2000 to today: Alaska gas interest revives

Changing gas supply situation in Lower 48 sparks pipeline interest; Far East prices put liquefied natural gas back on the boards

Bill White

Researcher/writer for the Office of the Federal Coordinator

Editor’s note: This is the first part of the concluding section of a three-part story.

The Alaska gas pipeline project got another life in the late 1990s as North Slope producers showed renewed interest in tackling the job.

Oil production from the flagship Prudhoe Bay field had plunged about 50 percent since its peak a decade earlier. With Prudhoe fading, perhaps the time was near for marketing the megafield’s natural gas, which largely had been reinjected for 20 years to push more oil from the reservoir. But there was still that pesky problem: Could a gas line make money?

The market targeted in the 1970s — the Lower 48 — remained unattractive. Natural gas prices were too low.

But Japan showed promise. The Japanese gas market was just one-ninth the size of the Lower 48 market in 1999 — too small to absorb the massive volume of liquefied natural gas an Alaska project would produce. But the appetite of utilities there and in South Korea had been growing, and with continued growth might reach the critical mass an Alaska project needed. They also paid more for LNG than U.S. buyers paid for pipeline gas.

The lack of a gas project gnawed at some Alaska leaders. One in particular, state Rep. Ramona Barnes of Anchorage, chairwoman of a House-Senate gas task force, made an LNG project her crusade.

In early 1997, Barnes lectured a roomful of oil lobbyists and executives: “We’re going to build this project in my lifetime.” (She died in 2003.)

The main producers — BP, Exxon and ARCO — had been talking for a year or two about how Asia might want Alaska LNG, perhaps as early as 2005, more likely closer to 2010. But the project’s $15 billion estimated cost was a barrier, making Alaska LNG too expensive to compete for the growing demand, the president of ARCO Alaska said after visiting Asia buyers in fall 1995.

In March 1997, the producers said they would study how to shave costs from an LNG project. But they wanted the state to change taxes and/or royalties to improve the economics, too.

In 1998 Alaska enacted the Stranded Gas Development Act. “Stranded” due to no pipeline to carry the North Slope’s estimated 35 trillion cubic feet of gas reserves to market. The new law didn’t change taxes, but it allowed the producers and state to negotiate a fiscal contract to replace the normal set of taxes. It was unclear whether this was constitutional. At Rep. Barnes’ insistence, the contract could apply only to an LNG project.

That law lapsed a few years later with no takers. Asia prices and demand were up, but not nearly enough.

Then the LNG project all but faded from view, eclipsed again when a freak of nature put new energy behind the old plan: Pipe Alaska gas to the Lower 48.

This time, the Lower 48 route had real traction.

First, government — initially the state but Congress as well by the early 2000s — was actively looking for ways to help.

Second, North Slope producers now were publicly engaged in trying to solve how to move Prudhoe Bay gas to market profitably.

Government and producer enthusiasm wasn’t enough, however. Something needed to shore up Lower 48 natural gas prices. Without higher prices, the cost of piping Alaska gas 3,000 miles to Chicago would make the gas too expensive to attract buyers.

On that front, good fortune for the project was coming.

As 2000 began, anxiety resurfaced that the United States was running short of natural gas — the same anxiety that birthed Alaska gas pipeline plans 30 years earlier. The nation’s old reliable gas fields were petering out.

Soon, enflaming that anxiety, the Lower 48 was whacked with a nasty winter — the coldest in years.

Natural gas prices spiked during the winter of 2000-2001.

And a race was on to pipe Alaska gas south to the rescue.

New energy for a gas pipeline

The buyers’ manic responses were swayed by the breathtaking volatility of natural gas prices during this period.

As gas-shortage anxiety bloomed in the early 2000s, several Alaska gas pipeline ideas came forward. These proposals exposed schisms among Alaskans and among the oil producers over which idea was wisest, complicating efforts to unify behind a single project.

Most of the ideas responded to the same cue: Natural gas prices that blasted off like a rocket.

In 1999, Lower 48 gas prices averaged a ho-hum $2.20 per thousand cubic feet at the wellhead, roughly the average of the previous few years.

But as the anxiety sank in during the next year, prices began to creep up.

The benchmark Henry Hub spot price topped $3 in April 2000 and $4 in June before leveling off. Then it got very cold in November. The price spiked to $6 around Thanksgiving, and by Christmas it topped $10, more than four times higher than at the start of the year.

The catalyst was an unusually cold weather — the 26th coolest winter in the previous 106 years, the National Oceanic & Atmospheric Administration Reported at the time.

