Alaska natural gas gets new market competition

LOWER 48: Improved drilling techniques in shale, sand unlock huge reserves.

July 11, 2009 

If there weren't already enough barriers to building a gas pipeline from Alaska's North Slope, the Lower 48 recently entered its biggest-ever natural gas boom.

Just as the prospects for the Alaska gas line seem to be growing brighter, new drilling techniques have unlocked vast pools of natural gas all over the Lower 48, from Texas to Pennsylvania. For now, demand isn't keeping up. Prices have swooned and drill rigs are idling.

Pundits, politicians and industry executives have been speculating for months about what bountiful, cheap gas in the Lower 48 means for the North Slope's gas.

Emphasis on the word speculating.

Analyzing the economic prospects of North Slope gas requires looking into a murky future that begins in 2018 -- the earliest year that an Alaska pipeline would be finished and North Slope gas could arrive in the market -- and projecting out 30 years beyond that.

"Anything could happen between now and then," said Gary Long, a petroleum engineer who analyzes gas reserves for the U.S. Energy Information Administration.

Skeptics -- including those who'd compete against Alaska's project -- have raised doubts about the multibillion-dollar project. Among them is T. Boone Pickens, the legendary Texas oilman, who recently said he thinks Alaska's gas line will be delayed 10 to 15 years because of giant shale-gas deposits now being exploited in Texas.

Pickens isn't exactly neutral: He's invested in the Texas gas.

The three major energy companies who hold leases to trillions of cubic feet of North Slope gas take a more optimistic view. Current conditions in the U.S. gas market aren't a factor in their decision-making, they say.

In the future, "We believe there will be a place for Alaska's gas," said David McDowell, a spokesman for BP and Conoco Phillips' Denali pipeline project.

As long as the costs of the pipeline project are kept under control, Alaska gas will be competitive with gas from other sources, according to Tony Palmer, a vice president for TransCanada Corp., a Canadian company vying with Denali to build the gas line. TransCanada was awarded a state license to develop the pipeline and recently entered into a partnership with Exxon Mobil, the North Slope's biggest gas lease holder.

UPS, DOWNS OF GAS PRICES

The cold reality that dashed Alaska's gas pipeline dreams for decades was the low price of natural gas in Lower 48 markets.

Price is a key determinant of whether a gas line will be profitable in the future, and it's impossible to predict accurately. The best that anyone can do is plan a project that will remain profitable within a reasonable range of prices.

In a recent press conference, Palmer of TransCanada conceded that the price of gas in the Lower 48 has declined this year, but he invoked long-term forecasts that predict the price will rise again.

The major North Slope lease holders revived their interest in a gas-line project early this decade, when gas prices rose dramatically. They funded a $100 million study in 2001 to analyze potential pipeline routes.

Later that year, gas prices dropped and the companies declared the project impractical. Yet the price decline was short-lived. Lower 48 natural gas prices spiked in 2005 and again last year. Prices have sunk this year as the national recession deepened, but still remained well above the historic range of the 1980s and 1990s.

Prices could drop even lower in the near future, warned Porter Bennett, of Bentek Energy, a Colorado-based energy consulting firm.

"The bottom line is right now that we are producing a lot more gas than we are consuming. Those trends are going to continue for several years at least," Bennett said.

But what about beyond that?

THE LURE OF GAS

Federal forecasters and industry experts say natural gas prices will rise again, not just as a consequence of the easing of the global recession but also due to new trends in U.S. energy consumption and a shift to costlier production methods.

Right now, some politicians and energy companies view natural gas as an attractive, cleaner alternative to two fuel sources in heavy use in the Lower 48 now -- crude oil and coal -- which generate a larger amount of greenhouse gas emissions, linked to global warming.

The U.S. Energy Information Administration is projecting a 2.5 trillion cubic feet rise in annual demand for natural gas from 2009 to 2030. That leaves room for the roughly 1.6 trillion cubic feet a year an Alaska pipeline could supply, despite the new discoveries and production in the Lower 48.

The potential growth areas for gas in the Lower 48 are electricity generation, transportation and factories that convert natural gas into a liquid fuel, said Bennett and other oil and gas experts.

Such growth very much factors into the justifications provided by the Palin administration and by oil companies for the need for Alaska gas.

"We have this huge lead time in front of us. The demand is, in fact, going to be there," said Joe Balash, a Palin administration special assistant on oil and gas issues.

But Alaska gas will have to compete with other suppliers who are drilling so-called "unconventional" gas sources in the Lower 48, in shale and sand formations. Another potential competitor is liquified natural gas imports. The cost structure of developing and producing those two resources is different than a conventional gas project, but in the long term, the costs end up being comparable, the experts say.

For example, while shale gas is cheaper to develop in the short term, the costs to produce it increase over time. Drillers have to constantly poke deep holes in the ground to keep wells in production.

In the long run, the cost of developing Alaska's gas is comparable to the cost of developing shale gas or importing liquified gas, said David Hobbs, head of research for Cambridge Energy Research Associates, a global consulting firm that has advised both Exxon and the Alaska Legislature on energy issues in the past.

Also, Hobbs said, the energy giants are better positioned to tackle the expense of building Alaska gas line than they were eight years ago. Thanks to high oil prices, they have much stronger balance sheets, plus Congress gave them federal loan guarantees for the project. He said he wouldn't argue that Palin administration legislation has also "been a factor in sharpening focus on the gas line issue."

GAS EVERYWHERE

Many factors still could derail Alaska's gas project or make it unprofitable.

Chronic low gas prices. Political infighting. Construction costs that spiral out of control. North Slope lease holders refusing to commit their gas to a pipeline because it seems too risky.

TransCanada's Palmer said at a recent press conference that the builder of a pipeline has to keep the cost of gas production as low as possible and maintain a tight construction schedule rather than waste time worrying about things it can't control.

"We think that Alaska gas can be very competitive if we can keep the (cost) of the gas down," he said.

One Alaska petroleum geologist said he's less worried about competition from shale gas than he was a few months ago.

The geologist, Dan Seamount of the Alaska Oil and Gas Conservation Commission, said he recently toured some massive natural gas fields in British Columbia with much bigger reserves than the North Slope has been calculated to hold.

"My first reaction was, 'You guys have just killed the Alaska pipeline,' " Seamount said.

But he said in recent weeks, he's looked at the issue a little deeper, realizing, for example, that shale gas projects in the Lower 48 face some hurdles that won't exist for a North Slope gas project. For example, activists in many Lower 48 communities have claimed that shale gas projects have contaminated their water supplies. Some Democrats in Congress this year have filed legislation to force shale gas projects to comply with stricter environmental rules.

No matter how much shale gas is considered recoverable, people who think it's as "easy as turning open a valve" are being overly optimistic, Seamount said. That being said, U.S. natural gas production rose by nearly 8 percent last year -- its biggest increase on record, according to a recent BP report on global energy.

Last month, a national committee of gas experts estimated that the country has a total gas resource base of 1.8 quadrillion cubic feet of known or probable gas resources -- a roughly 75-year supply if consumption doesn't grow. Alaska's portion of that is about 157 trillion cubic feet of gas -- a mere 11 percent, according to numbers provided the group, called the Potential Gas Committee.

"We've only begun to scratch the surface of this resource," said Mark Finley, general manager of global energy markets for BP America, during a visit to Anchorage last month.

He said it is hard to tell now how Alaska's gas line will stack up against other projects throughout the country, but he noted that natural gas has a bright future as the cleanest-burning of all fossil fuels.

"There's demand potential for sure," Finley said.


Find Elizabeth Bluemink online at adn.com/contact/ebluemink or call 257-4317.

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