In the process up updating the Anchorage Chamber of Commerce on ConocoPhillips’ progress on making a natural gas pipeline from the North Slope a reality, the company’s vice president of Alaska North Slope gas said he thought the most important benefit of a gas line would be the creation of a new industry in the state. Unlike others, Joe Marushack doesn’t think that new industry will be petrochemicals; nor is he focused on the benefits of a short-term pipeline construction boom. Marushack thinks the real benefit of building a gas pipeline from Alaska’s North Slope will be the birth of a natural gas exploration and production industry in Alaska – one that both opens new basins along the line and across the North Slope.
More importantly, he said ConocoPhillips has already begun its own gas exploration in the National Petroleum Reserve-Alaska.
Between Prudhoe Bay and Point Thomson there are some 35 trillion cubic feet of known natural gas, but over a 30-year period the pipeline the North Slope producers are talking about would require 50 tcf, Marushack said.
ConocoPhillips believes the gas will come from the NPR-A, where the company has already drilled 17 exploration wells.
“NPR-A is very heavily gas prone, so ConocoPhillips is already out there trying to develop this new industry. We’re looking for gas, we’re finding some gas. We think that’s the opportunity, the big opportunity, to fill up this pipe, or at least the starting point,” he said.
A gas pipeline will also spur other exploration companies to start looking for gas, Marushack said.
New basins along the gas line corridor could also be opened for exploration, he said, “and this pipeline being open access will provide the opportunity for all companies at various times to get access to the pipeline, as well as the opportunity for Alaska to get access to the gas.”
In risk mitigation phase
In his presentation to the chamber, Marushack reviewed the major North Slope producers’ (BP, ConocoPhillips and ExxonMobil) progress on ‘un-stranding’ North Slope gas, starting with the $125 million the companies spent on a 2001-02 study to commercialize North Slope gas.
He reminded the audience that the producers, which are also the main gas owners on the North Slope, need regulatory certainty in the United States and Canada and fiscal certainty from the state of Alaska before a gas pipeline project would be sanctioned.
Federal enabling legislation, a major project milestone, passed last year, and the companies are now negotiating a fiscal contract with the state of Alaska, working on the Canadian side of the regulatory process and “doing some cost-saving initiatives.”
What’s going on now is the risk mitigation phase of the project, Marushack said.
An approved project would go into project development, with engineering and permitting work expected to cost about $1 billion and take about four years. Procurement, construction and commissioning will take five years. The 2001-02 study estimated the total cost at $15 billion to Alberta, close to $20 billion if a pipeline has to be built to the Midwest.
The construction phase is often seen as having the jobs benefit of an Alaska North Slope gas pipeline, but Marushack said that is short-term work: the real focus with jobs is “the opportunity to create a new industry,” a gas exploration and production industry on the North Slope.
Propane makes sense for heat
He pointed out that Alaskans have frequently talked about the possibility of a petrochemical industry in Alaska — of stripping off natural gas liquids in Alaska as the basis for that industry. The study the North Slope producers did in 2001-02 concluded that Alberta would be the best place to have a natural gas liquids plant, Marushack said: ethane would be mixed with the methane and sold for its heating value, while propane components would be dropped off in Alberta.
Alberta and the Texas-Louisiana Gulf Coast have the only two major petrochemical facilities in North America, he said. The facilities are centralized because of requirements for “good transportation, the ability to transfer products back and forth … (and) a lot of feedstock opportunities.”
Marushack, who was the business manager of a petrochemical facility before he came to Alaska, said the requirements for such a facility are “world-class transportation,” feedstocks and the ability to throw off by-products. He said use of petrochemicals in Alaska would be looked at further, “but we’re only really talking about two sources of petrochemicals” in an Alaska gas pipeline: ethane, used to make ethylene and then polyethylene and propane, used to make propylene and then polypropylene.
“And so we’re not talking about lots and lots of different chemical feedstock compounds: we’re talking about two.”
Marushack said he thinks “it’s going to be a real challenge” to make an Alaska chemical project economic.
On the other hand, he said, it “might make good sense” to take some propane out of a gas pipeline and use it to provide heat in communities that don’t have direct access to a pipeline.
Reducing risk
Marushack said what the North Slope producers want out of negotiations with the state of Alaska under the Alaska Stranded Gas Development Act is fiscal stability.
“We’re trying to figure out … how we can reduce risk and make the project most viable and most economic,” he said. The North Slope producers will be making a big investment in the project, and “need to have as much assurance that it’s going to be a good project as possible.
“And actually Alaska needs it to be as good a project as possible, too, because the lowest-cost project will create the highest wellhead. That creates the most royalty, the most taxes for the state, so we’re all in this together…,” he said.
The shippers — the North Slope producers and the state — take the project risk, Marushack said, because they have to make the long-term shipping commitments.
“Cost increase, any schedule delays, anything that makes that (project) cost go up, automatically comes back on the resource owner. … If we have problems, if we have delays, people who are going to be held accountable for that, basically, are the ones who are the owners of the pipeline. But they’ll just transfer that back to the state and the producers and we’ll pay all the costs on that.
“So this is why we believe that the producers have the most incentive to manage their costs.”
The state is discussing taking equity ownership in the project, and the producers, Marushack said, think that would be a good idea because it would give the state a seat at the table and basically put the state in the role of a producer: it could take gas in-kind if it chose to, market that gas, “do long-term deals, short-term deals, spot deals. Basically it’s their opportunity to try to figure out how they could maximize the value of that asset through whatever sales mechanisms they came up with.”
