Financial incentives proposed in the Senate omnibus energy bill would lower the “trigger price” required for construction of an Alaska natural gas pipeline to be economically favorable to $3.05/Mcf, according to a new report issued by the Energy Information Administration (EIA).

The legislation’s provisions to provide a $10 billion loan guarantee to the qualifying pipeline project and to speed up the permitting, right-of-way and certification processes could chop off as much as 45 cents/Mcf from the trigger price sought by investors to build the mega-project to deliver gas supplies to the Lower 48 states, the Department of Energy (DOE) agency estimated. Absent the Senate’s proposed incentives, the EIA had assumed that a sustained Lower 48 wellhead price of at least $3.50/Mcf would be in order for the economics of constructing the project to be favorable.

Although enticing, the EIA said the Senate bill’s proposed loan guarantee and increased federal oversight may not be sufficient carrots to convince pipeline companies and producers to build the $10 billion-plus project. Investors “may still feel that the project is risky enough that they will not commit to build the pipeline until the Lower 48 wellhead price is well above the minimum level for profitability,” it said. The agency admitted it made some “very simply assumptions” in the report, and that the trigger price (minus the incentives) might be higher than $3.50 — possibly $4 or more — for the Alaska project.

The EIA reviewed the pipeline provisions of the Senate’s original comprehensive energy bill (S. 1766) at the urging of Sen. Frank Murkowski of Alaska. The bill has since been revised to S. 517, but the majority of the provisions dealing with the Alaska pipeline have remained the same.

Absent the incentives in the energy bill, the EIA said it did not forecast construction of an Alaska pipeline before 2020. But based on assumptions made in its Annual Energy Outlook 2002 reference case and in the Senate energy bill, the EIA study projects that an Alaska gas pipeline would be implemented by then. Construction of the line is projected to begin in 2016, and the first year of deliveries to the Lower 48 (730 Bcf) is projected for 2020, according to the agency. The wellhead price in the Lower 48 states ($3.20/Mcf) is expected to be lower than it would be without the Alaska pipeline ($3.26/Mcf), the report said.

In an alternative scenario that combines higher Lower 48 wellhead prices ($4.06, for example) and the energy bill’s pipeline incentives, construction on an Alaska gas pipeline could begin as early as 2010, with deliveries starting in 2014 — reaching full capacity of 4 Bcf/d, or 1.5 Tcf a year, by 2015, the EIA said. The volume of the Alaska pipeline would represent about 5% of the total gas consumed in the United States by 2015.

This alternative scenario, the Lower Oil and Gas Technology Case, assumes that the rate of technological advance in the oil and gas supply sector would be lower than it historically has been, making it more difficult to add gas reserves and leading to higher gas prices.

Earlier operation of the Alaska pipeline will lead to lower gas prices, the EIA noted. By 2020, Lower 48 wellhead prices under the alternative scenario would be $3.74/Mcf, about 8% lower than initially projected. Residential prices for natural gas in 2020 would be $8.07 without the pipeline provisions of the Senate omnibus energy bill, and $7.72 with the pipeline provisions, according to the report.

Murkowski also asked the EIA to review the effects of the House energy bill (H.R.4), which would open access to reserves in the Arctic National Wildlife Refuge (ANWR), on crude oil production in the United States.

By opening ANWR, the EIA estimated that on average domestic oil development would rise by 800,000 barrels/day in 2020, nine years after production in ANWR is projected to start. This, it said, would reduce net imports to the U.S. to 60% from 62%, while boosting domestic production by 14%.

In a high-resource sensitive scenario, the agency projected ANWR production could add as much as 1.5 million b/d to total Alaskan production and reduce U.S. oil import dependence to 57%. In a low-resource sensitive scenario, ANWR production would drop to 590,000 b/d by 2015, with a decline to 510,000 b/d by 2020.

The EIA did not review ANWR gas resources, which it said are estimated to be about one-eighth the size of the region’s oil resources, and are not considered to have as “significant an impact” on U.S. energy markets.

The U.S. Geological Survey, however, has estimated technically-recoverable gas resources in ANWR to be between zero and 10 Tcf, with a mean value of 3.5 Tcf. An additional 2 to 5.5 Tcf of technically-recoverable gas is estimated to exist in ANWR as associated gas (gas found when drilling for oil).

About 35 Tcf of stranded gas assets have been found already in Prudhoe Bay and other areas of the North Slope. “These reserves would most likely be developed first if the infrastructure is developed to market North Slope natural gas” to Lower 48 markets, the EIA noted.

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