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Providing coverage of Alaska and northern Canada's oil and gas industry
December 2010

Vol. 15, No. 49 Week of December 05, 2010

Alaska gas must compete in marketplace

Both Alaska gas line proposals, project’s top federal regulator, discuss progress to date, what will be required to move forward

Kristen Nelson

Petroleum News

The Resource Development Council for Alaska got three perspectives on an Alaska gas line project at the group’s annual conference in Anchorage Nov. 18.

Larry Persily, Tony Palmer and Bud Fackrell all said progress is being made on a line, but much remains to be done. And all emphasized that Alaska gas has to compete in the marketplace.

The three brought different perspectives to the issue: Persily is the federal coordinator, Office of the Federal Coordinator for Alaska Natural Gas Transportation Projects — responsible for ensuring that federal agencies cooperate on needed permitting for the line; Palmer is a vice president of TransCanada, and the TransCanada official in charge of the Alaska Pipeline Project, the TransCanada-ExxonMobil partnership which has the state’s Alaska Gasline Inducement Act license for a line; Fackrell is president of Denali — The Alaska Gas Pipeline, the BP-ConocoPhillips owned project.

Alaska needs a gas pipeline

Persily said there is a market for Alaska’s gas, but some myths about the project need to be addressed.

“You look out to 2020 and beyond and there is a market — we just have to get in there at a competitive price with a reasonable tax structure,” he said.

But Alaskans need to recognize that “we need that pipeline a lot more than the producers need it. You know, they can make a profit elsewhere in the world to pay their bills; we just can’t,” Persily said.

Not only does the state need revenues from a gas line, it needs more investment in oil on the North Slope to keep the trans-Alaska oil pipeline running, he said, and “attracting the investment dollars to Alaska, keeping the state’s treasury flush to pay for the public services that people want and need, would be a lot easier with a natural gas pipeline.”

That’s because North Slope exploration — which requires big investments — would be a lot easier if there wasn’t the risk of finding gas, which is “essentially … a liability, a byproduct that you must spend money to remove from the oil stream.”

With a gas line, high-cost Arctic development would become more attractive, because “you could sell everything that comes up out of the ground,” making Alaska more competitive for exploration dollars, Persily said.

Myths to be overcome

Alaskans believe a number of myths about a gas line, Persily said, and “We’re going to have to overcome those myths if a gas line is going to get built.”

Those myths include shale gas taking over the gas world. Production from shale gas is growing, he said, “but it has its own problems.”

Another myth is that Alaska’s gas won’t be needed.

Persily said shale gas will put a lot of gas into the market, but more than the gas an Alaska line would provide will be needed each year just to cover the decline in production from the Western Canada Sedimentary basin.

On the issue of liquefied natural gas — sending Alaska’s gas overseas as LNG — Persily said Alaska’s North Slope gas can’t compete with gas at tidewater; the 800-mile pipeline puts it at too big a cost disadvantage in world markets. And, he said, $100 billion worth of LNG projects are under construction or within a year of the final construction decision — just in Australia, with all that LNG headed to the Asian market.

Biggest market in the world

Does the North American market need Alaska gas?

“It’s the largest gas market in the world. North America last year on an average day consumed three times as much gas as Japan, Korea, Taiwan, China and India combined,” Persily said.

With a growing gap between demand and the conventional gas coming into North America, “If Alaska can develop a project that is price competitive,” then Alaska can get a piece of the North American market.

Persily said the EPA “could become one of Alaska’s best friends when it comes to the gas line project” because almost everything EPA does “to clean up the nation’s air, that makes it harder for utilities to justify spending money on coal plants” and pushes utilities toward gas, “which builds demand, which is what we need.”

“The demand for Alaska gas is not going to be people turning up their thermostats because it’s a hard winter; it’s going to be from utility demand.”

Calling in the experts

Persily said the Office of the Federal Coordinator is taking on a couple of projects to help overcome the myths about an Alaska gas line.

On Jan. 22 in Anchorage the office will host a natural gas public forum with a panel of experts from the Lower 48 to talk about supply and demand fundamentals.

Alaska public TV will stream the forum live at www.360north.org and the Federal Coordinator’s website, www.arcticgas.gov and broadcast it later.

Persily said they are also adding a writer-researcher to the staff to produce fact papers on issues around the project.

Upfront work important

TransCanada’s Palmer said TransCanada agrees “that Alaska gas can compete in the marketplace,” but said “cooperation is needed” from the state, from potential customers, from regulators and from Alaskans if the project is going to succeed.

The Alaska gas project has long lead time “and that quite frankly is a disadvantage of this project relative to shale gas and other potential projects,” many of which can be done in a short timeframe and “on the balance sheets of existing companies in terms of financing.”

The economies of scale from an Alaska gas pipeline project are positive, Palmer said, “but the negatives are you have a long lead time for the project and you have a massive financing. So it’s important that we do the upfront work today to allow the project to ultimately succeed.”

Because of the massive size and cost of the project, $30 billion to $40 billion, most of which has to be financed, it’s “critical that we have a project that is financeable, sustainable, that our customers can make money on and quite frankly that regulators can approve.”

Work to date

Palmer said negotiations continue with potential customers for the Alaska Pipeline Project. The open season for the project closed July 30.

The project has been in the development phase for 30 years, and will require cooperation from all those involved.

“It is critical that all parties — the State of Alaska, the U.S. federal government, the Canadian federal government, provincial governments, the commercial parties, the project sponsors as well as customers — must work together and hit our target,” Palmer said.

Field work continues, with “an intensive field season this summer,” with more than 300 people in the field, as well as “active discussions with regulators.”

Market driven

Denali’s Fackrell said “Denali is a market-driven project. We need customers. Up to this point we’ve spent BP and Conoco’s money” putting a commercial offering together.

“If we get full project support from shippers, we move forward,” he said.

Denali has been talking to potential shippers for more than a year and has learned a number of things.

“Gas has to compete in the marketplace.”

And shippers have “universally, unanimously said they need a durable and attractive fiscal framework that covers the value chain of the project,” Fackrell said.

Shippers have also said they need Point Thomson resources “free from litigation, available and dedicated to the project.”

Another necessity is state approvals for offtake from the fields and receipt of all the necessary permits.

Conditioned bids

Denali got conditioned bids in its open season, Fackrell said.

“It’s not uncommon in an open season to have conditions; what is uncommon here is that most or many of the conditions were outside of Denali’s control.” Conditions are usually things that are in the control of the pipeline company and the shipper, but in this case “many are dependent on the State of Alaska,” some on U.S. and federal Canadian regulatory bodies.

But all conditions have to be satisfied for shippers to sign firm transportation agreements.

“If one condition is not satisfied, no firm transportation agreement has to be signed. If you don’t have the firm transportation agreements, you don’t have financing and you don’t have a project,” he said.

The competitive issue

Whether it’s the North American gas pipeline market or the international LNG market, “Alaska gas must compete in the marketplace,” Fackrell said.

While the “verdict is probably still out on shale gas,” it has the advantages of being close to demand, available today and in plentiful supply — and Alaska gas is going to have to compete on the delivered cost of the gas, he said.

“The important thing to understand is that if we did the project today, it is probably not economic,” Fackrell said. And while the price that’s important lies out in the future, shippers today are “going to make a hundred-billion dollar decision” when the gas price is not economic for the project.

So that decision will have to be made on other fundamentals of the project.

“And today I don’t think we have all the fundamentals in place even to compete,” he said.

Those fundamentals include “a fiscal regime that’s durable so they can decide what the envelope of economics is going to be on the project”; the resource base; and “all of the shippers aligned on one project concept.”






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