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Canadians Thaw Out Plan for Arctic LNG

Canadians Thaw Out Plan for Arctic LNG

No stone is being left unturned, including the fabled Northwest Passage, in the quest to resurrect an expansion of Canadian natural gas supplies for anticipated market growth in the United States. The latest dormant plan to be taken out of industry freezers for a fresh run through serious economic study is a grand design born in the "energy crisis" era of the 1970s for icebreaking tankers to deliver liquefied gas south from Canada's Arctic Islands.

The scheme deserves to be revived as economically feasible if the industry believes annual average gas prices will take off into a range of US$8 to $12/Mcf starting in about 2015, says a new analysis by the Canadian Energy Research Institute.

CERI, a semi-official agency supported by an industry foundation and Canadian federal and provincial government agencies, found that a number of options are practical if such high prices materialize. High Arctic production and deliveries would work using LNG, compressed natural gas (CNG) or gas-to-liquids (GTL) technology, the new study found.

Confidence that commercial navigation is possible offshore of Canada's Arctic coast dates back to a celebrated 1969 demonstration voyage through the Northwest Passage by a supertanker, the S.S. Manhattan, to prove that ocean deliveries of oil were possible from the Prudhoe Bay discovery while transportation options were being evaluated. Although Alaskan oil producers eventually opted for a pipeline across the state to ice-free waters off its west coast, the Manhattan voyage combined with visions of more Prudhoe-scale discoveries lit a fire under exploration drilling in the Canadian Arctic during the 1970s and early '80s.

Panarctic Oils, majority-owned by the federal government in Ottawa, initially (on its own and through Petro-Canada while it was a Crown corporation) drilled more than 170 wells in areas so remote that some of the rigs operated on ice floes in the neighborhood of the Magnetic North Pole.

Although falling oil prices and changing government policies eventually left Panarctic stranded as a corporate shell, the organization still exists on paper. Arctic Islands discoveries remain well known at least among experts who keep tabs on the national resource endowment such as CERI, the Canadian Gas Potential Committee and the National Energy Board. The recognized results of the Panarctic drilling campaign are 17 Tcf of gas in 18 significant fields and 500 million barrels of oil, inspiring belief that the vast northern islands region potentially harbors much more.

The Panarctic legacy also includes further practical demonstrations of commercial navigation in High Arctic waters. Ice-strengthened vessels delivered a series of 100,000-barrel shipments from the Bent Horn oilfield on remote Cameron Island to Montreal in the 1980s.

Also still on industry book shelves, as the starting point for the new CERI economic studies, is the Arctic Pilot Project. Advanced in 1981, with a C$2-billion (US$1.6-billion) price tag, the proposal called for icebreaker tanker deliveries of LNG equivalent to 320 MMcf/d. The gas would travel about 5,200 kilometers (3,250 miles) by sea from discoveries named Hecla and Drake Point on remote Melville Island to terminals in Nova Scotia and Quebec. The project's NEB application anticipated eventual expansion to 1.4 Bcf/d via a fleet of nine icebreaker LNG tankers.

CERI portrays the dormant Arctic Pilot Project as potentially a logical extension to the C$7-billion (US$5.6-billion) Mackenzie Gas Project now under review by the NEB and northern environmental authorities. By extending the industry's reach as far as the Beaufort Sea coast of the Mackenzie Delta, CERI points out that the MGP establishes a logical and economic possibility for tapping Arctic Islands gas. The lowest-cost option would be to use short-haul CNG vessels for a shuttle service between Melville Island and the Delta, where the gas would be injected into the Mackenzie Valley Pipeline, CERI said.

Other options rated as realistic if gas prices stay right include LNG deliveries directly to terminals in Atlantic Canada, or via a "transshipment" site in West Greenland where cargoes could be transferred from expensive icebreaker tankers to cheaper conventional ships. GTL, while theoretically possible, is "relatively inefficient," not least because the conversion process for the still new technology consumes about 35% of the energy content of the gas, CERI said.

The agency calculates capital costs for a revived Arctic Pilot Project shipping LNG at C$4.8-$6.3 billion (US$3.8-$5 billion). The CNG option would be cheaper but still require the industry to break new ground in a remote, forbidding region. "The overall capital and operating costs of the various schemes vary by less than 30%," CERI reported in a research note.

CERI also acknowledges that, as in the case of the Mackenzie Gas Project, there is more to development of northern Canadian supplies than calculating costs and prices. The cultural side matters. Offsetting the SS Manhattan and Panarctic tanker voyages, the 1989 wreck of the Exxon Valdez on the Alaskan coast is bound to cast a long shadow over any attempt to revive the Arctic Pilot Project.

"Development of Melville Island natural gas, with its shipping option for the production stream, might well be seen as more environmentally sensitive than conventional offshore exploration and development of Beaufort Sea resource potential, and could well have an impact on the timing of that activity," CERI said.

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