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Weak Gas Prices Don't Deter Denali Gasline Backers

February 23, 2009
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Despite predictions that glutted markets and low prices will keep arctic natural gas in the deep freeze, a start has been made on regulatory review of the Canadian part of the Denali Project's proposed Alaska pipeline.

Sponsors ConocoPhillips and BP got the Canadian process going by filing a preliminary, informal project description with the National Energy Board (NEB). The document expressed hope that the early action will encourage -- prior to formal construction applications -- clarification of the complicated regime for assessing environmental and socio-economic effects of northern industrial developments.

"It would be extremely beneficial if available provisions in relevant statutes and inter-jurisdictional agreements were used to facilitate coordination among the bodies responsible," the NEB filing said. Preliminary oral discussions have been held with officials of the board and other federal, territorial and provincial authorities, the document said.

The Alaska partners diplomatically refrained from referring to the plight of their counterparts in the C$16 billion (US$13 billion) Mackenzie Gas Project. It remains bogged down in complex procedures three years after its regulatory review began before the NEB. The board finished the evidence collection part of its hearings more than a year ago and stands ready to hold a final argument stage then make a decision.

But ConocoPhillips Canada is all too familiar with the Mackenzie project's regulatory stumbling block, which is that the NEB is far from the only agency involved. A parallel environmental and socio-economic Joint Review Panel -- representing about a dozen federal, territorial and aboriginal authorities -- has delayed its report until at least late 2009 after its hearings dragged on for months longer than originally planned. The NEB cannot hear final arguments on the Mackenzie proposal until the panel turns in its findings, including recommendations for conditions on the project approval.

The Mackenzie scheme's headaches prompted creation of a new agency in Ottawa with a mandate to coordinate national regulatory reviews called the Major Projects Management Office, as an arm of Natural Resources Canada. The Denali partnership hopes to make use of the fledgling system. "We have requested that a coordinated 'single-window' office approach be adopted -- such as, for example, the Major Projects office -- for our interfacing with these (government) bodies," the NEB filing said.

Plans for the Denali Project call for 1,000-1,300 miles of new pipeline in Canada, with the amount of construction depending on selection not yet made of a final destination. The route crosses the Yukon, British Columbia and part of Alberta.

The NEB filing makes no fresh disclosures of the partners' plans except to sketch in some Canadian details such as a long list of aboriginal societies along the route, including communities where land and mineral rights are targets of sometimes hotly contested native claims.

The Denali schedule remains as originally announced, with BP and ConocoPhillips declaring intentions to start an open season auction of capacity before the end of 2010, then make construction applications if customers step forward for the project's intended space for about 4 Bcf/d. The partners are keeping their options open about hooking Denali up to TransCanada PipeLines in Alberta or building a new route to complete the proposed connection between Alaska and the Lower 48.

As the Alaska producers made overture to the NEB, industry analysts described a stormy market outlook for all gas projects -- and especially mammoth arctic developments priced well beyond US$10 billion -- at a conference held in Calgary by the Canadian Institute.

"It has been a wild ride -- it will continue to be a wild ride," said Michael Sloan of ICF International. Prices could drop well below US$4/MMBtu this summer then spike upwards into a range of US$10-12 as a drilling slump sure to be brought on by the low cuts supplies that will be demanded when the economy recovers, he predicted. Forthcoming climate change policies will encourage increased gas use by capping carbon emissions from oil and coal over the next 15 years. But long-term average prices will hover in a moderate range of US$7-8, Sloan predicted.

The low coming this summer could be extreme with the economic slump driving gas markets down into the range of US$1-2/MMBtu, said Mercator Energy President John Harpole, citing a bet by an associate with a good record of making predictions. On the market's supply side, he said shale gas development is changing the outlook and growing global output of liquefied natural gas is also bound to affect North American prices because the United States has 70% of the world's storage capacity and it will draw LNG dealers looking for places to unload cargoes.

Gerry Goobie, a Calgary senior principal of Purvin and Gertz Inc., described arctic gas as technically feasible but highly uncertain as an economic proposition. "It is way, way too expensive," Goobie said.

The northern pipeline megaprojects face rising tides of LNG trade or shale production or both, he said. "There's going to be a lot of gas in North America. Arctic gas is going to have to compete and the competition will be fierce," Goobie predicted. "Costs have to come down or it just isn't going to happen."

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