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Vol. 13, No. 31 Week of August 03, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Big gains for Alaska gas

Pipeline could get multi-billion dollar annual boost from federal climate bill

Stefan Milkowski

For Petroleum News

What will federal legislation to curb greenhouse gases mean for Alaska’s oil and gas? According to a recent analysis from the University of Alaska Anchorage Institute of Social and Economic Research, a lot more money for producers and the state.

Just how much money will depend on how the legislation is written and how it plays out on the ground, but the cap-and-trade legislation currently before Congress could dramatically improve the economics of an Alaska natural gas pipeline and add $4 billion to $9 billion in wellhead value each year, according to the analysis.

While natural gas would be subject to additional costs because of its carbon content, those costs would be less than the additional value of the gas as a relatively low-carbon fuel. Per unit of energy, natural gas produces about half as much of the greenhouse gas carbon dioxide as coal.

“There’s likely to be a pretty significant shift right away from coal to gas,” said Steve Colt, an associate professor of economics at the University of Alaska Anchorage and author of the ISER analysis. “It’s really the only thing utilities can do immediately to reduce their carbon output.”

“It means the market for Alaska’s gas becomes that much stronger,” Colt added.

Colt’s analysis, dated April 11, looks specifically at a report done by the American Council for Capital Formation and the National Association of Manufacturers using the National Energy Modeling System. The report projected the national and state impacts of the Lieberman-Warner Climate Security Act.

The Lieberman-Warner bill would cap emissions for various sectors of the economy, but would allow utilities and other major emitters to trade their emissions allowances. The bill aims for reductions in carbon dioxide emissions to 4 percent below 2005 levels by 2012 and 17 percent below 2005 levels by 2020.

According to the ACCF/NAM report, the legislation would increase the market price of natural gas by roughly $6 per thousand cubic feet in 2020 and $20 per mcf in 2030. The cost of emissions allowances would total roughly $3 and $14 over the same period, meaning the overall value of the gas would increase by $3 per mcf in 2020 and $6 in 2030.

At 4 billion cubic feet per day, an Alaska natural gas pipeline would generate an additional $150 billion to $230 billion over a 30-year lifespan, according to the analysis.

Colt challenges some of the assumptions in the ACCF/NAM report, which projects very high costs associated with carbon reductions in 2030, and argues that the availability of alternative energy sources will keep the cost of allowances relatively low. A lower cost for carbon allowances would likely decrease the premium for natural gas, he said.

Good for the gas pipeline

The projected increase in value would significantly boost the economics of TransCanada’s gas line proposal. According to Alaska Revenue Commissioner Pat Galvin, Gov. Sarah Palin’s gas line team and hired consultants considered the potential impacts of climate legislation on gas pricing, but did not include those impacts in their economic analysis.

“What we recognize in our analysis is that if a cap-and-trade was put in place, it would likely put a greater demand on gas prices,” Galvin said, adding that the team was taking a conservative approach and had not assumed the additional value.

Antony Scott, head of the Division of Oil and Gas’ commercial section, said none of the three price forecasts used in the state’s analysis assumed the passage of federal climate legislation.

He said it was impossible at this point to project detailed impacts of cap and trade legislation because of the huge number of variables and unknowns. But he added that it was hard to imagine the legislation would have a negative impact on the gas line project.

“Getting serious about climate change is likely to be very supportive of this project,” he said.

BP, ConocoPhillips support carbon cap

Alaska’s big three oil producers declined to speculate on how federal legislation would impact their business in Alaska.

“There’s so many variables, we’d really have to wait and see what the legislation would look like to assess it,” said Alan Jeffers, a spokesman for ExxonMobil.

But BP America and ConocoPhillips are both advocating some kind of cap-and-trade legislation. In a July speech to the National Governors Association, BP America Chairman Robert Malone said it was critical to start addressing climate change.

“Until energy producers and consumers know the cost of carbon, the uncertainty associated with planning and investing in all kinds of energy projects will remain high,” he said.

BP America and ConocoPhillips are both members of the U.S. Climate Action Partnership, a group of businesses and environmental organizations pushing for emissions reductions of 60 to 80 percent from current levels by 2050.

Jeffers said Exxon has not taken a formal position on climate legislation but favors proposals that are efficient and predictable and allow market forces to work.

Those tracking the climate legislation in Washington say the Lieberman-Warner bill probably won’t pass this session. But they add that some kind of cap-and-trade legislation will likely pass in the next few years.

“I think the only question is, how strong is it going to be?” Colt said.

Congress is also considering a carbon tax, but it’s expected that a cap-and-trade mechanism will ultimately be used instead.

Alaska Sens. Ted Stevens and Lisa Murkowski last year co-sponsored a different cap-and-trade proposal that capped the cost of carbon allowances.

Impacts on oil and coal

While the impact of federal climate legislation on Alaska’s natural gas is likely to be positive, the impacts on crude oil and coal are less certain.

Per unit of energy, oil products emit less carbon dioxide than coal but more than natural gas. Colt said it’s unclear how cap and trade legislation would affect U.S. demand for crude oil, but he added that oil is sold in a global market and that worldwide demand will likely continue to rise.

According to Colt, the ACCF/NAM report suggests that oil prices will rise more than the cost of emissions allowances, adding to the overall value of the product. Additional wellhead value would range between $500 million and $9 billion per year in 2020, according to Colt’s analysis of the report.

Coal used in conventional ways would likely face large new costs for carbon allowances, but could remain competitive in Alaska if the carbon dioxide produced through combustion is captured and stored, according to Colt.

In a separate analysis from July 2007, Colt estimated that emissions allowances could double the cost of coal.

“The conventional wisdom is carbon control is going to be bad for coal,” he said. “That’s probably true for utilities in Ohio, or if you’re sending boatloads of coal to the Midwest, but it could actually be good for Alaskan coal if it leads to one or two big-time projects.”

Colt said the potential for using carbon dioxide to increase oil recovery makes Alaska an attractive place for new technology aimed at capturing and storing carbon emissions.

Charlie Boddy, vice president of governmental relations at Usibelli Coal Mine, Inc., said he and company President Joe Usibelli Jr. have traveled to Washington to advocate for more research into carbon capture technology.

Boddy added that he has been working with Alaska’s congressional delegation on ways to protect Usibelli from the negative impacts of cap-and-trade legislation, such as through credits for emissions allowances. He said Usibelli would be interested in helping develop and test carbon capture technology.

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