North American natural gas is no longer the favored fuel for new power generation, major utility customers report - and its fall from grace has triggered a competitive race with coal, nuclear, imported LNGs and other energy sources vying for incremental market share in the crucial electricity sector.

"For decades, natural gas was considered too expensive to burn for power and those conditions are already reoccurring," says Jim Oosterbaan, senior vice president of merchant operations for Edmonton-based Epcor Utilities Inc. He made that comment on March 7 to a North American natural gas conference sponsored by the Canadian Energy Research Institute in Calgary.

Energy-intensive heavy industries have already switched away from natural gas or abandoned North America in favor of other locations, Oosterbaan says, and the power sector is poised to make a similar shift to other fuels.

Stephen Reynolds, president and CEO of Seattle-based Puget Sound Energy, agrees: "Frankly, if I were looking at building a new generating unit, I'd be concerned that gas supply looks real tight even without incremental power demand. I think coal, which is reliable in terms of supply and pricing, would have the edge, above all in the Midwest."

Puget Energy, located in Seattle, services 1.6 million electricity and gas customers. Reynolds' assessment of coal's growing appeal is shared by his wife Paula Rosput Reynolds, president and CEO of AGL Resources. This Atlanta-based company distributes gas to 2.2 million customers through six subsidiary utilities.

"Even pristine states like Florida and the Pacific Northwest are determined to keep the coal option alive," says Rosput Reynolds, who is also a director of Coca-Cola Enterprises and Delta Air Lines.

Reynolds and Rosput Reynolds, who both hold degrees in economics, were president and vice-president respectively of Pacific Gas Transmission during the 1990s when that company was embroiled in a lengthy regulatory battle to expand its pipeline system capacity from Alberta to northern California.

The couple warns producers and pipeliners that similar delays in bringing Arctic gas from Alaska and the Mackenzie Delta to southern markets would give a potentially decisive boost to competing forms of energy.

"The gas industry's reputation is at stake here," suggests Steve Reynolds. "Its future depends on the sensible resolution of regulatory disputes and prompt development of Arctic supplies."

A supply shortage, if severe, could even draw the attention of government. In 1978, alarmed by a severe natural gas crunch, the U.S. Congress outlawed the burning of gas in new generating plants, in effect dictating the use of coal and nuclear fuel for new baseload and residual crude for peaking power.

After the act was repealed in 1987 by U.S. President Ronald Reagan, American gas consumption for electricity generation rose from 2.6 tcf in 1988 to 5.7 tcf in 2002.

The reputation of gas has again suffered a severe blow, Rosput Reynolds says: "A decade ago, INGAA (Interstate Natural Gas Association of America) and plenty of other upstream people were predicting that annual consumption would rise to 30 tcf. In fact, demand has remained relatively flat yet gas prices have still risen dramatically because supply has failed to keep pace with demand."

The contenders to build new Arctic gas transportation include:

Sempra Energy - whose subsidiaries Southern California Gas Co. and San Diego Gas & Electric Co. make it the largest distribution utility in the U.S. - wants to construct a 1,297-kilometre north-south pipeline through from Alaska's North Slope to the port of Valdez, where gas would be liquefied and shipped by tanker to the West Coast. Its partner in the project is the Alaska Gasline Port Authority. Pipeline capacity could range from 2.6 bcf per day as high as 6.0 bcf.

TransCanada PipeLines Limited, through its subsidiary Foothills Pipe Lines Ltd., plans to build a 4.5 bcf per day line which would follow the Alaska Highway to TCPL's pipeline grid in Alberta, then move the fuel to the (U.S.) Midwest. The $20 billion US project would be built under legislation passed by the federal government 27 years ago after a review.

Enbridge Inc. has proposed an alternative similar to TransCanada's, threatening to take legal action if Canada's federal government does not open the Alaska opportunity to another round of competition.

BP, ConocoPhillips and ExxonMobil, the major gas producers on the North Slope, have also filed an application with the U.S. Federal Energy Regulatory Commission to construct a similar U.S.-Canada pipeline. A Canadian pipeline company could become a partner with the producer group.

