What’s new in production

	Vol. 230 No. 2
DAVID MICHAEL COHEN, MANAGING EDITOR, DAVID.COHEN@WORLDOIL.COM

Revisiting the Alaska natural gas pipeline(s)

Last spring, I wrote a column praising a then-largely unknown governor from Alaska for her initiative to move forward a natural gas pipeline from the North Slope to distribution hubs in Alberta, Canada, from which it could be marketed to the Lower 48 (World Oil, May 2008, p. 33). That initiative, the Alaska Gasline Inducement Act (AGIA), selected Calgary-based pipe builder TransCanada to develop the $30 billion, 4-Bcfd pipeline to the tune of up to $500 million in state subsidies, and spawned a copycat pipeline project by North Slope producers ConocoPhillips and BP.

Since then, Gov. Sarah Palin has become something more of a household name, and the pipeline project she touted as her main accomplishment while running as the Republican nominee for US vice president faces an increasingly uncertain future.

The economic downturn has made it hard for either TransCanada or Denali, as the ConocoPhillips-BP initiative is called, to find investors willing to put large sums of money into such a long-term project, especially with so much uncertainty as to which pipeline will end up being built, if either. Meanwhile, one of the biggest envisioned markets for the North Slope gas, oil sands development in Alberta, is drying up, as low oil prices make the unconventional resource uneconomic and force an increasing number of delays and cancelations to oil sands projects.

The TransCanada plan in particular has faced increasing skepticism, since the line can only be built with the participation of the three biggest North Slope producers-ConocoPhillips, BP and ExxonMobil-which have indicated that they might boycott the pipeline without major tax concessions, although the state could use the threat of pulling their leases as leverage. To make matters worse, an Associated Press investigation in October 2008 revealed evidence that the AGIA selection process was improperly tailored to narrow the field of candidate companies to TransCanada, a firm with ties to the Palin administration.

Meanwhile, there is a new drive by Palin and lawmakers to build a smaller, all-Alaska pipeline by 2014, at least four years ahead of the 4-Bcfd pipeline, to offset declining Cook Inlet fields and offer cities such as Fairbanks a heating alternative to expensive diesel fuel. This smaller project-there are two proposed, one by the public Alaska Natural Gas Development Authority and one, endorsed by Palin, by Enstar Natural Gas-wouldn’t compete with a pipeline to the Lower 48, but it has renewed interest in enlarging the state’s LNG export capacity to Pacific markets. If the state decided to go that route after building the in-state line, the infrastructure would be in place to move the gas to liquefaction before Denali or the Trans-Canada line could even be completed.

A competing Canadian pipeline project that would supply about 2 Bcfd from the Mackenzie Delta and Beaufort Sea could also preempt an Alaskan pipeline. The Mackenzie line has been held up by numerous regulatory delays and by negotiations over tax breaks, but, if approved, it could be built as much as five years ahead of the Alaskan line.

In the current industry environment, with the price of gas now hovering under $5/Mcf and the likely tariff to move gas from Alaska to Chicago by pipeline estimated at anywhere between $3 and $5/Mcf, the economics just don’t work. Of course, potential shippers who bid for space in the rival pipelines during their open seasons planned for 2010 won’t be looking at the current gas price, but at what that price will be beyond 2018, which is the earliest either pipeline would be operating.

As TransCanada Vice President Tony Palmer said in a Jan. 27 Associated Press article, “This project cannot swing with the wind of gas prices month to month. They need to look at what long-term prices are, and is this project economic in those long-term forecasts?” Palmer was in Juneau, where he told concerned lawmakers that the project would be economic, and that the TransCanada project is moving forward as planned.

While TransCanada seems to be taking the economic downturn in stride, senior officials at BP and ConocoPhillips have recently made public statements casting doubt on the economic soundness of an Alaskan gas pipeline. Brian Frank, president of BP Energy Co., told the Alaska Support Industry Alliance at its annual conference on Jan. 23 that the recent dominance of shale gas and other unconventional sources-now making up about 40% of US gas supply-combined with unused LNG capacity, present difficulties for the pipeline project. However, North American LNG facilities were running at much lower than capacity long before demand crashed, and are expected to continue doing so, as the US remains the LNG market of last resort (see the global LNG report, p. 111). And the feverish shale drilling of the last few years has only been able to keep US gas output relatively flat (see the North American gas report, p. 89), so even a moderate demand increase by 2018 should make pipeline gas from Alaska a welcome addition to the Lower 48 supply mix.

Even more bizarre was ConocoPhillips President John Carrig’s warning, at the same conference, that proposed federal climate change legislation could lower gas demand, destroying the market for Alaskan gas. In reality, electrical generation is one of the few areas of natural gas demand that has stayed relatively steady as the economy has fallen into recession, and this segment of gas demand is widely expected to get a lot bigger if carbon cap-and-trade legislation is enacted in the US and begins putting the squeeze on coal-fired electrical plants.

The producer executives’ motivation in casting doubt on their own project seems to be to scare the state into granting them long-term guarantees on tax rates, a demand the state had rejected previously before embarking on the AGIA process. After his speech, Frank told reporters that a successful pipeline would require fiscal “reliability” from the state. “How do you know the economics for your project if you don’t know what you’re going to pay in taxes?” he said.

Having a steady market for the gas will help, for starters. No question: A gas pipeline from Alaska will have to face numerous difficult hurdles before being realized. But shale gas competition and cap-and-trade will not mothball the Alaska gas pipeline, and will more likely help move it forward.