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Vol. 15, No. 12 Week of March 21, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

A change of mind

Stevens opts for in-state gas-line routes from NS to Kenai or Valdez

Alan Bailey

Petroleum News

In a major change of heart since leaving office, former U.S. Sen. Ted Stevens now thinks that LNG exports into the Pacific Rim from Alaska present the optimum solution for bringing North Slope gas to market. The state should create an emergency management team to assure the fast-track construction of gas pipelines from the Slope to tidewater liquefied natural gas plants on the Kenai Peninsula and possibly in Valdez, Stevens told a packed meeting of Commonwealth North in Anchorage March 12.

“The team should be given emergency powers to waive existing restrictions in state law and be assisted by the attorney general to prevent court delays such as we encountered with the (trans-Alaska) oil pipeline,” Stevens said. “We must to everything in our power to assure that the private sector, who we want to pursue these projects, will get underway as soon as possible.”

Stevens has in the past been a proponent of a pipeline route through Canada to supply natural gas to the Lower 48, but says that the world natural gas supply and demand situation has changed dramatically in recent years, thus favoring the LNG export route.

“With the recession and the basic changes in supply and demand in the south 48, a new vision of our future with regard to gas is required,” Stevens said.

And a gas line to the Kenai Peninsula would support the continued operation of the existing LNG plant there, he said.

At odds

Stevens’ vision is at odds with current industry plans for the commercialization of North Slope natural gas.

TransCanada and its partner ExxonMobil are planning the construction of a North Slope gas line through Canada under the terms of the state’s Alaska Gasline Inducement Act, or AGIA. However, AGIA does require consideration of an option to deliver gas to Valdez for export as LNG. The TransCanada-ExxonMobil Alaska Pipeline Project plans to start its open season in May, soliciting bids for the future transportation of gas — that open season will include an option for the transportation of gas to Valdez.

“The Alaska Pipeline Project open season, which is expected to run from May-July, will provide customers with opportunities to ship their gas to either Valdez for LNG deliveries to the U.S. or international markets or to Alberta on the way to the Lower 48,” Tony Palmer, vice president for Alaska development, TransCanada Corp., told Petroleum News March 17. “In both cases, the Alaska Pipeline Project has provided opportunity for in-state deliveries off the main pipeline. If parties believe Asia LNG markets provide superior netbacks, I would expect they would nominate gas for deliveries to Valdez this summer.”

Denali—The Alaska Gas Pipeline LLC, co-owned by BP and ConocoPhillips and not operating under AGIA, has been moving forward on a competing project for a North Slope gas line through Canada. The company does not plan to offer an LNG option during its open season, company spokesman Dave MacDowell has told Petroleum News.

“We’ve been focused on developing a large diameter, high pressure pipeline to bring Alaska gas to the North American market,” MacDowell said when asked for a reaction to Stevens’ comments. “We’re developing a high-quality cost estimate and attractive commercial terms that will enable our customers to decide what they’d like to do. They will make those decisions during the upcoming open season, and we believe it is premature to speculate on the outcome of that process.”

And in the debate about the relative merits of exporting gas from Alaska as LNG, versus exporting the gas south through an overland pipeline, some people have questioned whether North Slope gas, with a relatively high carbon dioxide content and lying some 800 miles from an ice-free port, can compete on cost with major gas producers such as Qatar, with its massive gas resources close to tidewater. Some people also believe that North Slope gas can fulfill a useful role as a component in the overall portfolio of future North American gas supplies.

Hard look

Stevens said he has changed his views on the gas-line options after spending the past three months taking a hard look at the various gas-line proposals and discussing the gas-line issues with many people including Paul Metz, director of the Mineral Industry Research Laboratory in the University of Alaska Fairbanks, and CEO Robin West and his staff in international consultancy firm PFC Energy.

Thanks in large part to a drive towards the development and production of unconventional natural gas sources such as shale gas, estimates of gas resources in the Lower 48 have almost doubled in recent years, Stevens said. At the same time the U.S. Department of Energy has lowered its forecast of increases in U.S. natural gas demand, he said. And the upshot of these two factors is an expectation that that Lower 48 gas supplies will be able to keep up with gas demand in the coming years.

But DOE also predicts that, if a gas line from the North Slope to the Lower 48 comes to fruition, North Slope gas will not come online until 2022, Stevens said.

“The Lower 48 demand is not rising as fast as it had been predicted. Supply is rising faster than predicted. The supply will likely more than meet demand through 2030,” Stevens said.

Against that backdrop, Asian demand for LNG, particularly in Japan, Korea, India and China, is steadily increasing, Stevens said. Stevens presented a graph prepared by PFC Energy showing projected Asian LNG supply and demand, and depicting a shortfall of supply relative to demand starting to open up at around 2012.

“The balance between (global) LNG supply and demand tightens after 2015,” Stevens said. “… South Korea buys under long-term contracts and consumes almost exclusively LNG. Its deficit … commences in 2012.”

India’s shortfall in LNG supplies is predicted to start in 2014; Japan’s in 2012; and China’s in 2015, Stevens said.

Price differential

Not only that. Unlike in the United States where natural gas prices have dropped in recent years, Pacific Rim gas prices are indexed to oil prices and have remained relatively high.

“The higher price of LNG, based on oil prices ... makes LNG a high-value proposition for anyone who takes LNG to that (Pacific Rim) area,” Stevens said.

And although countries like Australia are moving rapidly to bring new natural gas to market to meet the future Pacific-Rim gas demand, those countries are experiencing difficulties in developing the necessary industrial infrastructure for LNG exports. For example, one Australian natural gas discovery will require a more than 1,000-mile pipeline to an LNG plant, compared with the length of an 800- to 900-mile Alaska pipeline to bring North Slope gas to a tidewater LNG plant, Stevens said.

“All over the world there are developmental delays which open a window of opportunity for Alaska to enter the LNG market in the Pacific Rim,” Stevens said.

And there is sufficient available worldwide shipyard capacity to build new LNG carriers, should additional carriers prove necessary to support an Alaska LNG export trade, he said.

In addition to creating an export market for the approximately 35 trillion cubic feet of natural gas known to exist on the North Slope, plus major quantities of additional undiscovered North Slope gas resources, Stevens sees the in-situ gasification of the vast Alaska coal resources as an additional source of gas for exported LNG. Cook Inlet Region Inc. is currently planning an underground coal gasification facility of this type near Beluga on the west side of the Cook Inlet.

“We have to remember we have half the coal of the United States,” Stevens said. “The best use of that coal, in my judgment, is to develop on-site coal to LNG gas.”

Action needed

But, while time is of the essence in moving forward, if Alaska gas is to start filling the pending supply gap in the Pacific Rim LNG market, existing state laws limit people’s ability to move quickly with the necessary industrial developments, Stevens said.

People can move ahead “only with a concerted effort of a real emergency team (that) will look at those laws and say ‘change them. Let’s move ahead. We don’t need any more open seasons. We don’t need any more periods for analysis. We need an emphasis on getting the job done,’” Stevens said. “… The (supply) gaps start in all of these places within two to three years, and within five years after that gap starts it will be filled by long-term contracts of 20 to 30 years … I’ve never seen such a magnificent opportunity for an incentive to develop our own resources. … If we don’t act soon that window of opportunity will be closed.

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