When natural gas prices were sky high a year ago, the “window looked wide open” for the long awaited Alaska natural gas pipe, which would carry supplies from the North Slope to the Lower 48, but realistically, “it’s never been a slam dunk,” said Ed Small, an analyst with Cambridge Energy Research Associates based in Canada. He also cautioned that producers will have to have the Alaskan government’s blessing on the chosen route, or it would be a “fatal flaw in the process.”
Small, who will testify next week before the Alaska State Legislature’s Joint Committee on Natural Gas Pipelines (see Daily GPI, July 9), said Thursday that instead of making it easier to build the pipe, politics seem to actually be making it more difficult now than ever before. Besides the political climate, which pits Alaska’s elected leaders against Alberta’s — where the pipe would be laid under one proposal, Small also sees a two-fold problem on the supply side.
“On the demand side, when high prices showed, demand went down, and probably will not come back like it did before,” he said. “The economy slowing down has helped in the perception of weakness and demand softness.” Of the predictions that the North American gas demand will reach 30 Tcf in the next 20 years, Small said that CERA analysts had “never been a proponent of a 30 Tcf world, and now it’s less plausible than probable.” That in itself will lower expectations of an Alaska pipeline, he said.
Part of the demand problem is actually laying the pipe, and Small pointed to the infrastructure it will take, which he said will require no stopping once it really begins. “If you overlay the reality of the world, to bring the kind of supply to make it worthwhile from Alaska would require a huge infrastructure, which I don’t see happening by 2007. Maybe 2010, or maybe 2015, but it’s just so huge.”
The second part of the dilemma facing an Alaskan pipeline is the incredible growth in the liquefied natural gas market, which has seen an enormous amount of activity from both majors and independents since the beginning of this year (see related story).
“LNG is going to be competition to Alaskan gas,” Small said. “The demand problem has brought out a lot of potential responses, and LNG is one of them. It has changed the landscape, and so it changes the outlook for the pipe.” While he said that the economics are actually comparable from Arctic gas and new greenfield LNG facilities, “LNG can be different on a scale regarding the cost and it has more of an environmental footprint than a 3,500-mile gas pipeline.”
However, not all of the LNG announcements made thus far will be completed, Small noted. “As projects are announced, it’s what’s going to be built that puts the actual question into Arctic gas.”
Despite what he called his “realistic” rather than “negative” attitude toward the pipe, Small said that laying it will be such a “monumental undertaking that it may develop a life of its own regardless. The need for gas may be more than adequate to overcome any obstacles.” However, he cautioned that the obstacles were only getting higher.
“Alaska has drawn a line in the sand, and without getting into the legality of that, what that does is set the tone,” Small said of the Alaska legislature and Gov. Tony Knowles moving to ensure the pipe is built the way the state wants it built, regardless (see Daily GPI, Jan. 11). Meanwhile, Alberta also has sort of drawn a line in the sand, Small said, which is important, because at least one-third of the pipeline would move through the province.
“From the sheer cost of it, it doesn’t need any obstacles,” he said. “Those kinds of things are stumbling blocks.” Besides the government officials working to ensure they not upset constituents, Small said there also are the rights-of-way that have to be obtained and a lot of other work to be done behind the scenes.
“At this juncture, it’s in the producers hands, and they say they will make a decision by the end of the year, but I’m skeptical of that,” he said. “It doesn’t mean it won’t be built. But if (the producers’ route decision) is contrary to the Alaskan government, it may be a fatal flaw in the entire process.”
The key, he said, is in the economies of scale. “The bigger they make it, the more impact it will have on the market. A huge pipeline would have a huge impact on the market.” In his opinion, the total pipeline’s capacity, which includes Alaska, the Mackenzie Delta supplies and any LNG facilities built, would be a “maximum of 4 Bcf/d.”
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