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Tough Sledding Seen for Alaska Gasline

It's not yet "forget about it" time for proposals to carry Alaska's North Slope natural gas to Canada and Lower 48 markets, but hopes have dimmed noticeably for two competing pipeline projects.

While the federal government has a 14-member team assigned to the effort, even Washington's coordinator for Alaska gas transportation projects concedes that "it doesn't necessarily have to pencil out for the federal government to support it." Coordinator Larry Persily and Wood Mackenzie's Ed Kelly, vice president of North American gas and power, spoke on Alaska gas at the annual Pipeline Opportunities Conference in Houston Tuesday.

Both the state-sanctioned project of TransCanada Corp. and ExxonMobil Corp. and the BP plc. and ConocoPhillips-backed Denali pipeline have completed open seasons for their respective projects (see Daily GPI, Oct. 7, 2010). "All we know is they received multiple bids, significant bids..." Persily said. "They're not telling us from whom or for how much...

"Even though we're a little skeptical on the economics [of a project], it's possible...and companies are working toward it."

Some Alaska lawmakers have grown more skeptical. Proposed legislation is sitting in committee that would take away the $500 million state subsidy of the TransCanada project (see Daily GPI, April 7; Feb. 10). Persily said the state is now covering 90% of the project's costs under the Alaska Gasline Inducement Act agreement. Alaska lawmakers just ended their regular session, and if nothing happens between now and the time lawmakers return to session, the bill to cut off TransCanada could advance, Persily said.

Alaskans, particularly those in the state's gas-hungry Southcentral region, have grown impatient for North Slope gas reserves to be commercialized. Various permutations of an in-state gasline that would serve the southern part of the the state with North Slope gas have long been considered and currently are very much up for discussion (see Daily GPI, Feb. 14). However, the economics for such a project are hard to make work for sparsely populated Alaska, Persily said, suggesting that it would require a state subsidy of $5 billion or more.

For the Lower 48 pipeline project to come to fruition, Alaskans need to "get real" about their fiscal expectations and "give up the greed a little bit," Persily said. The state needs to strike a long-term deal with producers ExxonMobil, BP and ConocoPhillips that gives them the security they seek on royalties at the same time it works with pipeline backers.

Persily noted that the Trans-Alaska Pipeline System, the oil pipeline, is running two-thirds empty and a gasline is needed to make investment in oil and gas production in the state more attractive.

The biggest shadow on an Alaska gasline is cast by burgeoning supplies of natural gas from shale plays in the Lower 48. However, it's not today's shale plays that a pipeline from the North Slope would be competing against, Kelly said. It's the next generation of shales -- which will be more costly to develop than today's -- that will be any Alaska pipeline's competition, he said.

The production outlook of the next wave of shales is unknown, Kelly said. These include the Bossier Shale of Louisiana and the Pearsall Shale of South Texas, the Niobrara, Mancos and Pierre in the Rockies, and the Utica Shale below the Marcellus, to name a few.

Despite the promising -- if somewhat uncertain -- outlook for future shale supplies, "It's possible that we'll need Alaskan gas," Kelly said. He pointed to a brightening demand picture for natural gas in particular.

While stricter limits on carbon dioxide emissions would be a boon for gas demand, expected coal-fired power plant retirements still are a bright spot, as is the work being done to commercialize natural gas vehicles (NGV). Kelly said a lot more work is needed to advance NGVs.

Additionally, the petrochemical sector has taken notice of natural gas liquids coming out of shale plays and has been shifting to reliance on lighter feedstocks to take advantage of their more favorable prices, Kelly noted. And there are multiple proposals to liquefy and export U.S. gas. However, some members of the gas-consuming community are beginning to raise their voices against this, Kelly said.

For an Alaska gasline to move forward, the ball in in the state's court, according to Persily. Producers there have been the state's "deep pockets" for 40 years, he said, and they're worried about what the next 40 years could bring and want some security. Another sign of progress would be for the two pipeline projects to merge, he said.

Kelly said if the federal government steps in to regulate hydraulic fracturing activities, it will send shock waves through the Lower 48's shale plays and improve the prospects for Alaska gas.

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