Disputes over access to pipeline routes could torpedo the Mackenzie Delta natural gas pipeline if they’re not resolved in just six to twelve months, says a recent report by a Canadian analyst.
Access across the Yukon is also likely to be the biggest hurdle for a proposed line from Alaska’s North Slope to Midwestern markets, says Chris Theal. He wrote a new 50-page report for Tristone Capital on Arctic gas prospects and how well they compete with LNG projects that are becoming a big part of the future energy picture for North America.
Backers of the Mackenzie Gas Project said last month that they’ve stepped back from the project due to stalled discussions with First Nations leaders over access payments and future contributions to the northern communities. That will push back first gas from the project by a year to 2010 at the earliest, says Theal’s report, titled “Monetizing Northern Frontier Gas; Is the Market Window Closing?’’
While the Mackenzie pipeline is stalled, dozens of new LNG terminals are being planned around the rim of North America, and huge liquefaction plants are under construction in Qatar, on Russia’s Sakhalin Island, in Nigeria, Australia and elsewhere.
For the two big Arctic pipeline projects, hung up on access issues, that’s an ominous development:
“We do not see either project advancing until the regulatory regime is streamlined, First Nations groups are on side and fiscal terms are agreed upon,” the report says. “We note the risk of these delays is that the participants can move forward with alternative international LNG supply projects targeting North America, with time lines that have first mover advantage over the northern pipeline proposals.”
Election could stall progress
On top of that, Theal said in a Petroleum News interview, “if we do go to an election (in Canada), that creates a real risk for Mackenzie Delta pipeline. This is matter of national energy security for the U.S. We don’t have that.’’
In his analysis, Theal compares costs of four gas projects: the North Slope pipeline, the Mackenzie Valley Pipeline, the Alaska LNG proposal, and bringing LNG from Qatar to the Gulf of Mexico.
Looking at those alternatives, the report says the Mackenzie Delta option is actually the cheapest of the four, at $3.12 to get a thousand cubic feet of gas to market in Chicago. The Qatar-to-the-Gulf option was next at $3.30, followed closely by the Alaska pipeline at $3.36. The Alaska LNG option was far behind, at $3.70 per thousand cubic feet.
High cost for Alaska LNG
Even at that, Theal said, the Alaska LNG capital costs are understated because the proposal by the Alaska Gasline Port Authority and Sempra treats LNG tankering costs and West Coast regasification infrastructure as operating expenses.
While tankers can be leased, assuming the backers can get past the legal hurdle that prohibits using foreign-built ships in U.S. commerce, “there’s no spare regasification capacity on the West Coast,” Theal notes. “That’s another minimum $2 billion to integrate Sempra’s proposal.
“We’ve looked at over 200 LNG trains around the world. This is the highest capital cost by far,” Theal said.
Tristone’s analysis puts the current cost of a pipeline from the North Slope to Chicago at $24 billion, up from the $19.4 billion estimated by the North Slope producers group three years ago when they said the project was technically feasible but uneconomic. Gas prices have risen substantially in the interim, of course.
But steel costs are up 150 percent since that time, the report notes, and cement is also more expensive. Still, the cost could be cut back by $6 billion to $18 billion by using spare capacity in pipelines from Alberta to Chicago.
With that cost advantage, plus the recent federal legislation favoring the line, and fiscal terms now being negotiated with the state of Alaska, “the project is close to overcoming three of the four issues that required progress in 2002,” the report says.
Big regulatory hurdle
But the big hurdle is just across the border, according to the report by Calgary-based Theal.
“The remaining issue — establishing a clear and predictable regulatory process in Canada — is far from being resolved,” his report notes. “Unsettled land claims in Yukon/BC are additional barriers to development.”
It goes on: “Inaction by the Federal (Canadian) government on the Mackenzie Delta regulatory and economic issues would provide a poor precedent for a streamlined Canadian framework for the Alaska approval process.’’
Still, the report concludes, the Alaska line will be built, and will be delivering gas in 2015 or 2016, simply because the U.S. government sees it as a priority for national energy security.
Declining domestic supply
North American supply has reached its peak and will slide about 1 percent each year into the foreseeable future, the Tristone report projects. So LNG and northern gas are a vital part of the energy future for the continent.
The question is where the investment will be made by the world’s super-majors, who are already putting tens of billions of dollars into integrated LNG supply chains.
The proponents of the two Arctic pipelines have interests in terminals that could import 13 trillion cubic feet of gas daily, about double what the two Arctic pipelines combined could deliver at their initial capacity. ExxonMobil, for example, has its huge investment in Qatar LNG liquefaction, is building LNG tankers that are substantially bigger than current vessels, and it has interests in several LNG regasification terminals in the Gulf of Mexico.
Shell has its Sakhalin 2 project and guaranteed receiving capacity at the Sempra terminal, along with interests in two other proposed import facilities. BP has its interests in Tangguh and Trinidad, plus its proposed New Jersey terminal. ConocoPhillips is working on a Qatar LNG project and has interests in one approved LNG terminal, plus three proposed import sites.
“Those are the real competitive threats to the pipelines,” Theal said. “That’s the competition. It’s the competition for capital among the super-majors.’’l
Editor’s note: Tristone Capital Inc. is a full-service investment banking firm that specializes in the energy industry, with offices in Calgary, Houston and the United Kingdom. It recently merged with Petroleum Place Energy Advisers Inc., which specializes in acquisition and divestiture of energy properties and has offices in Dallas, Denver and Oklahoma City. Tristone’s Web site is www.tristonecapital.com/.
