?
We think that feasibility needs to be examined from financial, political, and business perspectives. According to a 2010 estimate, an 800 mile pipeline project from northern Alaska to a southern port may cost between $20 billion and $26 billion. As per industry estimates, the total project cost could lie anywhere between $40 billion to $50 billion, factoring in a pipeline and liquefaction plant. We think that a project of this scale and complexity entails phenomenal capital commitment which can only be justified if the terms of the contract are stable and competitive. According to estimates submitted by these companies, the North Slope holds more than 35 trillion cubic feet of discovered gas. We think that this ought to take care of any concerns regarding adequate availability of gas for export.
Alaska can leverage its more than 40 year history of sending fuel to Asia from ConocoPhillips’s terminal near Kenai, which is located in the southern part of the state, to expand shipments. The state’s coast provides one of the closest routes to Asian markets, thus potentially giving it lower shipping costs than competing projects from western Canada. The existing ConocoPhillips plant near Kenai is small by today’s global standards, so either that will have to be expanded or a new terminal will have to be built at Valdez, which already has a port used by large oil tankers.
Politicians in the U.S. can be a bit touchy about exporting gas. Their concerns are largely about ensuring that petrochemical companies or power generation utilities are not being deprived of gas. Alaska’s isolated location may help insulate it from discussions about whether the U.S. should be exporting gas pumped domestically.
How Does ConocoPhillips Stand To Gain?
For reasons already discussed above, there is a vast gulf between realized prices for Conoco’s international and North American gas businesses. In Q2 2012, the average realized price for natural gas in the international segment was $11.69/Mcf (1 Mcf = 1,000 cubic feet) while that for the North American market was $1.93/Mcf. Even futures prices are quite low, so Conoco will not profit much out of the future contracts it has already committed itself to. On the other hand, international markets pay a huge premium for the gas even after one factors in increased costs to account for liquefaction and transportation. Considering the upward sloping expected long-term demand trajectory for Asian countries, the attraction that this project might hold is not difficult to fathom. You can examine the impact of natural gas EBITDA margins on the price estimate of the company using out interactive chart below:
The international gas business constitutes 20% of Conoco’s overall natural gas business. 
The natural gas business accounts for 15% of the Trefis price estimate for ConocoPhillips.
We recently revised the Trefis price estimate for ConocoPhillips to $60, which is in-line with its market price.Notes:
- Alaska Sees Asia Driving Annual $20 Billion Via Pipeline, Bloomberg [↩]
- Q2 2012 Earnings Conference Call Presentation, ConocoPhillips [↩]