Hope springs eternal on Alaska's large natural gas pipeline - Alaska Journal of Commerce

[Hans Laetz, Newsgroup Editor]

Analysis by Tim Bradner
Alaska Journal of Commerce

Will Alaska ever get a large natural gas pipeline? Less than a year
ago, hopes seemed to be high for a $40 billion-plus pipeline built
from the North Slope to Alberta, where it could connect with other
pipelines. Now there seems increasing disillusionment and worries that
we may have missed the market again on this.

Hopes were high in 2010, when open seasons, or periods when gas
shipping contracts are solicited by pipeline companies, were held by
the two competing consortiums working on projects.

TransCanada Corp., the leader of one group, worked to have some
contracts signed by the end of 2010. That didn't happen, but
negotiations are still continuing, TransCanada has said.

The competing Denali pipeline, owned by BP and ConocoPhillips, held
its open season after TransCanada's. Denali said it hoped to have
contracts in March 2011. The jury is still out on that.

Alaskans' hopes for a pipeline have soared and plummeted several times
over four decades of effort. One attempt in the 1980s involved an
effort to build into Canada along the Alaska Highway, the same route
being proposed today.

The effort ended when natural gas prices in the Lower 48 declined
sharply. That time it was caused by deregulation of the U.S. gas
industry by Congress. This time it is the proliferation of new gas
from shale formations that are creating big surpluses and low prices.

Another effort, in the early 1990s, North Slope producers teamed up to
look at a liquefied natural gas, or LNG, project in Valdez. The
conclusion was that the Asian market couldn't absorb the volumes of
LNG required to make a Valdez LNG project viable.

Today there are huge amounts of LNG being sold in Asia, as well as
Australia. There doesn't seem to be room for Alaska LNG, a fact
illustrated by ConocoPhillips' inability to sell even small quantities
of liquefied gas from its existing Kenai LNG plant. The plant's
owners, ConocoPhillips and Marathon Oil, decided to close the plant
earlier this year.

Alaskans' disappointment has reached the point where several
influential state legislators, including the Speaker of the House,
Rep. Mike Chenault, R-Kenai, and the co-chair of the Senate Finance
Committee, Sen. Bert Stedman, R-Sitka, argue that it's time to
reconsider the state's endorsement of TransCanada Corp.

The state has committed up to $500 million in a subsidy to TransCanada
in return for certain agreements by the pipeline company. So far the
state has paid $134 million to TransCanada to reimburse it for
expenses. Gov. Sean Parnell has included authorization for another
payment of $160 million in the state's fiscal year 2012 budget.

The state subsidy is galling to lawmakers because it seems like
throwing money away given the size of the shale gas surplus. What also
rubs legislators is that the contract with TransCanada limits the
state in helping an alternative gas project, at least one that would
require enough gas that it might be viable.

One alternative the state is considering is a bullet line, a 24-inch
gas pipeline that could bring gas from the North Slope to Southcentral
Alaska, where new gas supplies are urgently needed, in case the big
pipeline is seriously delayed. But that pipeline will be limited to
500 million cubic feet of gas per day because this limit is in the
TransCanada contract. If the state helps a larger project, the
contract provides that there could it be liability for a treble-
damages claim by TransCanada.

A state team working on bullet line studies will complete final cost
estimates and a feasibility report in mid-2011, but many who have
looked at the initial cost estimates made for this conclude that a
pipeline moving larger gas volumes, mainly to industrial customers,
would be needed to make this project happen.

However, the TransCanada contract appears to preclude this, which most
likely will doom the bullet line idea. If the state can get out of its
contract with TransCanada, not only would part of the subsidy not be
paid, but the potential penalty for aiding alternative projects would
be removed.

Alaska U.S. Sen. Lisa Murkowski has now joined this discussion,
suggesting that it's time that Alaska consider supporting other
options for using stranded North Slope gas. In her annual address to
the Legislature, Murkowski suggested that one or more gas-to-liquids
plants could be built to convert gas to high-quality liquid fuels that
could be shipped in the Trans-Alaska Pipeline System, which is now
running at one-third capacity.

Gov. Parnell feels it's still too early to throw in the towel on the
gas pipeline and for now is sticking with the commitment the state
made to TransCanada.

This project is huge, and it's not surprising that working out the
shipping arrangements, which involve financial commitments of more
than $100 billion, are complex and taking longer than expected.
TransCanada deserves more time and patience, the governor says.

Supporting Parnell's position is Larry Persily, an Alaskan who is now
the federal gas pipeline coordinator. Persily said that no matter how
grim things look now in the Lower 48 gas market, there are things
happening that bode well for Alaska gas in the long run.

For one thing, environmental problems with shale gas are becoming more
evident and drillers are encountering political opposition and the
likelihood of increased regulation, which will add to costs.

Mark Myers, now the University of Alaska Fairbanks' vice chancellor
for research and a former U.S. Geological Survey director, has said
that shale gas drillers are now tapping the easier, more productive
parts of the big shale formations. As time goes by, they will drill
farther and deeper, and into parts of the formations that are less
productive and where costs will be higher.

Persily said shale gas will eventually turn out to be a help for
Alaska because the availability of gas from shale will help flatten
the volatility of gas prices, which will encourage the U.S. power
industry to build more and larger gas-fired power plants.

That natural gas is burns cleaner and pollutes less than coal, which
is now the mainstay of U.S. power generation. And that's a big selling
point. Persily's point is that more demand for gas overall will
eventually create a market big enough to absorb not only shale gas but
also Alaska's gas.

What will really matter are the views of the major North Slope gas
owners, which include ExxonMobil Corp., BP, ConocoPhillips and Chevron
Corp. These are the companies who will sign the long-term contracts
with a pipeline company to ship their gas.

Tim Bradner can be reached at

tim.b...@alaskajournal.com.