Consultants: Demand, price have to be part of gas plan

Liquefied natural gas proposal, piping gas into the Lower 48 through Canada are two viable ideas for getting gas to market

Posted: Wednesday, September 17, 2003

JUNEAU - Alaska has more to consider than building a $2 billion treatment plant on the North Slope or an 800-mile pipeline to a terminal in Valdez if it wants to sell liquefied natural gas in the California market, consultants say.

There are the questions about how much gas the market needs, who will supply the gas and what would happen to the price if too much new gas goes to California.

The liquefied natural gas proposal is one of two ideas being pursued to finally get natural gas off the North Slope and into world markets. The other idea calls for piping the gas into the Lower 48 through Canada.

At least eight LNG receiving terminals are proposed for the California market, ranging from 680 million cubic feet per day to 1.5 billion cubic feet in capacity, with half of them proposed for Mexico's Baja coast to avoid site debates in California.

The long list of proposed projects would serve a limited market, with little excess pipeline capacity to move gas elsewhere.

Producers, buyers and potential investors are asking how much is too much for the market.

"You can easily swamp a market if you put too much gas into it," Jim Jensen, a natural gas consultant with 30 years of experience in U.S. markets, told the Petroleum News.

Commenting the Alaska Natural Gas Development Authority's push to sell 1.5 billion to 2 billion cubic feet per day in California, Jensen said, "that's an idea whose time has come and gone."

Moving 4.5 billion cubic feet per day of Alaska gas in a pipeline down through Canada to a much larger Midwest market has less risk and better economies of scale than shipping 2 billion cubic feet per day to the smaller California market, he said.

Jensen, whose office is in Massachusetts, is familiar with Alaska's effort to market its gas.

He consulted on the Alaska Natural Gas Transportation System, the Alaska Highway gas pipeline route to the Midwest that President Carter selected in 1977.

Deborah Resley, an LNG consultant in Houston, has 20 years in the natural gas business. She too is cautious about the California market.

"There are just a myriad of problems," she said. "The market-specific issues are fairly daunting as well. Once you've re-gasified the gas, where are you going to ship it?"

A successful LNG project most likely will require a company with downstream markets for the gas, Resley said.

Pipeline capacity also is a concern, as options to move excess gas to other markets are limited.

It's different in the Gulf of Mexico, where hopeful companies have proposed a dozen new LNG terminals. There, unused pipeline capacity would make it easier to move LNG to markets throughout the region and into the Midwest, she said.

History provides a lesson for the California market, Jensen said.

When the Pacific Gas Transmission Co. expanded its pipeline capacity from Alberta by almost 500 million cubic feet per day to boost California's supply by 10 percent in 1994, gas prices in California took a dive.

California prices are quite volatile, he said, adding he wouldn't be surprised if an oversupply in the market forced prices down 10 percent or more.

In 1972, the United States set a record for natural gas consumption at 22 trillion cubic feet, when the average wellhead value was 22 cents. Then the federal government deregulated gas, prices went up and demand dropped. The country didn't reach 22 trillion cubic feet again for 28 years.

Supporters of pushing Alaska LNG into California base much of their enthusiasm on strong demand projections, but Jensen warns: "I don't think demand has really made its case."

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