Alaska Natural Gas Pipeline Becoming PipeDream?

(Published January 24, 2009)
ANCHORAGE, Alaska — Energy market analysts addressed an Anchorage audience hoping for a multibillion dollar Alaska natural gas pipeline and the news was not good.

The global economic crisis has slashed demand for natural gas and dimmed chances for an Alaska pipeline, they said. The line also faces expanded competition.
"It's certainly going to be taken off the urgent list," said Ed Kelly, a Houston-based vice president with the global energy consulting firm Wood Mackenzie.
Kelly and a BP gas sales executive each delivered a grim overview of gas markets Friday at the Alaska Support Industry Alliance conference.

The alliance represents drillers, builders, haulers and other contractors who depend on petroleum development.

The recession and credit crunch have hammered industries that use natural gas, depressing demand and prices, said Kelly and Brian Frank, president of BP's gas marketing company.

"It's not a pretty story right now in terms of North American gas markets," Frank said.

Gas customers are regularly filing for bankruptcy, he said.

Competitive challenges to an Alaska gas line also could increase, including an expected surge in imports of liquefied natural gas, production of huge gas discoveries in Lower 48 shale deposits and a rise in renewable energy such as wind power.

Frank stopped short of saying the Alaska gas line is in jeopardy of further delay or even shelving because of poor market conditions.

Instead, he said, the conditions highlight the staggering risk of investing in a pipeline that could cost more than $30 billion to build.

Frank also repeated the contention regularly voiced by oil companies controlling the huge North Slope gas reserves: Steps are needed to "mitigate project risk and uncertainty."

That's generally taken to mean a long-term deal between the state and the oil companies on how 35 trillion cubic feet of gas would be taxed.

Top officials in Gov. Sarah Palin's administration have argued no such pact is necessary to achieve a profitable pipeline, even during times of low gas prices.

State Sen. Charlie Huggins, R-Wasilla, said the tough market outlook means state officials must keep looking at the tax question. Officials also should look at alternate ways of selling gas, and making it available for Alaska use, rather than just hope a blockbuster pipeline somehow will come together.

"We have to be flexible enough mentally to plan for other courses of action," Huggins said.

He likes the idea expanding output of a small LNG export operation at Nikiski so large volumes of Alaska gas could be shipped to Asia or the Lower 48.

BP, ConocoPhillips and Exxon Mobil have said an overland pipe is more economically viable than an LNG project.

Two competing pipeline proposals are in the planning stages. Each would stretch about 1,700 miles from the North Slope to an existing pipeline network in Alberta, Canada.

One project belongs to Calgary-based TransCanada Corp., which last year won an exclusive state license that includes up to $500 million in state incentive money.

BP and Conoco are teaming up on the other pipeline proposal, a joint venture called Denali. The companies did not apply for the license that TransCanada received.

One positive coming from the recession might be a decline in construction costs for a pipeline, Kelly said.

Drue Pearce, a former state senator and now federal coordinator for Alaska natural gas transportation projects in Washington, D.C., said steel prices have fallen sharply.

TransCanada and Denali are focused more on developing pipeline cost estimates and less on current gas markets, which could strengthen in the years it will take to arrange financing and regulatory approval of a project, Pearce said.

Information from: Anchorage Daily News, http://www.adn.com