AGIA, Denali, Exxon, Shale Gas, and all that

The announcement this week that the ConocoPhillips / BP Denali project is over (link) has the pundits punditizing. The alternative plans are rampant: terminate AGIA, built a LNG plant in Valdez, build a small line to _______fill in the blank, make petrochemicals, make methanol, make ethanol and so on.

Concerning AGIA. It's all about unintended consequences and timing. Amanda Coyne of the Alaska Dispatch assembled a good timeline of recent efforts to build an Alaska Gas Pipeline (LINK). Let's add price data to the pivotal points in the timeline:

March 2007, Sarah Palin rolls out AGIA, well head gas price = $6.65/mmbtu.

January '08 AGIA has five bidders, gas at $7.38/mmbtu

April '08 ConocoPhillips & BP form Denali, gas at $8.87/mmbtu

June '09 ExxonMobil joins the TransCanada AGIA licensed project, gas price $3.38/mmbtu

December '09 Exxon announces acquisition of shale gas producer XTO, gas price $4.66/mmbtu.

What this data shows is that AGIA imposed a delay of about 4 years at the precise time that gas prices and support for a pipeline surged. It also shows that Exxon joined the TransCanada project near the lowest point in the gas price cycle. It also shows that Exxon made it's big move in natural gas about the same time and also at low gas prices - Exxon clearly picked a shale gas winner (XTO) and bought in at a cyclic low, and built a foundation for a future Alaska gas pipeline. In May '09 Exxon was drilling in the gas-rich Point Thomson field, gas price $3.23/mmbtu.

I'm going to go with the premise that Exxon got it right and that the State of Alaska got it wrong. Got it wrong in several ways, but mainly via AGIA and oil and gas taxes.

So what's next? Denali's collapse shows that a couple of well financed oil and gas firms can't fund an Alaska gas pipeline any time soon. At least they can't get it done without Exxon. AGIA may get chased out of town by villagers with pitch forks sometime soon, but I think we can judge Exxon's intentions by their actions, specifically why are they drilling at Point Thomson unless they believe in a pipeline? I don't like the 2020 date proposed for Alaska Gas flowing, but that's probably what we can expect. We're probably 3 years and 150 hopeful blog posting away from kicking off the project.

Exxon and other producers, and maybe TransCanada will move forward because natural gas will become a bigger part of the power generation mix, and because the lower 48 will begin to export LNG (LINK: Cheniere Unit Wins US Approval To Export LNG From Louisiana). The potential Cheniere export volume (2.2 BCFD) equals roughly half of the proposed Alaska gas pipeline volume (4.5 BCFD). Moves like this will be the game changer, this time back in the favor of Alaska.

Keep in mind any optional use of natural gas is less expensive to execute in the lower 48. LNG export plants, petrochem plants, gas to liquids (GTL) plants, methanol, plastics you name it - I can build it cheaper on the Gulf Coast and feed it with cheap shale gas from Texas and Louisiana.

LNG export and the Fukushima effect will sponge up $4/mmbtu shale gas and prices will move back to $6/mmbtu by the end of this decade. $100/bbl oil will drive heavy oil production in Canada and that will drive gas demand.