A consortium headed by Imperial Oil Ventures Ltd. is planning a pipeline from the Mackenzie Delta to Alberta, scheduled to move one bcf per day by 2009-2010.

Industry officials hope that the Mackenzie pipeline, based on present tentative construction schedules, would act as a warmup for the mammoth Alaska Highway project.

The Sempra and Alaska-Midwest proposals appear to have more potential for overlap in terms of timing and volumes.

Sempra's LNG facilities could be in service for 2011-2012 if government permitting is completed by 2007, says company spokesman Art Larson.

The tankers might discharge their cargoes at an LNG facility, named Energia Costa Azul, which Sempra has received government approval to construct south of San Diego in Baja California, Mexico.

Although the Coasta Azul facility's capacity of 800 mmcf per day is already committed, Larson says its expansion is possible, or another LNG facility might be built elsewhere on the West Coast.

"Alaska has enough gas potential to support to pipelines to market. We do not oppose a second pipeline but only on condition that our project moves ahead first," Larson comments.

Sempra stresses that, without its Alaska project, the West Coast will become entirely dependent on LNG from foreign sources, which it considers a potential concern for security of supply. Above all, Californians are anxious not to replay the enormously expensive energy supply crunch which they suffered at the turn of century.

Serious gas supply and pipeline construction conflicts between Sempra and other Alaska project do not appear likely at this stage, says George Eynon, CERI's senior director of natural gas research. "The actual construction component of Sempra's gas line (planned to parallel to the present trans-Alaska oil line) should occupy a relatively modest time window," he says, noting that TransCanada's 2012 in-service target is widely seen as overly optimistic.

But an orderly sequential deployment of the Mackenzie, Sempra and Alaska-Canada-Midwest projects could easily be disrupted by regulatory snafus.

The Mackenzie line, for example, has yet to win approval from some aboriginal groups. Brendan Bell, minister of non-renewable resources for the Northwest Territories, says Canada's prospects for developing its own Arctic gas could be set back by decades if delays put Mackenzie development into direct conflict with an Alaska-Midwest pipeline or large-scale LNG projects which bring foreign gas into North America.

Also on the regulatory front, Sempra must win an exemption from the Jones Act, a federal law which dictates that ships cargo moving between U.S. ports must be American-built, American-owned and American-crewed. Darcel Hulse, president of Sempra LNG, says this requirement is not feasible for his project because building an LNG carrier today in the U.S. would cost at least three times as much as it would on the open market.

Eynon points out that other constraints besides regulatory issues could emerge. "The sheer physical scale of a $20-billion (U.S.) Alaska pipeline project will impact virtually every major steel plant in the world directly or indirectly," he says.

Fuels acting as competitors to Arctic gas also face formidable regulatory and development challenges.

For example, Puget's Reynolds does not believe that LNG importers will be able to relieve the tight continental gas supply. "The siting of new LNG plants will continue to be slow and thoughtful," he forecasts. "Additional LNG imports will occur but in my opinion not quickly enough to do much more than offset production declines from the lower 48 states and Western Canada - and possibly not even that."

Nuclear power plants have been all but impossible to site since the early 1990s but Oosterbaan advises that the sector is reviving. Three nuclear plants backed by powerful sponsors are now braving the permitting process in the U.S. Policy-makers are drawn to nuclear by new technology which has dramatically increased output from existing plants and enables the construction of smaller nuclear plants.

Oosterbaan says design improvements have enabled the construction of several innovative coal-fired generating plants whose emissions are competitive with natural gas. At current electricity prices, he predicts, older coal plants will be retrofitted with the same clean-burning technology.

But Martin Edwards, INGAA's vice president for legislative affairs, says gas may yet win more market share in power. "Gas-fired plants have a very low utilization rate. Increasing that rate in many cases will be cheaper than constructing new coal-fired or nuclear plants," he comments (see following story).

But without timely access to Arctic reserves, Reynolds says, gas producers cannot assure their power customers of the 30-year supply needed to finance new generation plants, and by default new-generation capacity at least will be forfeited to other fuels.

http://www.nickles.com/brn.html