Delay enhances Alaska’s gas economics

Canadian oil producers group says pushing North Slope start-up beyond 2016 eliminates need for new pipeline from Western Canada to Chicago

Gary Park

PNA Canadian Correspondent

Stalling the development of Alaska gas makes economic sense for the North Slope owners and the operators of pipelines to the Lower 48, Canada’s natural gas producers have argued in a regulatory filing.

In a submission to the National Energy Board, the Canadian Association of Petroleum Producers — ‘CAPP’ — makes a case for bringing Alaska gas on stream later rather than sooner, to take advantage of existing infrastructure.

Without suggesting an ideal timetable, CAPP noted that a long-range forecast by the U.S. Energy Information Administration that Alaska gas is unlikely to reach markets before 2020.

If North Slope gas was to start flowing by 2011 a major new “express” line would be required from Western Canada to Chicago, CAPP said.

But even a delay to 2016 could see space open up on TransCanada PipeLines Ltd.’s mainline to the U.S. Midwest.

The points are made as part of CAPP’s case to defeat a regulatory application by TransCanada which wants to hike its shipping tolls by C$250 million, or 40 percent a year to cover mainline depreciation expenses.

CAPP, whose 140 member companies account for 97 percent of Canadian oil and gas production, says uncertainty over the timing of Alaska gas development undermines TransCanada’s case for increasing tolls by C$250 million a year.

In testimony filed for the National Energy Board hearing, which starts Feb. 24, CAPP accused TransCanada of inflating its financial requirements by prematurely forecasting developing of Alaska gas.

The timing of any project to deliver gas from the North Slope affects TransCanada’s depreciation expenses, which then spill over to pipeline revenue requirements and shipping tolls.

Delay adds life to mainline system

For that reason, CAPP said the National Energy Board should turned down the pipeline’s request for a 40 percent annual increase in its mainline depreciation expense.

CAPP said its own consultants, Technical Associates Inc., suggested TransCanada had failed to justify an increase beyond the current 2.89 percent rate.

TransCanada’s requested increase was based on an assumption that North Slope gas would be flowing by 2011, matching the original target of the U.S. producers.

That timetable would require a major new gas pipeline from Western Canada to Chicago because the TransCanada system was expected to be operating too close to capacity to handle any Alaska volumes.

CAPP also said that a 2016 start-up for Alaska would present a different set of circumstances.

By then, declining output from the Western Canada Sedimentary Basin would open up space on the TransCanada mainline, thus eliminating the need for a new pipeline across the continent and TransCanada’s need for major toll hikes.

CAPP said North American demand will eventually lead to development of Alaska gas over the long term.

“The timing of this gas will be dependent on prevailing market conditions,” CAPP said in its written evidence filed with the National Energy Board.

“As conventional supplies tighten, resulting upward pressure will help make this (Alaska) gas supply economic, so that it will be developed.”

TransCanada space makes Alaska gas more economic

“Given the vast distance associated with bringing this gas to market, the economic viability of this resource is substantially enhanced to the degree it can make use of existing pipeline infrastructure,” the submission said.

TransCanada’s own studies project that production of Western Canadian conventional, unconventional and northern gas will peak about 2015.

As throughput slides below 50 percent of current mainline capacity, TransCanada said “significant” facilities will be phased out and by 2027 remaining resources in the Western Canadian Sedimentary Basin would be 10 percent to 30 percent of current rates.

TransCanada said its requested depreciation rates would enhance mainline competitiveness by requiring current users to pay their share of depreciation expenses rather than shifting that load to future users.

CAPP said TransCanada has failed to prove that its mainline will not be economically viable after 2027.

Independent power producers and firm shippers have also lined up against the TransCanada application, with the shippers accusing TransCanada of trying to “load costs on to current captive customers in an attempt to artificially reduce capital-related costs for future shippers.”