Distributing North Slope gas challenging

Enough gas exists to meet Alaska’s needs for decades, but at a cost; and getting gas to rural areas more difficult and costly yet

Bill White

Researcher/writer for the Office of the Federal Coordinator

Offtakes from a large North Slope natural gas pipeline could supply gas to Alaskans for decades, but delivery would come with an upfront cost of over a billion dollars.

Even then, only people in the state’s population core might enjoy ready access to the gas; getting the Btus to more distant communities would take much more effort — and money.

Gas for Alaskans is a central goal of federal and state laws pertaining to any pipeline project.

State leaders have long sought to forge an energy Eden where Alaska, although remote and northern, would tap its fossil-fuel bounty so that residents at least could burn their lights and furnaces warmly and cheaply through the dark chill of winter.

In 2007, during her first state-of-the-state speech, then-Gov. Sarah Palin called gas for Alaskans one of the “bedrock, must-have requirements” for any pipeline project.

The late U.S. Sen. Ted Stevens, running for re-election the next year, said: “Fishermen can’t afford to fish, rural Alaskans are migrating, and families choosing between groceries and fuel oil. To restore a vibrant economy, our priority must be to address the high cost of energy. We must develop our resources to create jobs and invest in hydropower, geothermal, and methane energy projects.”

Alaska’s commissioners of natural resources and revenue echoed Stevens during their approval that same year of the TransCanada proposal to build a North Slope gas line: “Ever-rising fuel prices are increasing hardships for Alaska communities and families, and there is no single solution to ease this energy crunch. However, in-state supply of North Slope natural gas could help reduce energy costs in some regions of the state.”

Almost four years later, no one has fully worked out how much it would cost to achieve the goal of gas for Alaskans.

The scattered information that exists suggests it would be possible to deliver gas from a large-volume pipeline to the state’s population center in Anchorage and surrounding areas for about the price consumers there now pay for gas — possibly less.

It also suggests that many Fairbanks residents in the state’s Interior might see their cost of heating and electricity fall — possibly a lot.

For the vast but sparsely populated rural Alaska — whether far from a major North Slope gas pipeline corridor or even along the route — the price of natural gas or propane extracted from the gas could be too high to win customers without state help in covering construction costs.

At a minimum, delivering gas to Alaskans could involve:

• Building one or two plants to receive gas from a mainline. The plants would depressurize gas flowing under extreme compression from Prudhoe Bay. They also would cleanse the gas of higher-end gas liquids such as ethane, propane and butane, a step necessary before a home furnace or power plant can safely burn the methane that remains.

• Constructing a thousand miles of gas transmission and distribution pipelines in Fairbanks, a town where the fuels of choice are heating oil and coal.

• Possibly laying a spur pipeline to bring gas to the Anchorage area, depending on the route of the mainline.

Natural gas is only one fragment of the state’s efforts to clip high energy prices. Besides subsidizing planning and design of both a large-diameter and a small-diameter gas pipeline from Prudhoe Bay, the state’s all-things approach involves spending to date several hundred million dollars to annually underwrite rural electricity bills, advance the gigantic proposed Susitna River hydroelectric project, bankroll small-scale renewable-energy concepts and weatherize homes.

Alaska has the ironic distinction of hosting a large proportion of the United States’ oil and gas reserves while its residents pay some of the nation’s highest prices for products made from those hydrocarbons.

Below we look at the preliminary, and in some cases only conceptual, work that’s been done on the decades-long yearning to provide Alaskans with low-cost natural gas.

The Anchorage area: affordable gas

That is if the gas traveled most or all of the way in a big gas pipeline.

No one has pinpointed the gas shipping fee, or tariff, all the way from Prudhoe Bay to the Anchorage area in a big pipeline. The tariff would depend on whether the gas exits the big pipeline near Anchorage, Fairbanks, on its way to Valdez or somewhere else along the route. The tariff also would depend on the pipeline’s construction cost and the volume it carries.

But parts of the route have been priced, at least preliminarily.

