Sunday, July 12, 2009

The Threat of Shale Gas

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


Another Engineer said...

Looking at it today, the chance of Alaska's gas being used to process Alberta's heavy oil/syncrude projects is very unlikely. Canada produces a surplus of natural gas and in 2008 exported about 3.6 tcf, much of it from Alberta. That's over 9 bcfd, more than twice the capacity of the proposed gasline. Why import gas when it's available next door w/ a lower tariff?

I also sincerely doubt that a Congress that approves loan guarantees for an Alaska gasline will also approve an export license for that same gas to Canada.

Shale gas does have its own issues. It's expensive to produce because it requires so many more wells that each require fracs. There is also a perceived hazard to groundwater that has attracted the attention of greens, lawmakers, and regulators.

Wow Gold said...

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Brett Chandler said...

I largely agree with the wisdom in this post. Our current low prices and a political will to decrease GHG emissions will both serve to boost the NG market.

The major northern pipeline projects won't be transporting gas for another decade. The market can--and likely will--change considerably in that time.

The biggest quibble I have: the Alaska line is not likely to break ground before the Mackenzie Valley line. The Mackenzie Valley line is actually further along in the permitting process. The Joint Review Panel is currently scheduled to release its report in December, and unless it contains some as-of-now-unanticipated showstopper, we could be seeing actual construction as early as next year or '11