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Analyst Report Paints Grim Picture for At Least Two Northern Gas Projects

The Alaskan LNG project, proposed by Sempra Energy and the Alaska Gasline Port Authority, is least likely to go forward among the three projects proposed to tap northern natural gas resources -- the Alaska and Mackenzie pipelines being the other two. But an uncertain regulatory process and competition from multiple liquefied natural gas (LNG) import terminals make the fate of all three northern projects uncertain, according to a new report by Calgary-based Tristone Capital.

"In our view, the Mackenzie Valley Pipeline (MVP) and the Alaska Highway Pipeline (AHP)...compete with international LNG schemes targeting the U.S.," Tristone analysts said in the report titled "Monetizing Northern Frontier Gas; Is the Market Window Closing."

"The producers included in the northern gas development schemes are collectively proposing to build and operate 13 Bcf/d of LNG regasification capacity in the Lower 48. Lack of progress up north may trigger a shift in capital allocation to international LNG schemes, which have a 2-5 year first mover advantage over the northern pipelines."

In Tristone's view, Sempra's Alaska LNG proposal already is a nonstarter because of its enormous cost, which would includes $22.5 billion for an 800-mile 3 Bcf/d pipeline, a 2.3 Bcf/d liquefaction facility and a 154,000 b/d liquids processing facility at Valdez, AK, as well as another $2.2 billion in regasification facilities somewhere on the West Coast. Sempra's LNG terminal in Mexico is already fully booked with liquefaction so any LNG from Alaska would have to target some other as yet unannounced regas terminal, Tristone said.

"Despite efforts to vary Sempra's return on capital based on prices and tax relief, the project economics just don't compete with other proposals on the table," the analysts said. "We do not see this project moving forward."

While the report sees the Mackenzie Pipeline's economics as superior to the other projects and even to international LNG import projects, it sees Mackenzie's chances dwindling rapidly because of the regulatory delays associated with an ongoing dispute over aboriginal compensation and a lack of clear federal government leadership on the project.

"With the MVP group and [the] First Nations [aboriginal group] at loggerheads on economic benefits, the MVP is at risk to missing its development window in favor of the stakeholders shifting capital to LNG import projects in the Lower 48 states and Canada," the analysts said in the report. "We believe the Mackenzie Delta project has the highest risk of failure as a result of economic and timing uncertainty. If resolution of multibenefit agreements with First Nations keeps the project economic, we see first gas at the earliest in winter 2010/2011.

Tristone analyst Chris Theal said the interim agreement reached last week between the federal government and aboriginal groups "does little to provide First Nations with revenue certainty nor the producers with cost certainty" (see related story).

In contrast, Tristone expects the $24 billion Alaska pipeline project to move ahead because of its legislative support. "Timing suggests that the AHP has already missed the monetization window; however with the overlying objective of the U.S. Energy Bill and the Alaska Natural Gas Pipeline Act being national energy security, this pipeline will be built. We see first gas in 2015/2016."

For more from the Tristone report, contact Chris Theal at (403) 539-4349.

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