“The winter began with record or near-record cold across much of the nation in December as arctic air spread from the Rocky Mountains to the East Coast behind a series of strong cold fronts,” NOAA said. “Severe winter storms and record snowfall fell in many cities from Amarillo, Texas, to Buffalo, New York.” (Meanwhile, Alaskans were enjoying their mildest winter since statewide records began in 1918.)

In California, power companies imposed rolling blackouts on customers.

The cold weather broke later that winter. Gas prices deflated like a botched soufflé. The Henry Hub price plunged under $6 in February and pierced $5 in May. By Thanksgiving 2001, the spot price had even penetrated below $2 briefly.

But the shortage fears lingered and a new paradigm of high prices took root in the U.S. gas industry. The Lower 48 wellhead price averaged $4.92 per thousand cubic feet from 2001 through 2006, double the price of the late 1990s.

The answer to high prices seemed obvious: Get more supply. Besides renewed interest in the Alaska gas pipeline project, billions of dollars were invested in Lower 48 LNG import terminals.

In 2000, the three major North Slope producers formally teamed up on a fresh look at piping Alaska’s gas to market.

Easing their effort was a recent détente that took hold among them. On the surface, the oil industry can appear monolithic, hand-in-hand sharing risks and rewards while jointly developing fields. To some extent that does describe the industry’s dynamic.

But a closer look often reveals divisions not readily apparent from afar. And this was true for Prudhoe Bay’s big three.

A gnarly schism involved their unbalanced ownership of the oil and gas rights. BP owned 51 percent of Prudhoe’s oil production but only 14 percent of the gas. ExxonMobil and ARCO (soon to be bought by Phillips) each owned 23 percent of the oil and 43 percent of the gas. BP wanted the gas retained to help produce more oil. ExxonMobil and ARCO had a stronger urge to move some gas to market.

This schism flared among the companies from time to time, but for the most part it was invisible to the public. The détente occurred in April 2000. The three companies announced a major shuffling of their ownership interests so that each company’s share of oil was the same as its share of gas.

That ownership shuffle more closely aligned their interests in developing Prudhoe Bay gas.

Within a few months, they were zeroing in on a project. In September 2000, BP and Phillips told the U.S. Senate Energy and Natural Resources Committee they hoped to “achieve consensus on route and timing” within a year.

Internally, the three companies were not fully aligned on the project. ExxonMobil was pushing a route that was about to ring alarm bells within Alaska, the national environmental community and even Congress.

Over the top

In the 1970s, Exxon (and the other two producers) backed the unsuccessful Arctic Gas project that would have strung a pipeline eastward from Prudhoe Bay to the Mackenzie Delta then south through Canada and into the U.S. Midwest and West.

That project died in 1977 when President Jimmy Carter and the Canadian government backed a competing proposal that would pipe North Slope gas south into Interior Alaska then southeast along the Alaska Highway to the Lower 48.

In 2000, ExxonMobil saw an opportunity to resurrect the Prudhoe-to-Mackenzie project, dubbed the “over-the-top” route. This time it would pick up gas from the company’s big Point Thomson discovery east of Prudhoe then wade offshore coastal Alaska to avoid trenching the Arctic National Wildlife Refuge as the 1970s project proposed. Conservationists had spent decades lobbying to keep oil and gas development out of ANWR.

BP and Phillips were more attuned to the mood of Alaskans about wanting a south-bound pipeline that would bring some North Slope gas to the state’s population center.

In late September 2000, Dick Olver, BP’s global production chief, said in an Anchorage speech that speculation about a route or even a project was premature. BP was considering all options, including LNG and converting gas to a liquid that could flow down the underused trans-Alaska oil pipeline.

But mostly he discussed a pipeline into Canada. In a nod to the controversy stirring on the over-the-top route, Olver said the project ultimately must be “in the best interests of U.S. consumers, the people of Alaska and our Canadian stakeholders.”

“The stars appear to be aligning for Alaska,” he said.

The CEO of Phillips had a similar message in an Ohio presentation. “The time is right, the technology is here and the market is here,” said Jim Mulva. “We are completely committed to making this a reality.”

In December 2000, the big three producers announced they had formed the North American Natural Gas Pipeline Group to assess costs and technology, pick a route and apply for construction permits. They budgeted $75 million and ultimately spent $125 million.

The prospect of an over-the-top line alarmed Alaska political leaders. Gov. Tony Knowles in November 2000 declared that route off-limits, dropping a slogan that caught on: “My way is the highway.”

The Alaska Legislature followed in 2001 with a law that prohibited granting state rights of way for an over-the-top route. Some in Congress also began discussing a ban on the route.

See the concluding part of this story in the April 29 issue of Petroleum News.

Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/print/Interest-in-Alaska-gas-revives-2000-to-today.