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Vol. 12, No. 38 Week of September 23, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Arctic gas sales no slam dunk

Stealing market share from other, cheaper energy sources could be tough

Alan Bailey

Petroleum News

As with any commodity, set the right price for natural gas and people will buy it. But high production and transportation costs for natural gas supplies from the Arctic could make sales of that gas challenging, given alternative energy sources and a burgeoning liquefied natural gas industry, was the message from Gerry Goobie, senior principal with consulting firm Purvin & Gertz, in a talk at the 3rd Annual Alaska Oil and Gas Symposium in Anchorage on Sept. 18.

“Arctic gas will have to compete with other less expensive gas and energy supplies in North America,” Goobie said. “… You’re trying to bring the most expensive supply into the market and steal market share. … If you’re trying to steal market share it’s tough.”

Increasing demand

Goobie said that a buoyant world economy will drive an increasing demand for fuels, and that trend will likely keep general energy prices high.

“We see fairly strong growth,” Goobie said. “… We’re transitioning to a much higher energy regime going forward.”

Crude oil prices may soften below current peaks as spare production capacity increases, but prices will remain above $50 per barrel in the long term, Goobie said. The geopolitical “fear premium” is lessening but geopolitical issues will continue to cause price volatility.

However, in the face of relatively high prices, U.S. natural gas usage leveled off after strong growth in the 1990s. And weak market conditions linked to large gas storage inventories have caused a cut in drilling for gas in Canada. Gas production in North America has reached a plateau.

But cuts in Canadian exploration activity have yet to impact production levels. And, despite strong drilling in the United States, companies are not replacing reserves fast enough, Goobie said. Canadian gas exports to the U.S. are not expanding and increases in Canadian domestic demand will likely increase. All of these factors will start to drive prices higher again.

But natural gas from Alaska will not be available in the Lower 48 until at least 2016.

More LNG

Meantime a rapidly expanding world LNG market will cause LNG imports to the U.S. to increase quite rapidly to meet an increasing U.S. natural gas demand. Although there are issues associated with LNG development in some parts of the world, those issues will be resolved and world LNG production will increase dramatically in the next few years.

Several LNG terminals are proposed for construction in North America during the next five to six years, with more terminals needed after that, Goobie said. That will result in severe competition with North American natural gas supplies.

“LNG is coming in whether we like it or not. … That’s where the competition is going to be,” Goobie said. “… The United States is expected to become the largest LNG importer, surpassing Japan.”

So, when Arctic natural gas comes on stream could it break into the North American gas market?

Depends on the price

That would mainly depend on the price of the gas, despite other issues such as existing supply contracts and sunk costs in LNG plants, Goobie thinks.

“Ultimately there are a lot of … factors. Price is going to be the determining factor long-term,” Goobie said. “… Competition is going to be severe.”

And Goobie sees the export of LNG from Alaska, say from an LNG terminal at Valdez, as being possible but very challenging, given the big LNG projects in Pacific Rim countries such as Australia and Indonesia, and given only limited plans for LNG receiving terminals on the West Coast of North America. Supply competition in the Pacific region would put downward pressure on prices.

“You’d have to push it into an already oversupplied market,” Goobie said. “… You’re competing against some pretty formidable competitors.”

And when it comes to processing Arctic gas and supplying chemical industry feedstocks, the use of existing infrastructure in western Canada makes business sense.

McKenzie gas will be processed in Alberta — “It doesn’t make sense to go anywhere else,” Goobie said.

Goobie also said that some Alaska gas will be processed in western Canada.

Changing gas market

Future Arctic gas supplies would also have to face the challenges of a changing North American gas market. High price levels have resulted in natural gas losing market share to some other fuels in North American industrial markets, Goobie said.

“Cheap energy is still a market winner,” he said.

There has also been an increasing interest in clean coal technologies and a resurgence of interest in nuclear power. Nuclear power is clean in the sense that it does not generate carbon dioxide, Goobie said.

But although the production of Arctic natural gas is technically and economically feasible, high cost will prove to be the main challenge. Costs are going to have to be controlled, Goobie said.

“The world is not waiting for Arctic gas to come on stream. … The goal is certainly attainable … but there are a lot of things that you’ve got to be careful about over the next number of years,” Goobie said.

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