February 2011, Vol. 238 No. 2

Q&A

Alaskan Gas Pipeline Is Viable, And Now

The state remains bullish about a pipeline for transporting gas from Alaska’s North Slope to the lower forty eight states. I am too. North Slope’s proven natural gas reserves currently stand at around 30 Tcf. Alaska governor Sean Parnell has said the state is working to settle a lease dispute seen as critical to building the natural gas pipeline (P&GJ, December 2010, p.4). I trust this happens soon.

Further, Parnell said he still supports the state’s plan for developing the pipeline established by former Gov. Sarah Palin in 2007 (ibid).

A recent state-backed forecast expects gas prices in Alberta, where Alaska gas would most likely be sold, to hover between $5-7 per Mcf through 2020, and then start to rise after that. The state believes the pipeline is economic within that price range. This belief too, in my thinking, is correct.

Speaking in November, representatives from two competing pipeline projects offered a lukewarm view of the market. TransCanada’s Tony Palmer said Alaska gas can compete, but is at a disadvantage to shale gas, while Denali’s Bud Fackrell said the pipeline is probably not economic today, but the “verdict is probably still out on shale gas.” Neither Palmer nor Fackrell was taking into account the following:

“The reason for Alaska’s bullish outlook is that the state expects shale production to get more expensive, not less, in the coming decades. The costs to produce shale are not fully understood because of the relatively short life of shale development in North America,” according to Antony Scott, a commercial analyst with the Division of Oil and Gas”.

Scott is right in saying: “My belief is that the biggest driver of the differences (between how the state and the EIA view future gas prices) has to do with expectations around how shale gas finding and development costs evolve,” Scott believes the state is taking more factors into account, such as the rising cost to acquire land, the rising cost of water used in the hydraulic fracturing process, and the need for new infrastructure in many shale plays.

I would like to add to that with every day passing there is more and more opposition by the environmental groups against shale gas development. And, as time goes this would put an increasing damper on developing shale gas resource.

While prices are crucial, Scott believes other factors will also come into play as the project moves toward sanctioning: “The Alaska project is of sufficient size that the companies are going to be looking at it on an individual basis. It is a strategic project.”

“The most recent cost estimates for the pipeline have pegged the price of the project between $20 billion and $41 billion depending on the route and the company in charge.”

In a statement published in vol. 15, No. 52, Week of Dec. 26, 2010 Eric Lidji says, “The U.S. Energy Information Administration (EIA) has removed the Alaska natural gas pipeline from its newest 25-year projection of the domestic energy market to account for the rise of North American shale gas resources, but the agency also notes that the change more likely reflects a possible delay, rather than a death knell, for the long sought-after project.

The statistical arm of the Department of Energy removed the Alaska gas pipeline from its forecast because it expects shale gas production across the U.S. and Canada to drastically increase, dropping prices to a point that makes the major project uneconomic. How does the EIA decide if the Alaska pipeline makes the cut? Simply put: If natural gas prices are expected to be above a certain level by the date the pipeline gets sanctioned, then the project get included. That “level” is an average Lower 48 wellhead price of about $6.18 per Mcf in 2009 dollars.

With the increase of shale gas resources, the EIA no longer forecasts natural gas prices to be high enough to justify the expensive pipeline by 2035. The EIA now estimates that the U.S. holds 827 Tcf of technically recoverable unproved shale gas resources, an increase of 480 Tcf from the 2010 estimate. Because of that, the EIA doubled its estimates for shale gas production and upped its estimates for total Lower 48 gas production by 20% through 2035.

Because of those (potential) production increases, the reference case expects wellhead prices will stay below $5 per Mcf through 2022 and increase to $6.53 by 2035. In its 2010 estimate, the EIA projected natural gas wellhead prices would reach $8.19 by 2035.

The entire thesis of my presenting this article is that the differing cost estimates for this project, being bandied around by various groups; need to be looked at by designers, engineers, geologists and constructors experienced in the art of pipeline construction in permafrost areas. Alaska’s natural gas pipeline project, much like Alyeska, is not going to be just another run-of-the-mill pipeline project. It will be „state-of-the-art with „preserving Alaska’s delicate permafrost and ecosystem being at the core of its design philosophy.

This project has to be looked at from an altogether new and innovative perspective – a completely out of the box perspective. In a country known for its ingenuity and “can do” people, this should not be difficult to obtain. Project sponsors should not get intimidated or hamstrung by numbers crunched by economists; they should be looking at the project in its totality. (See my article “Alaska Natural Gas Pipeline Project Needs Thinking Outside the Box,” Pipeline & Gas Journal, March 2007).

I would be interested in reviewing the econometrics used by EIA’s economists and statisticians. What design, construction and operation philosophy for the pipeline was used? Were they considering „winter construction or did they employ traditional pipelining techniques with pipe buried in a ditch; were they thinking of a chilled gas pipeline, with crack arrestors, cathodic protection, coating and insulation, etc., that has to be monitored for movement?

EIA has concluded that a pipeline for exploiting the existing vast proven reserves of natural gas on the North Slope of Alaska is currently not feasible. In my opinion, exploitation of the existing vast proven natural gas reserves available for delivery to the markets should not be held hostage to the possibility of finding potentially discoverable shale gas reserves sometimes in the future.

Understand that a significant portion of the project is already in place from Alberta to beyond. All that is needed is a pipeline to bring gas from Alaska’s North Slope to Alberta. We need to build this pipeline and build it now.

Author
Zaheer Jan is an Independent Energy & Oil/Gas Consultant. He graduated with Honors in Petroleum Engineering from the Imperial College of Science & Technology, London, U.K.
Zaheer has served as:
• Manager of Pipeline Engineering on the $24.0 billion Alaska Natural Gas Transportation System
• A Consultant and Expert Witness for the State of Alaska in its $2.0 billion oil transportation tariff case with Alyeska Pipeline Company
• A Consultant to PEMEX for optimzing Mexicos Southern Region Oil and Gas Production
• A Consultant to Occidental Oil of Pakistan for developing Dhurnal Oilfield

Prior to moving from Pakistan to the U.S., in 1971, he was serving as Deputy Chief Engineer, Transmission for Sui Northern Gas Pipeline Company.
Phone: 908-507-1436