Gauging competing gas supplies

As summer winds down, Denali and TransCanada discuss competing gas projects across the Lower 48; offer updates on work already under way, planned at Alaska Oil and Gas Symposium

Eric Lidji

Petroleum News

Following a rigorous summer of legislative hearings, public relations and field work, the two companies looking to build a gas pipeline from the North Slope are hunkering down for winter, preparing for next summer and considering the uncertainty on the horizon.

As Denali and TransCanada create more accurate cost estimates for their projects, much of the uncertainty comes from the always-fluctuating commodities markets, not only the rise and fall in the price of natural gas, but also the changing cost of materials.

Denali, a joint venture between ConocoPhillips and BP, and TransCanada, the leading Canadian pipeline company, have similar plans to build a pipeline from gas fields across the North Slope down to existing pipelines to markets in Canada and the Lower 48, more than 1,700 miles.

Bud Fackrell, president of Denali, and Tony Palmer, a vice president for TransCanada, offered limited project updates on Sept. 23 at the Alaska Oil and Gas Symposium, a two-day forum covering oil and gas issues affecting Alaska and northern Canada.

Either pipeline could theoretically supply around 6 percent of the domestic demand for natural gas, but both will have to reconcile that massive supply with several emerging gas and shale projects across the Lower 48, many of which can move on quicker timelines.

Those projects include rapidly increasing natural gas production in Colorado and Wyoming, and the undeveloped Haynesville Shale in Louisiana and the Marcellus Shale spread across several states in the Appalachian basin.

Even with those projects coming online, though, increasing demand across the United States in the coming decades should keep an Alaska project viable, according to Fackrell.

“North America needs natural gas. Every forecast that I’ve looked at and studies I’ve seen indicate that out in the future, there’s going to be demand for gas and a shortage of supply,” Fackrell said. “So my view is, I think the market will be able to absorb this gas.”

But most of the delays that plagued previous attempts to build the Alaska gas pipeline over the past 30 years boiled down to unfavorable supply and demand scenarios, according to Palmer. To succeed this time around, Palmer said pipeline builders must consider those Lower 48 gas projects, and any other large discoveries that could be brought online.

“This project must compete,” Palmer said. “This project cannot see costs go out of control. This project cannot see schedules go out of control, or it will not be completed.”

Even with sophisticated forecasts, Palmer said builders won’t be able to accurately estimate certain project costs this far in advance. First among those is the steel needed to actually make the pipe and the contractors who will do most of the work on the ground.

“Five and six years in advance you cannot get a firm quote, particularly without a commitment — a very, very substantial commitment — from your corporation,” Palmer said. “Those are the big factors that drive capital costs.”

Denali winding down summer

Unencumbered by the need for legislative approval, Denali spent around $40 million on field studies this summer designed to get a more accurate cost estimate for the massive project, according to Fackrell.

Denali opened a field office in Tok earlier this summer and is currently working to secure around 50,000 square feet of permanent office space in Anchorage. The company finished hiring its eight-member executive team over the past week, Fackrell said.

Denali and a team of 30 contractors surveyed more than 200 miles of wetlands, investigated 70 archeological sites, shot more than 1,700 miles of ortho-photography and 730 miles of immersive video, and studied 538 potential stream and river crossings along a possible route west from Delta Junction, Fackrell said.

The company is scaling back down its workload as winter approaches, but also looking ahead to next summer. Denali plans to extend its study over the entire Alaska route, and also focus on the Yukon and British Columbia. The work program will employ around 300 people, and will include meetings with local communities, Alaska stakeholders and Canadian aboriginals, and efforts to get permits and access to land along the route.

In the coming year, Denali will start an in-state gas study, a key piece of either project.

Asked whether Denali could build its pipeline in phases to deliver gas earlier to communities along the proposed route, Fackrell said: “Our focus is going to be on the big pipe. I think the big pipe leverages everything we want to do in Alaska. We’re not geared up to deliver gas early down that big pipe. It’s just not feasible.”

Fackrell said over the next few years Denali will invest $30 million “internal to Alaska and Canada” on “job training, in state gas feasibility and infrastructure.”

TransCanada starting to hire

Although approved on Aug. 1 and signed into law on Aug. 27, a legal technicality keeps the AGIA license from becoming effective until late November, casting some uncertainty over the work TransCanada can do this year with a guarantee of reimbursement.

Because of those legislative deliberations, TransCanada lost much, but not all, of the summer field season that Denali used to conduct its work program for this year.

“The fieldwork has commenced, although modestly,” Palmer said. “The bulk of the field work will be completed next year.”

To get necessary fieldwork done before winter, TransCanada started approving contracts in mid-August, and in the coming week plans to issue requests for proposals for early cost estimates on the gas treatment plant on the North Slope and for geotechnical work.

The company plans to begin meeting with First Nations and other stakeholders this fall.

But because of the effective date issue, TransCanada will be working on its own dime.

“TransCanada will not be compensated, will not be reimbursed in any fashion by the State of Alaska for any money we expend prior to the effective date of the license prior to late November,” Palmer said.

TransCanada still believes it can hold an open season by July 31, 2010.