New gas supplies 'could eat Arctic gas's lunch'

Rena Delbridge
Alaska Dispatch
Sep 19, 2009

For decades, Alaskans have dreamed of another pipeline boom, hoping for a giant natural gas project to generate tens of billions of dollars in tax revenue and put thousands of people to work.

Even people who didn't live here in the 1970s, when the trans-Alaska oil pipeline transformed Alaska from a poor, struggling state to one with a multibillion-dollar savings account that hands out checks to people just for living here, have heard the stories. And those handed-down memories of healthy economic times are enough to make plenty of Alaskans bullish on the long-sought-after natural gas pipeline.

Proponents of two separate pipeline proposals say they're moving along as intended, with a near-term goal of an open season in 2010. But as much as Alaskans pin their future on one of the projects, there are no guarantees either will be built.

There's a lot of gas out there right now, and prices are low. Then there's the gas line's enormous price tag -- an estimated $30 billion to $40 billion. Will the companies that hold leases to develop Alaska's vast gas reserves commit to such a massive investment (they like to say the pipeline would be the largest private energy project in U.S. history) under the weight of a struggling global economy?

Here are two views on Alaska's chances of another boom. The first comes from an industry gathering last week in Anchorage, when one analyst shared his doubts on the gas pipeline.

Gerry Goobie, managing consultant with the international energy consulting firm Purvin & Gertz, painted a picture at the Alaska Oil and Gas Congress conference of a buyer's market bloated with global supply, including in the United States, where much of Alaska's gas would be sold under current proposals. That's led to bottom-of-the-barrel Henry Hub natural gas prices in recent weeks - at one point, as low as $1.83 per million British thermal unit. Prices a year ago this time reached more than $7.80 per Btu.

Gas prices will remain depressed in North America until supply and demand level out, Goobie predicted. No one is clamoring for North Slope gas, and competition between supply sources will be fierce. Other supplies, including liquefied natural gas (LNG) imports to North America, are a real threat to Alaska's gas. And when prices rebound, some energy companies will focus on their ongoing shale gas developments around the country.

"They could eat Arctic gas's lunch," Goobie warned. "I'm not saying they will, but they have the potential. There is a lot of shale gas, and there is a lot of LNG."

Alaska's gas must compete with other supplies, some much closer to the cities and industrial centers where they are needed most. That leaves plans for a large-diameter natural gas pipeline -- as currently proposed in each of the two competing Alaska gas projects -- "technically feasible, but economically uncertain," Goobie said. A large pipeline increases risks for prospective investors, some whom may also be troubled by the other uncertainties - chiefly, a lack of precise details, such as regulatory and construction delays, and questions about how much the state might tax the companies that produce the gas.

If those issues aren't resolved soon, Goobie warned, other sources will flood the market. Further, he said, access to capital for the $40 billion line is critical, yet the severe market crash has left the global economy "in a period of maximum uncertainty."

Bill Gwozd, vice president of gas services for Ziff Energy Group in Calgary, is another analyst who has closely followed Alaska's gas pipeline quest and his own assessment of the situation. Although he believes North America will need Alaska's natural gas eventually, he said, the market doesn't discriminate for gas sources.

"The Johnny-on-the-spot that shows up is the gas supply that the market will consume," Gwozd added in a phone interview from his Calgary office last week.

It's a question of timing. If Alaska's gas isn't unleashed before emerging LNG, shale or other gas supplies corner the market, the state could lose out, he said.

Gwozd is still hopeful for Alaska. Like pipeline proponents, he estimates Alaska gas could hit North American markets at the end of the next decade, when prices have had a chance to rebound and supply and demand have balanced out. The project could change between now and then, he said. For example, the pipe size could be expanded to accommodate northwest Canada's large gas reserves, or the line's route could be redirected to LNG export terminals. (Asian markets may pay more for Alaska's natural gas than the American market.)

But both Gwozd and Goobie are clear one point: Alaska is running out of time.

"The world is not going to wait for Arctic gas," Goobie said.

Contact Rena Delbridge at rena@alaskadispatch.com

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