Wobbly energy market may crimp Alaska gas line

Photo/Rob Stapleton/AJOC

The global recession has created new uncertainties for a $30 billion-plus Alaska natural gas pipeline, according to the companies involved in the project and to independent analyst Wood MacKenzie.

But pipeline developers BP and ConocoPhillips are taking the long view and see present low prices as a cyclical wobbles in energy markets, company representatives told members of the Alaska Support Industry Alliance during its "Meet Alaska" conference in Anchorage Jan. 23.

A pipeline wouldn’t be carrying gas for at least 10 years but it would operate for decades, developers said.

Still, the current turmoil in energy markets comes at a delicate time for the project. Two competing pipeline projects, one by North Slope producers BP and ConocoPhillips and a second by independent pipeline company TransCanada Corp., both plan open seasons to solicit shippers in 2010.

The shippers can be either owners of gas or customers who would purchase gas. They will have to sign contracts during the open season that will commit them to tens of billions of dollars.

This comes just as the recession is cutting demand as it roils North American energy markets and as aggressive development of shale gas brings substantial new domestic production into the market, ConocoPhillips President John Carrig said at the conference.

If the pipeline were in operation today, its viability would be in question.

Brian Frank, president of BP Energy’s North American trading group, said studies in 2001 on the Alaska pipeline estimated costs at $20 billion and a tariff of $2.50 per thousand cubic feet to move gas from Alaska to Chicago.

Today the cost is likely in the $30 billion to $40 billion range, which would put the tariff at about $5 per mcf, which is about where North American gas is currently trading, Frank said.

He agreed with Carrig that the strong entry of shale gas into the market was unexpected, and added that there is now substantial surplus LNG regasification capacity in North America. That means LNG imports can be increased quickly when gas markets recover.

"There is now 12 (billion) to 13 billion cubic feet of regasification capacity, most of which didn’t exist five years ago," Frank said. "We’re only importing about 1 billion cubic feet of day of LNG, so there is enormous potential for increased use of the existing capacity. This is the equivalent of three Alaska gas pipelines."

The U.S. Energy Information Agency predicts that surplus LNG regasification capacity will hang over the market for years, he said.

"The EIA is predicting that LNG imports will be 4 billion cubic feet per day by 2010, which is one-third of the present capacity. There is a lot of flexibility to bring additional gas to the market," Frank said.

Growth of shale gas in recent years caught the market by surprise, Carrig and Frank said.

"The increase of supply from unconventional sources was an unexpected development that is helping drive gas prices down," Carrig said.

Frank said no one thought this much shale gas production would be possible two years ago.

"The shale gas plays show us how quickly technology can change things. Ten years ago we didn’t think we could produce most of the gas being produced today from shale," he said. "There has been an increase of 2 (billion) to 3 billion cubic feet per day this year compared with last year, and this really caught the market by surprise. It has helped make what was a bullish market for gas last year into a bear market today."

Thanks to technology advances, shale gas can still be produced at even today’s prices.

"The potential of yet-to-find gas from shale is enormous, about 30 times the North Slope resource," Frank said.

BP is still committed to its Denali project, but the current market environment just highlights risks for the project, he said.

"This just means that the Alaska pipeline will have to be able to compete with shale gas and LNG," Frank said.

Carrig said, "We’re having to find innovative ways to move projects forward," like the Alaska project.

Ed Kelly, Wood Mackenzie’s vice president for North American gas and power, said his firm thinks gas markets will recover, but when they do, renewable energy and energy conservation measures by consumers will take a bite out of the power generation market that had been previously served by gas.

"Alaska gas could enter the market at the time when demand is growing again, but the growth may not be as fast as previously thought because of renewable energy," Kelly said.

The consulting firm now estimates Alaska gas entering the market in 2021, he said.

On the other hand, Wood Mackenzie thinks climate change legislation will be net positive for gas and will help speed recovery because some coal plants will be taken out of the power generation market. But if major industrial nations and the U.S. fudge on emissions-reduction commitments, as Europe is now doing with Kyoto, it will delay recovery for gas, Kelly said.

ConocoPhillips’ Carrig disagreed with Kelly on the effects of carbon legislation, which will speed development of clean coal technology as well as nuclear, which will compete with gas for the power generation market.

Energy markets will eventually recover. ConocoPhillips’ estimates reserve replacement for medium-cost projects at about $50 per barrel, which is higher than current prices.

"We’ll come out of this, because the population will continue to grow," Carrig said.

Frank said it is important to stick with the long-term vision of the gas pipeline.

"Commodity prices will go up and down. The next step is to get a viable option," for a project, he said. "We believe the market will rebound, and prices will rise. Meanwhile, competition (from other gas) is good because it makes us sharpen our pencils."

11/15/2016 - 1:40pm