The Threat of Shale Gas

This weekend the Anchorage Daily News (ADN) ran a story titled "Alaska natural gas gets new competition". This not exactly what I would call news, this blog looked a the impact of shale gas back in February.

It's not yet time to give up on Alaskan gas and here's why:

1) Alaska gas can be delivered to the Alberta oil sands cheaper than shale gas from Albany NY. Take a look at the map from the ADN article and imagine the pipeline infrastructure needed to move an equal amount of gas to the oil sands. In Alberta heavy synthetic crude oil will be produced from Alaskan gas at a rate of 6 BTU (as oil) for every 1 BTU of gas consumed. It's a rock solid business model and gas from Pennsylvania can't compete.

2) Gas markets are extremely complex and volatile. T. Boone Pickens can nay-say the pipeline all he wants, but follow the money. Where's the money in natural gas these days?

• LNG (international stranded gas) isn't free (link to $50 Billion dollar LNG project story). The availability of LNG will figure into the cost analysis of any gas development project within 500 miles of any coastline.
• Shale Gas may be plentiful but it isn't free either. When the gas price drops the drill bits stop turning and producing wells are shut in. The tipping point seems to be around $4/MMBTU. Shale gas leader Chesapeake calls this "deferred production" and last April they deferred about 13% of their gas production including gas from the Barnett Shale . This quote from the Chesapeake new release says it all:

  In addition, because of the steeply declining production profile of new natural gas wells and the upward trending slope of the NYMEX natural gas futures curve, Chesapeake believes deferring production and revenue to future periods with higher natural gas prices creates greater shareholder value than selling production into the current unusually low priced natural gas market.

• Coal: Natural gas demand will increase and displace coal over time. Clean zero emission syngas from coal is technologically possible, but not at $4/MMBTU.
  
• Nuclear: Fear, high cost and unresolved waste storage issues will continue to support the overall value of natural gas. Don't bet on the 1950's fantasy of nuclear power too cheap to meter.
  
• Wind/Solar - There's a good reason Boone Pickens likes wind turbines. For every megawatt of wind or solar we build plan on building a megawatt of power from a gas turbine - you'll need it at night or when the wind stops blowing, and Boone will be happy to contract some firm gas for that need.
  

3) Finally - In the game of which gas projects will shut down other gas projects look for the Alaska Gas Pipeline to stall the Mackenzie pipeline. Both of these projects can supply gas to the oil sands, but Alaskan gas may just get to the finish line first.

Advancing in a Different Direction - Sarah Palin Quits

Bit of a shocker. I hope this means the business climate in Alaska improves for construction of the Alaska Gas Pipeline.

And this from Halcro.

And this long winded rant from Sarah Palin.

Todd S. Purdum's Vanity Fair article.

Your thoughts? Take the poll >>

Fiscal Certainty - It's what Projects Crave

AlaskaDispatch.com is carrying this op-ed piece by Andrew Halcro (LINK). As always Andrew hits the nail on the head and takes the Alaskan lawmakers to task for inaction on tackling the biggest obstacle to building the Alaska gas pipeline - Fiscal Certainty.

In a nut shell: You can't invest $40 Billion in a long term project with variable or random taxes.

From the article:

Since 2006, Gov. Sarah Palin and others like DNR Commissioner Tom Irwin have been critical of former Gov. Frank Murkowski's proposed gas line deal which included offering the producers 35 years of fiscal certainty. Critics claimed extended fiscal certainty gave away state sovereignty and thus was the primary reason why AGIA was created.

So after years of promoting AGIA as the only way to get around having to offer Murkowski-esq terms to secure commitments from the producers to build the Alaska gas pipeline, has the gas-line paradigm been changed by AGIA?

The answer is NO! the paradigm has not changed. Since Andrew's article did not offer a pop culture reference to make the point I'll offer one:

Idiocracy - We live and work in a democracy where one man has one vote regardless of mathematically impairment or financial illiteracy. I think that's clear when you meet average folks with massive student loans, A.R.M. mortgages, zero percent balloon payment mortgages, and high interest HELOCs.

