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Time is right for gas line, professor says Analysis by UAF’s Doug Reynolds suggests pipeline would be profitable now; North Slope producers group says still not viable Patricia Jones Petroleum News Contributing Writer
Analysis by University of Alaska Fairbanks economics professor Doug Reynolds supports construction of a natural gas pipeline from Alaska’s North Slope to existing pipe infrastructure in Alberta, feeding into the Midwest and eastern portions of the United States.
Supplies from the Atlantic Basin — Norway, Russia and Trinidad and Tobago — are tightening up, and prices for gas are increasing. Demand for natural gas in the Midwest and in the eastern United States is also increasing quickly, at a rate of 2 percent a year, Reynolds said in a speech “This is going to happen. It would be a shame if it doesn’t,” he said. “The economics are there … there’s the potential of prices being high for quite a few years, even with LNG competition in the Pacific Rim.”
He compares recent spikes in natural gas prices and the current 66-year supply of gas reserves in the Atlantic Basin with the 1970s oil crisis in the United States.
Back then, crude producers reported a 37-year reserve in oil resources, Reynolds said. A reduction in production and an increase in prices helped create a crisis that resulted, in part, in the construction of the trans-Alaska oil pipeline.
“It’s harder to develop natural gas and get it to market, so (the 66-year Atlantic Basin reserve) is on par with the 37-year (oil) reserve,” he said.
The state’s royalty benefits would be greater with a gas pipeline project selling to users in the Lower 48, compared to a liquefied natural gas project selling to Pacific Rim buyers, Reynolds said, because wellhead values for gas piped to the Lower 48 would be about $2 per thousand cubic foot, compared to about $1.30 for a LNG project selling to the Pacific Rim.
Reynolds also expects the North Slope producers to build the gas pipeline, in order to control tariff rates, allowing them to shift profits from gas production to the transportation system.
“They will want the pipeline first so they make sure they keep as much profit as they can there,” Reynolds said. “High tariffs mean much lower wellhead profits, so the profit is in the tariff, not the wellhead. That’s the game they’ll be playing.” Producers’ presentation But according to a presentation the same day made by Frank Roach of ConocoPhillips, the producers group still views the gas pipeline project as economically unfeasible.
“We did a feasibility study starting January 2002 with every intention to move a project forward and develop a commercially viable project designed to go to the permitting phase,” he said. “When it all came together, we communicated that the risks are just too much for the rewards.”
Part of the problem includes significant infrastructure, such as the state-owned railroad, ports and highways that need to be upgraded, Roach said, to avoid bottlenecks of materials. For example, he said, the producers group has identified 50 to 60 bridges that need upgrades.
Transportation infrastructure is key to such a large construction project, which will involve moving significant amounts of pipe, construction materials and equipment.
An estimated 35,000 to 50,000 truckloads of construction materials will need to be moved to sites for use, Roach said.
Additionally, pipe must be shipped to various construction sites, through ports in Alaska and through Canada. For example, construction will require 10,400 rail cars carrying pipe to Fairbanks and 20,500 to 30,750 truckloads through the Yukon Territory, he said.
Roach said estimates of equipment needed for construction of the pipeline include: 134 loaders; 275 automatic welders; 18 trenchers; 250 backhoes; 1,300 pickup trucks; and 230 buses. Open access stressed At the beginning of Roach’s speech, he stressed that the producers’ pipeline application would allow open access to the gas transportation system. An open season would be required prior to final design, to allow for accommodation in the pipe’s carrying capacity.
North Slope gas could be made available for in-state usage, “if it is technically economic and feasible,” he added.
The group has estimated several more years of work remain before the three-year construction project could begin. Another year of field environmental work remains, Roach said.
The group estimates a two-year permitting process and figures on spending $1 billion during that phase of the project, Roach said. That spending would also include technical work going on at the same time as permitting, he later clarified.
The group would also need about a year for site preparation and setting up marshaling yards, Roach said, prior to construction startup.
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