Perspective

How does the Alaska natural gas pipeline fit into the overall domestic energy demand picture? The image below is a Sankey diagram of US energy flows based on the 2009 Energy Information Agency Annual Energy Review.

I like this diagram because it shows the relative contribution of various energy sources and puts the Alaska natural gas pipeline into perspective.

The proposed Alaska gas line will deliver 4.5 billion cubic feet per day. In units of "Quads" that equals 1.67 Quads per year. That equals 7% of the current total natural gas demand or 1.7% of the total energy used. If consumed for electrical power it would equal 4.4% of the total energy input for electrical power. Now 2% of all energy or 4.4% of fuel for electricity may not sound like much, but we're talking about a single project.

Compared to Coal: One thing the diagram does not show is the relative efficiency of fuels. Natural gas can be burned for power generation in a combined cycle power plant at efficiencies of 55-60%, an average coal plant converts BTUs to kW at an efficiency of around 33%. On an efficiency basis, new high efficiency gas fired plants can be expected to replace aging coal fired plants.

Compared to Nuclear: Again gas fired combined plants are thermally more efficient than nuclear power plants. Unlike nuclear fuel, natural gas plants don't require cooling water utilities for years after shutdown. Gas fired plants are extremely less expensive to build.

Compared to Oil: Today, with our current infrastructure you can't beat the ease of fueling your vehicle with a petroleum product (gasoline or diesel) and jumping back on the road. On a cost per BTU basis it makes less and less sense to use gasoline or diesel instead of natural gas. You can't beat the concept of switching our motoring paradigm from imported oil to domestic gas. Projects like the Alaska gas pipeline can help make that switch possible. Gas can even be used to produce ultra clean grades of diesel fuel via gas to liquids (GTL) technologies. Gas can also fuel the projects in Canada that recover heavy oil and oil from bituminous sands. Sooner or later natural gas or products of natural gas will fuel your engine.

Natural Gas Cheerleaders

Some say shale gas has ruined the chances of an Alaska Gas Pipeline. I'll agree that the flood of cheap shale gas in the lower 48 has been a great set back to the sure thing envisioned by Frank Murkowski back in 2006 (Link to Murkowski op-ed piece in the News-Miner). Murkowski's loss of the Governorship to Palin coincided with the growth of shale gas development. Palin's policy shift from Murkowski's plans was the wrong move at the wrong time. Shale gas development reset the pricing basis for natural gas in North America. The one-two punch of Palin+shale gas was the black swan event that may ultimately prove fatal to the Alaska Gas Pipeline.

Of course the resources and the demand haven't gone away. Businesses will adjust and invest in development projects in places with more favorable conditions. Just listen to ExxonMobil CEO Rex Tillerson gush about doing business in Qatar and the acquisition of shale gas producer XTO:



The producers, like ExxonMobil are in this business for the long haul, they'll continue to meet market demands and manage risk with or without Alaska gas. Closure of facilities like the Kenai LNG export terminal shows that market forces govern the sale of Alaska energy and wishing it otherwise won't help.

So who is optimistic about North American natural gas? The shale gas folks of course. ExxonMobil bought XTO and took the lead in shale gas followed by Chesapeake. ExxonMobil sees a bright future for natural gas and so does Chesapeake (Link to Chesapeake Presentations).

The April 2011 Chesapeake investor presentation explains why they are bullish on natural gas. They see a future with compressed natural gas vehicles (CNG), LNG export from the lower 48, and gas to liquids plants fed by cheap and abundant shale gas. They also envision replacement of coal power plants with natural gas power plants:

I agree with Chesapeake's reasoning and ExxonMobil's optimism for the future of natural gas. The demand is great and they have bought the resources at the low point in the cycle. I think Alaska, as a resource owner, should also be optimistic. The selling price of natural gas will be constrained by production cost and the cost of alternatives. The alternatives: coal, oil, and nuclear all have future cost problems, the end result is long term gas prices in the $6/MMBTU range and sufficient demand for a couple of Arctic pipelines.

Precedent agreements explained

Here's a link to a good explanation of the ongoing precedent agreement phase of the Alaska Gas Pipeline (By Bill White, Researcher/Writer for the OFC) (LINK) Here's a quote from the article, spelling out what we can expect in the weeks, months and years ahead.

Disclosure of Precedent Agreements

As was said, precedent agreements usually get unveiled, in whole or part, when a developer applies to FERC for a certificate to construct and operate a pipeline. The agreements are the developer's affirmation that the project is needed.

For the Alaska pipeline projects, those certificate applications aren't planned until the fall of 2012 for the Alaska Pipeline Project and 2013 for the Denali project.

In an unusual move, FERC decided in 2005 to handle disclosure of the Alaska projects' precedent agreements differently. FERC's Alaska-specific regulations disallow withholding from the public the existence of signed agreements until the certificate filing.

The developer must issue a press release within 10 days of executing each precedent agreement disclosing the name of the shipper, the amount to be shipped and how many years the shipping will last. Then the developer must file the actual precedent agreement with FERC within 20 days of signing it, although the developer can ask FERC to seal the agreement so the public can't see its details. In handling past pipeline projects, FERC typically granted requests for sealing these documents.

Nice article Mr. White - Thanks.

The Nat Gas Act

External events may drive construction of the Alaska Gas Pipeline. The NAT GAS Act, pushed by oilman Boone Pickens is gaining momentum in Washington. The proposed law provides incentives for converting vehicles to compressed natural gas. (LINK: Natural Gas Vehicles for America).

Converting vehicles to natural gas will reduce demand for foreign oil and increase demand of domestic gas. Even the President says he endorses the plan (LINK).

If this measure passes, the price of natural gas may climb back to the $5 to $6/MMBTU range and justify construction of the Alaska Gas Pipeline.

Exporting LNG from North America may sponge up additional excess gas supplies (LINK) and help close the unit cost disparity between natural gas ($4/MMBTU) and crude oil ($18/MMBTU).

Natural gas vehicles, LNG export, and gas fired power generation will combine to redefine the energy equation in North America and maybe, just maybe help justify the Alaska Gas Pipeline.