In 2010, the Alaska Pipeline Project, a partnership of TransCanada and ExxonMobil, published proposed rates it would charge for a 2.7 billion-cubic-feet-a-day line ending at a liquefied natural gas export terminal in Valdez. The two partners now are teaming with ConocoPhillips and BP to explore an LNG project that could export North Slope gas from somewhere in Southcentral, possibly Nikiski on the Kenai Peninsula or Valdez. A pipeline from Prudhoe Bay to the Anchorage area would be roughly the same length as one to Valdez.

TransCanada/ExxonMobil’s proposed rates to Valdez varied depending on how many years the shipper committed to using the pipeline and how much the pipeline project cost. The companies estimated the project would cost $20 billion to $26 billion for the line itself and a Prudhoe Bay gas treatment plant.

For example, at pipeline start-up the tariff would total $3.85 per million Btu of gas treated and shipped from Prudhoe Bay to Valdez under a 20-year negotiated contract on a $26 billion pipeline. The price would drop to $2.96 for a $20 billion line. The liquefaction plant would add its own fee, which would be charged to the export customers, not Alaskans.

Assuming the tariff for a large-diameter pipeline to the Anchorage area would be the same as to Valdez, the $2.96 to $3.85 fee would be a base. Other costs would be added on. The Southcentral gas utility, ENSTAR Natural Gas Co., charges about $2 to pipe gas to homes and businesses. In addition, the North Slope producers would expect payment for the gas itself — no one knows exactly how much they would charge but several analyses have assumed a placeholder of $2.

That would bring the price to roughly $6.96 to $7.85 per million Btu delivered to a homeowner’s furnace.

Enstar currently delivers residential gas from Cook Inlet for about $8.60 per thousand cubic feet. A thousand cubic feet is approximately equal to a million Btu.

So in that hypothetical scenario North Slope gas would cost Southcentral customers less than or close to the same as the Cook Inlet gas they use today.

If the LNG plant were in Valdez rather than linked to the Enstar system near Anchorage, North Slope gas would cost more for residents of Southcentral Alaska.

How much higher is not clear, probably between $8 and $10 per million Btu.

A spur line would be needed, probably starting in Glennallen and ending at the Enstar system in the Matanuska-Susitna Borough outside Anchorage. In 2008, the Alaska Natural Gas Development Authority estimated a $1.40 tariff to pipe methane from Glennallen in a $725 million, 250 million-cubic-feet-a-day spur.

Or perhaps the spur line could start in Interior Alaska. ANGDA estimated a $2.34 tariff in a pipeline if the gas started north of Glennallen at Delta Junction. This spur would cost $1.25 billion to build.

In 2011, the Alaska Gasline Development Corp., another state agency, estimated a 500 million-cubic-feet-a-day gas pipeline from Fairbanks to the Anchorage area would cost $1.99 billion and charge about $2.25 per million Btu. The bigger volume would help hold the tariff below the estimated tariff of a Delta Junction-to-Anchorage pipeline, as would a difference in the gas stream: Besides methane, the AGDC line would carry propane and other valuable liquids; the liquids would comprise just over 10 percent of the volume but those shippers would pay 25 percent of the tariff — subsidizing the cost of methane for Southcentral Alaska residents. AGDC estimated its tariff would rise by about 60 percent if the pipeline carried just methane without the liquids.

That big economies of scale can result in lower prices is well known in business — it’s why the world has a few large automakers rather than many small ones; it’s why Wal-Mart can use bulk purchasing and the power of streamlined distribution to beat mom-and-pop store prices.

To illustrate how volume matters in the gas pipeline business, the small-diameter pipeline pitched by AGDC would carry one-fifth the gas of the TransCanada/ExxonMobil 2010 proposal to Valdez. As a result, its tariff would be higher. AGDC estimates its line from Prudhoe Bay could deliver North Slope gas to Anchorage residents for roughly $11.75 per million Btu at pipeline start-up, assuming that Enstar and the gas producers each would add $2 to the delivered gas price, and assuming that someone finds local and export markets for propane and other liquids. (Many supporters of the smaller AGDC line see it as a back-up plan in case a big line is not in Alaska’s near-term future.)

See part 2 of this story in the May 13 issue of Petroleum News and part 3 in the May 20 issue

Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/challenges-distributing-north-slope-gas-alaskans.