Will LNG jeopardize pipelines?

Diane Francis
Financial Post
October 04, 2006

The notion of building two Arctic natural gas pipelines -- Alaska and the Northwest Territories -- has been bandied about for decades.

A combination of politics, environmentalist opposition and red tape has prevented these projects from getting off the ground.

Now there's another obstacle to these megaprojects: LNG, or liquefied natural gas.

"Alaska's competition is Qatar,'' said Washington's top energy czar, Jim Kelliher, at a recent conference in Banff. He is chair of FERC, the Federal Energy Regulatory Commission which grants easements and licences for energy production and transportation across borders. He was referring to the Middle Eastern country, and its neighbours, who have embarked on an aggressive strategy to liquefy their shut-in natural gas resources because they have no nearby markets for their gas.

They have sunk billions into building facilities to super-cool, liquefy, refrigerate and transport LNG around the world.

Some, like chairman Kelliher, believe the Arctic pipelines may be supplanted by the LNG projects and expansions under construction in North America. Alternatively, LNG plants could be built in the Arctic in both countries instead of expensive pipelines.

No matter what North America decides, the world's biggest energy companies are betting on LNG globally.

"Gas demand will nearly double in 10 years, from 250 billion cubic feet per day in 2005 to nearly 400 billion cubic feet per day by 2015," said a spokesman with Royal Dutch Shell. "And LNG demand will increase four-fold to 80 billion cubic feet per day."

"We believe that LNG consumption will grow from 7% to 10% a year and conventional gas sales at 2.5%," added the Shell expert.

Despite such buoyant demand, the efforts to unlock North America's Arctic gas treasure-trove has been frustrating for all producers involved in both the U.S. and Canada.

In Canada, the Liberals in the 1980s launched an expensive series of public hearings, called the Berger Commission. It dragged on for months, cost millions and resulted in a recommendation against the pipeline. So the government scrapped it.

The economic fallout was dramatic for the high Arctic region, which would have benefited mightily from such development. Some locals were very angry.

"We called them the Bay Street Eskimos," said a Dene Chief in an interview with me back in 1985. "We wanted the jobs and activity and these people were a bunch of do-gooders who just wanted to prove a point."

Around the same time, plans were afoot to build a natural gas pipeline from Alaska's Prudhoe Bay down to the lower 48 states via Alberta. An oil pipeline was already shipping oil from that remote region to Valdez where it was transported by super-tankers.

But gas wasn't valuable enough at the time to justify the huge expense of cutting through Alaska's wilderness and mountains for thousands of miles.

Today, Alaska's oil production has declined dramatically and producers have resurrected talks in the hopes of transporting their shut-in gas reserves. Recent legislation proposed subsidies for the Alaska gas to insure security of supply, but the votes weren't there for such a scheme.

So Alaska's ambition may not be realized unless companies and governments decide to subsidize a pipeline or to liquefy and ship it as LNG like the Arab producers are doing.

Similarly, Canada's Mackenzie Valley reserves look orphaned due to opposition and foot-dragging on the part of aboriginals and politicians.

Another problem for Canada is the hyper-inflation in terms of construction costs in the oilpatch due to the huge oilsands projects underway. Previous estimates of costs totalled $7.5-billion for the 1,200-kilometre link from Inuvik to Alberta. Some oilsands plant estimates have doubled, jeopardizing their completion.

Imperial Oil Ltd., the Mackenzie Valley lead producer, is thinking about building LNG facilities up there.

Whatever is decided, this issue is of national interest, as well as continental importance.

The economic benefits of harnessing this gas wealth, which is environmentally benign, is enormous and should be a priority on both sides of the border.

Whether the politicians ever figure this out, separately or in tandem, is another question. "LNG represented about 1% of gas supplies in 2001. Now it's 3%; soon it will be 6% and ultimately it will be 24% of supply," said Mr. Kelliher.

So the multi-billion dollar question is, whose LNG is it going to be?