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Alaska gas could push down prices temporarily Commission: Drop could average 56 cents per mcf in pipeline’s first year Larry Persily Petroleum News Juneau Correspondent
An 18-member national commission, funded by a collection of nonprofit foundations, says the large volume of new natural gas supply from an Alaska pipeline could knock down U.S. gas prices by $2.10 per thousand cubic feet its first year of full production. The report says producers would quickly adjust to accommodate the new supply, however, and prices would recover most of the drop by the second year, averaging about 56 cents per mcf lower for the next 10 years.
But there is a benefit to lower prices, said the report by the National Commission on Energy Policy. The revenue loss to producers would be more than offset by savings to consumers from cheaper gas.
The report, Increasing U.S. Natural Gas Supplies, was released in late October. (See related story on page 1.)
U.S. consumers would save, on average, $18.9 billion a year from 2016 through 2025, the report said, assuming the Alaska line started phasing in production in late 2013 and reached its full flow of more than 4 billion cubic feet per day in 2015. Producers would lose revenue Producers — primarily Canadian and Lower 48 producers — would see their revenues fall an average of $18.4 billion per year over the same period of 2016-2025, although the companies would save an estimated $3.9 billion per year by using cheaper Alaska gas to replace other, more expensive sources to meet demand.
“The net gain to society from access to Alaska natural gas is estimated at $4.4 billion per year,” the report said.
Imported liquefied natural gas also would lose market share and revenue with the introduction of Alaska gas. The report estimates about $2 billion of the annual $18.4 billion revenue loss to producers would be carried by LNG suppliers.
It’s not just a matter of consumer savings, but also indirect benefits, the report added. Indirect economic benefits “This estimate reflects only the direct impact of changes in expenditures for natural gas and does not include any benefits associated with maintaining U.S. manufacturing jobs or other indirect economic benefits.
“This probably underestimates somewhat the aggregate net benefits to the U.S. economy.”
Without an Alaska gas pipeline, the commission projects gas will sell at more than $5.50 per mcf at Henry Hub in 2015 (in 2003 dollars), floating between $5 and $5.50 through 2025. But with a line from Alaska’s North Slope feeding the market, the commission sees a price drop to about $3.50 in 2015, then rebounding and averaging around $4.50 to $4.75 through 2025.
The proposed Alaska project would supply almost 7 percent of the nation’s current natural gas consumption, with the additional supply putting downward pressure on prices, the report said. Earlier report forecast smaller price drop The commission’s estimate of a price drop with the delivery of Alaska gas into the marketplace is steeper than a similar study released in late September by the U.S. Energy Information Administration. That report estimated the first-year drop in market prices at 27 cents per mcf.
Both reports point out that their projections are estimates based on financial modeling of market assumptions. The September federal agency report noted, “The projections in the reference cases used in this report are not statements of what will happen but of what might happen.”
Part of the problem in looking at future prices is the long lead time to bring Alaska gas to market, the national commission report said. The report said it could take 10 years to plan, design, permit and build an Alaska gas pipeline to the distribution grid in Alberta and expanded take-away capacity to serve Lower 48 markets.
Until then, the nation will need to rely more heavily on imported liquefied natural gas to meet market demands. Supply and demand gap grows “U.S. natural gas production has grown, on average, less than 1 percent per year since 1990. … At the same time, U.S. consumption growth has averaged about 1.4 percent per year,” the report said. That growing spread is “leading many analysts to conclude the North American natural gas market has moved to a permanently higher price level.”
The commission, founded in 2002, is also developing comprehensive, long-term national energy policy recommendations, due for release in December 2004.
Foundations providing financial support for the commission are the William and Flora Hewlett Foundation, Pew Charitable Trusts, John D. and Catherine T. MacArthur Foundation, David and Lucile Packard Foundation and the Energy Foundation, a San Francisco-based partnership of several foundations interested in sustainable energy. Commissioners include ConocoPhillips chairman Commission members include:
• William Reilly, former administrator of the U.S. Environmental Protection Agency for the first President George Bush.
• Archie Dunham, chairman of ConocoPhillips.
• Andrew Lundquist, former director of the current President George Bush’s White House National Energy Policy Development Group, former chief of staff for then-Sen. Frank Murkowski and former senior legislative assistant for Sen. Ted Stevens.
• Sharon Nelson, chair of the board of directors of Consumers Union.
• R. James Woolsey, former director of the Central Intelligence Agency for President Bill Clinton.
• Leo Gerard, international president of the United Steelworkers of America.
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