Alberta Clipper

Canada is hard at work providing heavy crude oil to the U.S. This article reports the U.S. approval of the Enbridge Alberta Clipper project (Link to project details). According to Enbridge the pipeline will carry 450,000 bbl/day in addition to another 1.6 bbl/day carried by other pipelines.

What does this mean to projects like the Alaska Gas Pipeline? - Nothing directly other than we should take note of the ongoing current and future demands for gas to fuel extraction of oil from the Canadian tar sands. Oil extraction requires about 1 BTU of energy for every 6 BTU of oil produced.

By my estimation production of 450,000 BOE/D tar sand oil requires about 435 MMSCFD of gas or about one tenth of the capacity of the Alaska Gas Pipeline. That gas has to come from somewhere and it might as well be from Alaska.

Projects like the Alberta Clipper and the Keystone Pipeline (500,000 bbl/d) point to the need to supply the Canadian Tar Sand projects with natural gas for the long term.

Maybe $2.75/MMBTU shale gas from East Texas can do the job, but then again maybe not.

Economics of Natural Gas

Wow! NYMEX Gas dipped below $3/MMBTU last week. Here's brief article from the Economist discussing the current trends in natural gas (LINK to "The economics of natural gas - Drowning in it").

Here's the EIA chart on gas storage. This graph shows that current storage is above the history maximum (click to expand image).

Prices below $4/MMBTU and maxed out storage will tend to shut in some wells (deferred production) and slowdown exploration and development of new fields. Long term cheap gas will drive more electricity producers to gas vs. coal.

Of course the gas market is too complex to draw a conclusion about the future of the Alaska Gas Pipeline from a single data point in late August. New demand will come on line and old demand will come back as the recession eases.

Key an eye on crude as the price tops $70/bbl. Tar Sand crude still looks like the future and arctic gas will supply the energy to produce it.

News Roundup

Links and Stories of Interest

Is the Future of Alaska's LNG Plant About To Flame Out?

Massive Shale Gas Field Found in BC

"The Horn River basin is located just south of Fort Liard and the NWT – BC border. An estimated 250 trillion cubic feet of shale gas is estimated for the basin, of which 20 per cent is reportedly recoverable."

The future for Alaska gas

"GTL’s have an unlimited market in U.S. today, tomorrow and 20 years from now"

Actual achievements point to Denali pipeline plan a success (By BUD FACKRELL)

"At Denali, we continue to take a long-term view of the project and believe there is a place for Alaska's gas in the North American market. The announcement by Exxon Mobil and TransCanada to work together on a competing project has not changed Denali's plans or goals. We have accomplished much over the last year and are focused on doing the work to make the Denali project a success. We have the team that can get the job done right."

Kitimat LNG Signs MOU with EOG Resources Canada for Natural Gas Supply

Kitimat LNG Inc. announced today that it has signed a memorandum of understanding (MOU) with EOG Resources Canada (EOG) to supply natural gas to Kitimat LNG’s proposed liquefied natural gas (LNG) export terminal in Kitimat, B.C.

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.

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 Thomson 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.