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Vol. 16, No. 16 Week of April 17, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Low prices, Alaska’s stranded gas interesting to chemicals industry

Shale gas from the Lower 48 might benefit Alaska after all.

While many worry that a glut of natural gas on the market could delay or negate a pipeline from the North Slope, that glut is also depressing prices, creating an incentive for end users to buy natural gas whenever possible instead of oil. With the right infrastructure in place, like an in-state pipeline, Alaska is well positioned to become a player in the global chemicals trade, a consultant told an audience in Anchorage recently.

“It looks to be a very feasible type of investment,” Dave Witte, executive vice president of business advisory services for CMAI, a global chemicals consulting firm, said during a resource extraction forecast hosted by the Anchorage Economic Development Corp.

Chemicals derived from hydrocarbons are used to make everything from shoes to paint to plastic bottles to wallpaper. “There’s a whole industry around converting these molecules into something that’s very useful,” Witte said. These byproducts, converted into solid chemical pellets, are often easier to ship than natural gas that must be piped or liquefied.

That ease of movement prompted emerging markets to build up capacity in 2010, just as demand tanked following the global recession. With demand building up again and shale formations helping to depress natural gas prices, the industry is just starting to recover.

With its proximity to Asian markets and its large reserves of natural gas stranded on the North Slope, Alaska is well positioned to capitalize on that recovery. “Trade is the perfect anecdote for anybody that’s got a surplus hydrocarbon resource and doesn’t know where to put it and this is really what we’re going to see for Alaska here shortly,” Witte said.

Wide price spread helps gas

The shale gas revolution under way in the Lower 48 might be threatening the economics of a natural gas pipeline from the North Slope to southern markets, but it’s creating a renaissance for the domestic chemical export industry. With shale gas glutting the market, natural gas is trading at a huge discount to oil, allowing exporters in the Gulf Coast to sell products made from natural gas into markets that currently depend on oil.

“The opportunity for Alaska is to take cheap ethane from the North Slope or cheap natural gas from the North Slope and sell it into the markets that are basing their prices on oil and capture the marginal difference between the price of gas and the price of oil,” Witte said. “And that, in a nutshell, is a huge driver for why it makes sense for the global (chemical) industry to look at investments where you have stranded natural gas.”

The North Slope, of course, is home to trillions of cubic feet of stranded natural gas.

Hypothetically, the methane in that gas stream could be used to make urea, methanol or gas-to-liquids, while the ethane, butane, propane and pentanes could also be exported.

A bit of a pipeline Catch 22

CMAI performed studies in 2009 and 2010 on the potential for marketing stranded North Slope natural gas through the chemicals industry. “The idea was to evaluate potential markets to see where you might fit in the global chemical world,” Witte said.

The studies found that Alaska has some advantages and some disadvantages.

Alaska could offer a low cost of production because its feedstock — natural gas and ethane — would likely sell at a discount to the Gulf Coast. And with its location, Alaska could easily sell into markets on the West Coast of North America or in East Asia.

But Alaska capital costs, as usual, are expected to be higher than those in the Gulf Coast, and without an existing industry, Alaska would need to depend on a big player spending $2 billion to $3 billion to build a new plant capable of producing 2 million tons per year.

Investors are skeptical about making that investment without some clarity about the various permutations on the bullet line or the spur line that would bring gas from the North Slope to Southcentral, Witte said. “They’re not sure what’s going on,” he said.

That creates a bit of a Catch-22.

Having an industrial anchor is crucial to the economics of an in-state pipeline. With a large customer at the end of the line, residential and commercial customers pay less.

The Agrium fertilizer plant and the ConocoPhillips-Marathon liquefied natural gas export terminal would have served that role, but with both now mothballed, project sponsors are looking for something new to put at the end of a pipeline to better spread out costs.

—Eric Lidji

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