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State, producers challenged with pricing issues for North Slope gas Setting a value on gas for royalty purposes will be difficult, says report, since there is no independent market for ANS gas elsewhere Allen Baker PNA Contributing Writer
Alberta’s roller-coaster history as a hub for natural gas is one of the challenges facing developers of a pipeline to sell natural gas from Alaska’s North Slope, a new study finds. The pricing structure for North Slope gas could have major impacts on Alaska’s royalty share of that gas.
The $55,000 report, prepared for the Division of Oil and Gas, provides “a really good synopsis of some of the issues that decision-makers should have in mind,” Kevin Banks, a petroleum market analyst for the division, told PNA. As for any revelations for state officials, he said that “by the time the study was published, people here had covered much of the same ground.
“In discussions we had with lessees early on, folks were advocating that we price our gas at the Alberta hub,” Banks said. “We were very concerned about that. We could get backed up behind somebody else’s gas.”
Over time, gas prices in Alberta have dropped sharply when capacity in downstream pipelines couldn’t handle the demand and, conversely, have risen when new pipelines were built.
“Whether ANS gas and NGL (natural gas liquids) will bring about market stability in Alberta is not a certainty,” said the report prepared by Econ Research Inc. “The added ANS volumes may simply offset production declines in that region.” Line just 5 percent of North American total While the pipeline’s expected capacity of 4 billion cubic feet a day of gas (and 10 million gallons of NGL) make it a major supplier, the line would still carry just 5 percent of the total North American gas sales for 2010 and 7 percent of the NGL sales then.
The report notes that “the critical factor influencing Alberta prices is pipeline takeaway capacity relative to those supplies. Excess pipeline capacity can be expected to produce strong prices in Alberta, relative to downstream markets, which constrained capacity will generate weak prices.”
Another factor that will influence the value of North Slope gas when it comes to market is just how many markets can take that gas. If there is a connection to Western markets such as California when the gas begins to flow, as well as the U.S. Midwest, Alaska producers will have options that could make their gas more valuable. Currently, the bulk of the Alberta gas flows to the upper Midwest.
Alaska producers could choose to essentially bypass the Alberta hub and deliver the product directly to Chicago, the study notes, either by adding a new pipeline or reserving capacity in existing lines. NGL an issue But that creates other problems, notably the question of how to handle the natural gas liquids that will be carried along if the gas doesn’t go to the hub in Alberta, where there already is an established market for the more valuable NGL to serve the petrochemical industry there.
Setting a value on the North Slope gas for royalty purposes will be difficult, the report predicts, since there is no independent market for the gas elsewhere. The report notes the extended wrangle between the state and oil producers over how to allocate transportation costs for Prudhoe Bay oil.
The authors, Roger Ridlehoover and Barry Pulliam, suggest that producers should share with the state information about movement and sale of gas and liquids in the early years of pipeline use, so that both can understand how North Slope products are fitting into those markets.
The report also says the state should retain the option of taking its royalty gas and NGL in kind so it can discipline a royalty partner.
The report is available at the oil and gas division’s web site, www.dog.dnr.state.ak.us/oil.
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