June 2011 Vol. 238 No. 6

Editor's Notebook

Editor's Notebook: Tough Times

It’s been a tough few weeks: first, two of my all-time sports heroes passed away, baseball Hall of Famer Harmon Killebrew and wrestling great Randy “Macho Man“ Savage. Around the same time another death may have occurred – one that has been reported periodically over the years but whose time may have finally come.

Of course we’re talking about the proposed Alaskan natural gas pipeline, the long-talked about $35-40 billion pipe dream that may never get off or under the ground.

The news, not totally unexpected, came May 17 when Denali announced it was pulling out after investing three years and $165 million on the project. Denali President Bud Fackrell admitted the recent open season failed due to a lack of customer support. So, after committing more than 760,000 man-hours on the project, Denali is withdrawing its pre-application from the Federal Energy Regulatory Commission.

Denali was a creation of BP and ConocoPhillips. It showed no interest in the Alaska Gas Inducement Act which promised $500 million in up-front to a developer that would meet certain state criteria, believing instead that the market should rise or fall based on market dynamics. TransCanada was awarded the AGIA and seemed to have everything going in its favor: a healthy balance sheet, solid pipeline construction experience, a well-heeled partner in ExxonMobil, and a logical plan to deliver that 4.5 Bcf/d of gas. It all seemed to be moving forward – albeit at a glacial pace – until the shale plays became the “game-changing” event.

Suddenly, the target date of 2020 to begin operations clouded up and I began to think that maybe the pipeline won’t be done before I retire. Last year, TransCanada also held its open season and has not announced any commitments from shippers either. Open seasons make or break pipeline projects because an agreement commits the shipper to share expenses with the developer as the project continues forward.

Just as fruitless have been negotiations with the state of Alaska on producer taxes should the pipeline move forward. Add to this the fact that natural gas is practically everywhere in America and one has to wonder who needs Alaskan gas. Prices have stayed in the $4 per Mcf range despite a colder winter. Natural gas has also firmly disassociated itself from crude oil prices or else it would in the $15 per Mcf range today. Keep in mind that more consumers are also using less gas because of efficiencies.

The Energy Information Administration pushed back the need for an Alaskan gas pipeline to 2035, by which date 98% of U.S. natural gas will be domestically produced – so say goodbye to all those proposed LNG terminals as well.

The producers in Alaska say they need a floor price of between $6-6.50 per Mcf to make the pipeline viable. With natural gas no longer the volatile commodity it was just a few years ago, that price seems unrealistic for years to come. When was it that producers said they needed a $1.25 per Mcf floor price to sign onto the project which then was supposed to be operating by 2014-15?

Larry Persily, the blunt-talking federal coordinator, acknowledges that U.S. natural gas markets are well- supplied for now, but believes that if more utilities choose gas to run their power plants, there could be a place for North Slope gas in the 2020s and beyond. He said the TransCanada/ExxonMobil team is working toward submitting its project application to the FERC in October 2012 and recently submitted the first of its draft resource reports to the commission, with all 11 reports expected in December. He said the project team will soon begin another field season in Alaska and Canada.

What’s next? As long as the state of Alaska continues to help foot the bill, TransCanada will keep moving ahead on the project, but there must be some good news to report soon or it can kiss the rest of the AGIA goodbye, if some state lawmakers get their wish.