Saturday, July 24, 2010

What's Next?

I ask myself that question a lot. What's the next milestone, what's the next stretch of trail going to look like? Is this project ever going to get some traction?

According to Federal Coordinator Larry Persily, Office of the Federal Coordinator, Precedent agreements are next (LINK to PetroeumNews).

When a shipper and a project sponsor reach agreement they sign a precedent agreement which is then filed with FERC: Precedent agreements become public after 10 days.

The Alaska Pipeline Project’s schedule says it is seeking to have precedent agreements signed by the end of the year; Denali’s schedule says Feb. 1, 2011.

Persily said what that means is that by the “end of this year, early next year, we’ll know if we’re closer to a deal on a gas line; we’ll know if there are any signed precedent agreements out of the open season.”
The article goes on to record his wishful babblings about a magical day when coal fired power plants are demolished and replaced by natural gas power plants - What's the time line on completion of a couple of hundred $500 Million to $1 Billion power plant projects - This is your message of hope for the Alaskan Gas Pipeline Larry?

And then there's this scripted quote directly from the White House talking points of the day memo:
But Alaskans need to realize that chances for an Alaska gas pipeline would be helped by passage of “comprehensive energy legislation that helps move the nation to natural gas as a preferred fuel for electrical generation,”
No mention of building a meaningful tax structure for the pipeline builders and shippers. He goes on to fantasize about a world were shale gas trims off the high end of gas market prices. From his perspective shale gas helps the Alaska Gas Pipeline because stable gas prices cause utilities to build more gas fired power plants.

Here's an alternative universe:

(1) Yes - Gas power plants are good, and a few are getting built - but there's also some rather large coal plants in construction as well. I'd say the two fuel sources will continue to compete for at least one more decade.

(2) Shale gas aint free, and it's not universally loved. For every coal hating global warming advocate I'll and find you a shale gas hating environmentalist. We also know from following Chesapeake(CHK) that shale gas producers will shut in shale gas wells when prices drift below $4.50/MMBTU.

(3) Shale gas isn't doing TransCanada any favors. According to the Calary Herald (LINK) shale gas is beginning to impact TransCanada's mainline volumes in a big way.
The answer to TransCanada's problem is to fill their mainline with Alaskan or Mackenzie Delta gas. Price that gas to compete with Northeastern shale gas and establish a new gas price equilibrium in the $5.50 to $6.00 range. Shale gas producers like Chesapeake carry a lot of debt and don't have the wiggle room to compete with large volumes of arctic gas. XTO, another shale gas leader is now owned by XOM, a North Slope producer - they are in the best position to weather the coming competitive storm and even profit from it.

(4) Arctic gas is also needed for the ongoing energy needs of the tar sand / oil sand industry. The bitumen plants in Alberta will become long term, steady baseline customers for arctic gas. That demand is more attractive than gas turbines designed to pick up load when the wind fails to blow in the wind power regions.

No Larry - I don't buy your logic, I still believe in the competitive forces of the market place and I'm cheering for TransCanada to re-fill their mainline with arctic gas, hopefully Alaskan Arctic gas.

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