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Arctic Gas: Bonanza or Boondoggle?

Arctic Gas: Bonanza or Boondoggle?

Prospects for Arctic natural gas development in both Alaska and Canada's Northwest Territories are running at their strongest since the dawn of the idea three decades ago, but how it will happen remains up in the air.

This sketchy view --- the time is ripe, but nobody knows for what --- emerged as an international consensus at the 16th World Petroleum Congress in Calgary last week. Arctic development stood out as one of the hottest topics. It was agreed that northern gas could begin to reach markets as early as 2008. But the route, markets to be served, and even the form the gas will be in when it reaches them, are still unsettled.

At a press conference at the World Petroleum Congress in Calgary last week, BP Amoco's Sir John Browne said his company might consider taking an ownership role in a new natural gas pipeline as it eyes development in the Mackenzie Delta, Beaufort Sea and Alaska. Said Browne: "Our cost of capital is such that if we find the right returns on a pipeline and are permitted to own it, we'd certainly consider doing that. Pipelines are not something that we shy away from as a matter of principle."

In fact, BP Amoco announced last week that it plans to strengthen its position in Canada's far north as it works to be a top dog in natural gas development in the region. In the Northwest Territories and the Yukon, BP Amoco holds 89,000 acres of discovery licenses and producing licenses. It also has another 155,700 acres of discovery licenses and 617,800 acres of exploration licenses in the Beaufort Sea, currently under an E&P moratorium.

"We want to maintain our good position in Canada, and if there's good business to be done, we'll do that in the north," Browne said in Calgary.

He also predicted even though it would be "well beyond this year" before development decisions are made, within a decade, a pipeline from the North Slope would be reality.

BP Amoco has a 26.7% ownership of about 30 Tcf of Alaskan gas reserves which are produced only to be reinjected at a rate of six to eight Bcf/d into the associated Prudhoe Bay oilfield.

Imperial Oil Ltd. has estimated its established reserves on the Mackenzie Delta and in shallow waters of the Beaufort Sea at 5.1 Tcf or about half the supplies discovered for sure so far by the Canadian industry.

But neither of the northern gas giants are about to be rushed into production or supporting a pipeline. "That is a popular question," said the BP Amoco chairman, but "there is no decision" on key questions: whether to build a pipeline to connect with the established transportation grid in Alberta, use new gas-to-liquids technology to create an expanded portfolio of North American delivery options, or adopt conventional methods of conversion into liquefied natural gas for tanker exports to Asia. The BP Amoco chief described work on all options as under way, and especially on determining a market destination. He indicated no options have been rejected yet, including part-ownership of a pipeline by producers.

There are others who support a pipeline, but point out that it's already in place --- it just happens to be carrying oil right now. Use of the Trans-Alaska Pipeline, however, could be an option as the North Slope oil runs low.

Chairman Bob Peterson of Imperial Oil indicated that his company is prepared to think about entirely new approaches to tapping Arctic resources. Imperial is 70%- owned by ExxonMobil, which also owns a 36.8% share of the North Slope reserves.

An ExxonMobil team presenting a technical paper at the WPC pointed to Alaska as a potential location for a commercial gas-to-liquids plant and "in this decade." The Trans-Alaska Pipeline System (for oil) offers the opportunity to transport AGC-21 products through the existing pipeline and provide high-quality synthetic hydrocarbons to world markets." ExxonMobil has spent about US$400 million into developing AGC-21, short for Advanced Gas Conversion for the 21st Century. Covered by more than 400 patents in the U.S. and 1,500 abroad, the process concentrates the energy content of gas into high-grade, clean liquids for refineries and petrochemical plants. The productivity of the AGC-21 system has more than doubled and costs have been cut in half in recent trials, the technical paper reported.

Peterson didn't indicate which avenue he favored, but offered "there's no doubt there is a large resource. At today's gas prices, you could show good economics." He also added that "no matter how you think about it, it's still seven to eight years away." He rattled off the host of issues that northern development still raises: native relations, pipeline competition, the route, government interests, and the tax and royalty regime. In a nutshell, Peterson told reporters, moving Arctic gas to markets is a case of "2008 maybe." He said, "I used to say it was eight years away. That was 27 years ago. I still say eight years."

It was made plain that production companies are in the driver's seat when it comes to the future of Arctic gas. At the WPC, David Anderson, from the Houston-based international consulting house of IHS Energy Group, presented a paper echoing earlier verdicts by others such as rival Purvin & Gertz Inc. Anderson also echoed a message heard repeatedly from pipeline promoters. No gas transporter is about to launch an Arctic project by itself.

Anderson pointed out this theme has been sounded by Enbridge Inc., operator of the northern-most oil line from Norman Wells, as well as the Foothills partnership of Westcoast Energy and TransCanada PipeLines, which are attempting to revive the dormant Alaska Natural Gas Transportation System, with its plan eventually to tap both the U.S. and Canadian Arctic. "For a project of this scale, spreading the risk is paramount," Anderson wrote.

IHS calculates a Mackenzie Valley gas pipeline could be built for C$5 billion (US$3.4 billion) and take until the 2008-09 period to build "unless the project receives additional impetus from . . . governments." While the territorial and Yukon governments are giving moral support to rival Arctic pipeline routes, neither has the resources to finance a project. Federal authorities likewise show no signs of stepping forward with active support. But at the WPC, the National Energy Board's Laura Richards reminded the international industry of the scale of the Arctic wealth awaiting development.

Estimates of discovered resources in the Canadian Arctic are 724 million to 1.38 billion barrels of recoverable oil and 6.96-11.44 Tcf of marketable gas, Richards reported. Anderson said IHS calculations show the Canadians have to raise their established reserves into the 15 Tcf range to support a pipeline with a 20-year project life. He pointed out that the effort is beginning. Canadian producers are beginning exploration on vast tracts of the Mackenzie Delta they procured last year with C$183 million (US$126 million) in work commitments, and an auction of Mackenzie Valley properties will be held later this year.

Richards reported that projections based on the limited geological knowledge available to date calculate the total Canadian Arctic resource endowment to be 12 billion barrels of oil and 168 Tcf of gas.

Gordon Jaremko, Calgary

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