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Providing coverage of Alaska and northern Canada's oil and gas industry
May 2009

Vol. 14, No. 19 Week of May 10, 2009

Administration provides first biannual AGIA report

Revenue, DNR, conclude long-term economic outlook for TransCanada gas pipeline project ‘remains strong’, despite short-term price drops

Kristen Nelson

Petroleum News

The administration told Alaska legislators at the end of April that “the AGIA-licensed project remains on track and on schedule.”

“The economic outlook for the project remains strong despite the recent market volatility and short-term drop in natural gas prices. The combination of stable long-term price expectations and the reduction in project cost indicators keep the project on solid economic footing,” the Department of Revenue and the Department of Natural Resources — who jointly share responsibility under the Alaska Gasline Inducement Act — said at the conclusion of an April 30 report.

The 20-page “AGIA Gas Pipeline Project Report,” the first of what will be biannual reports, was issued in response to resolutions introduced in the House last session by Reps. Jay Ramras, R-Fairbanks, and Craig Johnson, R-Anchorage.

AGIA, passed in 2007, is intended to kick start construction of a gas pipeline from the North Slope to market. It requires an annual report to the Legislature on reimbursements under the act.

In addition to the information required under AGIA, the departments said, “... this report includes information related to the progress of the pipeline project, and updates on natural gas markets and capital cost expectations.”

The first resolution Ramras and Johnson sponsored — which died in the House Special Committee on Energy — would have required a re-evaluation of the economic viability of the AGIA-licensed TransCanada Alaska project, calling on the administration and the state attorney general to determine whether the project was still in the best interests of the state.

Another resolution, introduced by Ramras and Johnson near the end of the session, called for a detailed report, dropping the re-evaluation.

The administration and the legislators ultimately reached an agreement, the second resolution was withdrawn, and on April 30 the departments issued the first of what will be bi-annual reports.

Recent gas prices volatile

The departments reviewed the natural gas market, noting that prices were “exceptionally volatile” in 2008, reaching “unprecedented summer highs,” with prices during the year between 16 percent and 29 percent higher than in 2007 — peaking at $13.31 per million British thermal units at Henry Hub I early July, but falling to $5.71 by the end of 2008.

“At the time of this report, the average spot price during April is $3.59,” the departments said in the April 30 report.

Weather, import levels, gas storage and the economic downturn have all impacted market volatility, the report said, but “are unexceptional” and do not fully explain “exceptionally high and sustained (2008) summer gas prices.”

The U.S. financial crisis limited availability of credit and raised borrowing costs, the report said, likely contributing — along with lower natural gas prices — to reduced natural gas drilling.

Financial distress also reduced trade in financial energy products, which “combined with the reduced gas demand of the economic slowdown helped accelerate the downward trend in gas prices.”

Other factors shaping market

But new pipeline infrastructure, alternative gas supplies and changes in government energy policies are also factors reshaping the domestic gas market and impacting the long-term natural gas demand outlook, the report said.

Phase II of the Rockies Express pipeline was completed and brought 1.5 billion cubic feet per day of natural gas from Colorado and Wyoming to higher-priced Midwest markets, reducing the price differential between the Rockies and the midcontinent.

The report said the cheaper Rockies gas also displaced more expensive Canadian imports, which were down 12.5 percent in 2008 compared to 2007.

U.S. liquefied natural gas imports were down in 2008, averaging less than 1 bcf a day, because prices were higher elsewhere. “Asian and European demand was high, and there were occasional supply shortfalls,” the report said.

Since the end of 2008, however, world LNG prices have fallen and U.S. Northeast LNG prices were on a par with the rest of the world by the end of March 2009, the report said. New LNG supplies are also coming online and Asian and European demand has fallen due to the global economic slowdown.

Unconventional gas grows

The report said unconventional gas supplies are continuing to grow — up 14 percent in 2008 compared to a 3 percent drop in conventional U.S. gas supplies, and accounting for 51 percent of domestic production.

Conventional reserves are in decline, but “total domestic reserves have actually increased due to the addition of new supplies from shale gas, tight sands and coalbed methane,” the report said.

While unconventional resources are more expensive to develop, “economics have improved considerably in recent years due to positive long-term natural gas price forecasts, and through improvements in horizontal drilling and hydraulic fracturing technology.”

The report said there is limited production-cost information available, but low-end break-even price estimates for unconventional gas range from $3.30 to $5 per million Btu, with high-end price estimates from $5 to $7 per million Btu.

That range of break-even prices indicates that current natural gas prices “are somewhat below the price needed to sustain drilling activity in most unconventional basins,” the report said.

“Evidence of this can be seen in the dramatic plunge in the gas rig count in these basins during the fourth quarter of 2008,” a decline from a peak of more than 1,600 in early September to fewer than 800 at the end of April, the report said.

While there are many variables contributing to uncertainty in short-term energy markets, “long-term gas price forecasts remain supportive of the project, with stable or increasing price expectations.”






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