Alaska editorial: Tale of two gas lines

Posted: Friday, January 22, 2010

Some recent gas pipeline news from Canada has Alaskans wondering whether our big North Slope project faces renewed competition from elsewhere in the Arctic. Canada's Mackenzie Valley project has now cleared a half-decade-long review of its environmental and social impacts. The $16 billion project had been stalled by the intensive review. At 1.2 billion cubic feet a day, Mackenzie would be a little more than a quarter the size of Alaska's project, and its gas is scheduled to hit North American markets sooner. Some key companies in Alaska's natural gas scene - Exxon, Conoco Phillips and TransCanada - are also involved in the Mackenzie project.

So is Mackenzie's progress bad news for an Alaska project that aims for the same market?

Not necessarily.

There's still a long road ahead for the Mackenzie project. The hurdle it cleared is similar to an environmental impact statement in the U.S. The study recommends more than 170 conditions that should apply if the Mackenzie line is built.

Next it will be reviewed by Canada's National Energy Board, which is their version of our Federal Energy Regulatory Commission. "That would be the more significant approval," says Tim Bradner, a consultant and analyst who writes about the oil industry.

Marty Rutherford, Gov. Sean Parnell's key aide on the gas line matters, notes that Alaska's project has advantages over the Mackenzie project.

The Mackenzie basin is totally undeveloped, while Alaska already has numerous wells that are producing gas. (Alaska's gas is reinjected to boost oil production.)

Alaska has proven gas reserves to support its project; there is still some uncertainty about how much gas is available to the Mackenzie project. Economies of scale work in favor of Alaska's project, as well - it's nearly four times as large as the MacKenzie project.

The majority of Canadian First Nation issues for Alaska's project have been resolved. Mackenzie may have a problem on that front if it wishes to expand beyond the size now proposed.

What about competition from shale gas in the Lower 48? Doesn't all that newly drilled gas, located so close to customers, kill the need for either Arctic pipeline, which will cost tens of billions of dollars?

Rutherford says shale gas won't sink the Alaska project. She cites forecasts from the U.S. Energy Information Administration, which has done "pretty darn well" with its past predictions.

"EIA's projections show that both shale gas and Alaska gas will be necessary to offset supply declines of conventional gas and consumption growth." That growth will be driven by electric utilities, as they build new gas-fired plants and switch old ones to gas because it's a cleaner fuel. The gas price picture looks good, too, Rutherford says. "EIA's 2010 forecast shows gas prices that are more than adequate to support the Alaska gasline project."

TransCanada's point man for Alaska, Tony Palmer, says he's confident the North American market will support both Arctic pipelines. "We don't think it's one versus the other."

In fact, says Bradner, if the Mackenzie project doesn't go first, it could complicate things for the Alaska project on the Canadian side. The Canadians badly want their project to go first, because Alaska's is so much bigger and might satisfy the market before Mackenzie gas can get there. "They couldn't block it but they probably could make our life miserable," Bradner says.

Critics of the Alaska-to-Alberta gas line still insist the project will never happen and urge the state to get behind a line to Valdez, where tankers could carry liquefied gas to a wide range of markets.

"That option will be there, in the open season," Rutherford says. She's referring to the process coming later this year where both TransCanada-Exxon and Conoco-BP will solicit customers for their competing pipeline proposals. Both projects would carry Alaska's gas to the continent-wide network of pipelines that starts in Alberta. TransCanada is offering the option of shipping gas to Valdez as well.

"Gas producers will determine where their preferred market is," Rutherford says. "Government is not going to dictate Alberta."

For now, most signs seem to be pointing to Alberta. Between Alaska's two pipeline partnerships, hundreds of millions of dollars are being spent to prepare for the Alberta option.

The first big commercial test for those proposals will come later this year, with their open seasons. They're not likely to produce bankable commitments to ship North Slope gas. Open season bids usually carry various conditions that have to be worked out, says Rutherford. Bradner concurs on that score.

This will be the first time an Alaska gas line project has reached the open season stage. The results won't be definitive and no final decision on construction is expected until 2014, but at least the process is moving forward, after three decades of mere talk.

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