From what I've seen it might be easier to teach French to arctic squirrels than to explain cash flow and net present value concepts to lawmakers.

"Nothing goes ahead until Exxon is happy with it."

More details came out this week outlining the agreement between TransCanada and ExxonMobil for work on the Alaska Gas Pipeline. (Link to Alaska House Resources Committee Meeting Documents).

High points from the TransCanada presentation:

• TransCanada (TC) and ExxonMobil (EM) have reached agreement to work together to progress TransCanada’s Alaska Pipeline Project
• Immediate EM participation and project support
• TC / EM will jointly advance all aspects of the project–technical, commercial, regulatory, financial, etc.
• EM contributing prior study results, existing Alaska ROW data
• TC Alaska and Foothills remain the AGIA Licensees
• AGIA rights / obligations are unchanged and remain with Licensees
• EM is ready to work with the State to enable full participation in the AGIA license
• Project Schedule unchanged- Initial Open Season target completion by July 2010
  
• AGIA Project Scope unchanged: GTP and pipeline from Prudhoe Bay to Alaska delivery points, LNG via Valdez, or Lower 48 markets via Alberta Hub.
• TC / EM will also advance an upstream gas transmission pipeline from Point Thomson to GTP to be included in the Open Season Outside of AGIA project and ineligible for AGIA reimbursement
• Current TC / EM alignment not contingent on any commitments by State
  
• TC can progress project independently, if it so elects, using all jointly developed assets /

Almost everyone gets what they want, the notable exception being CononcoPhillips and BP - (Link to the Denali Pipeline progress report).

TransCanada gets Exxon gas, Point Thompson gas, Exxon data, Exxon cost sharing and upto $500 million AGIA cash for project development. Exxon gets into the AGIA process, benefits from the AGIA cash and transforms the entire project to serve their needs.

TransCanada chief executive officer Hal Kvisle inadvertently coined the project motto when he said "Nothing goes ahead until Exxon is happy with it." Every future hurdle should be measure by the Exxon happiness metric.

Alaska Gas Pipeline Report

A good summary report by William P. Doyle, Director of Permits, Scheduling & Compliance Office of the Federal Coordinator was submitted to FERC last week (LINK).

This report provides a good summary of the various possible Alaska Gas Pipeline Projects, although it states that

There is a very low probability that all five projects may be constructed. It is more likely that one interstate and one in state natural gas pipeline will be constructed.

Below, a figure from the the report showing all the possible projects: (Click on it for detail)

Exxon & TransCanada - It's official(?) - Update

Details are few, but the overall picture is shaping up - all three producers with gas, TransCanada, and $500 million of Alaska State AGIA money are all on board one of two gas pipeline projects. Even the Federal Government is on track to increase the total value of loan guarantees.

Next stop - Open Season 2010? Project consolidation?

TransCanada press release: (LINK)

According to the website of Office of the Federal Coordinator

Federal Coordinator Drue Pearce is delighted by today’s news that ExxonMobil has agreed to join TransCanada in its effort to construct a pipeline to commercialize Alaska North Slope gas.

I'll hold off on being delighted until I read a press release from ExxonMobil. Details - Let's hear some details (ExxonMobile News Release Link)

Exxon & TransCanada

Developing: Exxon Mobil enters talks to help build Alaska gas pipeline. From the Houston Chronicle:

Exxon Mobil is in discussions with TransCanada to help it build a massive pipeline to move natural gas from the North Slope of Alaska to U.S. markets, according to a source familiar with the deal. The move could undermine a competing effort by ConocoPhillips and BP.

Irving-based Exxon would not be just a passive customer of the pipeline, which could cost as much as $30 billion and run 1,700 miles, but would likely be involved in the design and construction, according to the source. Exxon has deep expertise with large construction projects, including in harsh climates like Alaska.