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Has the time come for North Slope gas? Two gas line projects face significant hurdles as they work toward finding customers; much will hinge on cost, competitiveness Alan Bailey Petroleum News
Almost since the birth of the North Slope oil industry, the idea of a pipeline to export natural gas from the Slope has remained a dream in the eyes of Alaskans, something to work toward but with its expected completion date perpetually decades into the future. But with recent moves to turn that dream into a reality, is the time approaching when the trillions of cubic feet of gas stranded in the Alaska Arctic can finally be delivered to market?
Following the shale gas revolution in North America, earlier ideas of shipping North Slope gas to the Lower 48 have fallen by the wayside: The focus now is on a pipeline to deliver gas to tidewater in Southcentral Alaska, where it would be converted to liquefied natural gas for export, probably to Asia.
Significant issues A venture of this type faces a couple of significant issues if it is to compete on cost with gas from, say, Australia or the Middle East: the cost of removing from the gas the significant amount of carbon dioxide that relevant North Slope gas contains; and the cost of transporting the gas by pipeline over the 800 miles or so of rugged terrain to the Southcentral coast.
The viability of the project presumably depends on some combination of the cost efficiency of the pipeline and its associated facilities, and the price charged by the oil producers for the gas on the North Slope. But liquefied natural gas produced on the Southcentral coast would be conveniently located for transportation to Asia. And the North Slope gas is a known and established resource, rather than a speculative resource requiring exploration and delineation.
However, one question regarding the export of North Slope gas is the fact that, whereas it is true that the gas is stranded from market, the gas is not currently valueless. Much of the gas from oil fields such as Prudhoe Bay is continuously recycled through the fields to maximize oil production by maintaining the underground reservoir pressure and by using some of the gas to manufacture a solvent for flushing oil from rock pores. And oil being a significantly more valuable product than gas, there will be a tricky question in determining the point at which it becomes more expedient to export some of the gas, rather than use the gas to support oil production.
Two projects Currently there are two gas pipeline projects in progress: The “big line” with a primary objective of exporting gas into world markets, and a smaller line primarily intended to ensure reliable energy supplies for Alaska communities, especially in the Fairbanks area and in Southcentral Alaska. And, since the larger line would have offtake points in Alaska, and since the possibility of two separate pipelines eventually being built seems inconceivable, the smaller line can perhaps be viewed as a “backup” arrangement, should the larger line fail to materialize.
The big line, with a throughput capacity of perhaps 3 billion to 3.5 billion cubic feet per day, has morphed from a TransCanada project to build a pipeline to connect with the Lower 48, becoming instead the Southcentral LNG export concept, sponsored by TransCanada, ExxonMobil, ConocoPhillips and BP. And, following a recent consultant report to the state, the question has arisen of whether the state should also become a participant in the project. TransCanada’s involvement is based on that company’s exclusive state license to construct the pipeline under the terms of the Alaska Gasline Inducement Act, or AGIA, passed in 2007.
The total cost of the project has been estimated at from $45 billion to more than $65 billion.
In October the companies involved in the project announced that they had chosen Nikiski on the Kenai Peninsula as the site for a Southcentral liquefied natural gas plant, at the southern end of the pipeline.
The AGDC project The project for the construction of the smaller “in-state” pipeline is being conducted by the Alaska Gasline Development Corp., or AGDC, a state entity that the state is funding to the point of holding an open season in 2015. The open season will determine whether there are customers wishing to ship gas on the line. If that open season proves successful, funding of project construction would come from appropriate bonding.
Under the terms of AGIA, the small pipeline is restricted to a maximum throughput of 500 million cubic feet per day, a throughput cap that would presumably limit some of the economies of scale that a larger line would enjoy but that the project proponents say could be financially viable.
But, with the full capacity of the line substantially exceeding internal Alaska utility gas demand, the viability of the line would depend on some form of industrial gas usage, probably the export of liquefied natural gas, as is envisaged for the big line.
Interaction with Cook Inlet The construction of the small line would raise some intriguing questions regarding the interaction between gas supplies from the North Slope and Southcentral utility gas supplies from the Cook Inlet basin. Although there is much uncertainty at present over future gas production from the Cook Inlet, it does appear that significant volumes of gas may be produced from the basin for delivery to utilities well into the 2020s. But, if gas could be delivered more cheaply from the North Slope, would that put the Cook Inlet gas industry out of business? If, on the other hand, North Slope gas cannot compete on cost with Cook Inlet gas, would the North Slope gas become a marginal supply, filling in shortfalls in utility supplies from the Cook Inlet gas fields as necessary, with excess gas needing to be exported?
Both North Slope gas line projects are currently working toward open seasons. Only after these open seasons have been held will people know whether either project will be financially feasible, and whether the long-cherished Alaska dream of exporting North Slope gas will become a reality at last.
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