Resource Development Council

Open season: silence does not mean failure

By Larry Persily, Federal Coordinator, Alaska Natural Gas Transportation Projects

I cannot tell you an Alaska gas line to the Lower 48 will be built this decade. But I can assure you it is not dead; shale gas has not driven a silver stake through the project; the market has not forgotten us, though it is not paying as much attention as we would like.

That could change.

The natural gas share of U.S. electrical generation doubled between 1990 and 2009, climbing from 12 percent to 23 percent. It’s that trend in power generation that gives me hope for an Alaska pipeline. Cambridge Energy Research Associates forecasts another doubling in gas demand from electrical utilities by 2030.

A new, combined-cycle gas-fired power plant emits one-third as much carbon dioxide as the average U.S. coal-fired plant. The natural gas industry is looking to capture future growth in generating capacity and the conversion of older coal-fired plants ready for retirement. That is the best hope for an Alaska gas line.

The president’s energy policy is built in great part on cleaner-burning natural gas and domestic sources for that gas. I have met with the president’s top energy advisor and senior White House staff, and I can tell you the president supports the Alaska pipeline and wants his staff to look for ways the federal government can help bring the players together for success.
Among the pieces that have to fall into place is price stability. No utility is going to build a gas-fired power plant if it doesn’t know what its fuel costs will be. Utilities like stability; their customers like stability; but the gas market has been anything but stable in the past decade.
Shale gas is changing that. The new supplies coming online are making gas buyers feel more comfortable that years of price volatility are over. Alaska gas may be able to grab a share of the demand growth so long as our gas can be delivered for the market price — nothing more.
This year’s two open seasons to solicit shipper interest in the Alaska gas line will tell us how the market views the project. One open season closes the end of July; the other is expected to close in early October. Unlike oil and gas lease sale bids, the envelopes will not be opened to the public the minute after bidding closes. The pipeline developer and potential shippers will enter closed-door commercial negotiations.

Those negotiations could last months, without a word publicly of what’s going on. Alaskans need to understand silence does not mean failure, it just means there isn’t any immediate good news. The open season is just a step in the process.

The project is costly beyond anything ever attempted by the private sector, and competition from shale gas will make the margins tight. North Slope producers, pipeline owners, and the state may have to accept less profit from the gas than they would like. Everyone at the table will have to acknowledge the risks and share in them.

Meanwhile, U.S. and Canadian officials are making plans for the permit applications they hope will be filed, getting together to identify problems and starting to solve them now, not later. The Office of Federal Coordinator is ready, too.

In addition to bringing together agencies to ensure that permit applications proceed smoothly, we are completing a geographical information system (GIS) prototype. We shot a 20-mile-long section in the Atigun Pass using aerial light detection and ranging technology to create an authoritative base map. We layered an incredible amount of data to show terrain, geology, cultural sites, ground cover, water and more. Ultimately, I would like our office to provide such detailed mapping from the North Slope to the Canadian border.

The Alaska Natural Gas Pipeline Act of 2004 that established the Office of Federal Coordinator is clear: The office is to assist in a pipeline that brings North Slope gas to the Lower 48. An exclusively export project is not entitled to the federal loan guarantee of the 2004 law or permitting assistance.

I know, however, that many Alaskans are more enthusiastic over shipping Alaska LNG to Asia Pacific markets. But selling a big load of Alaska LNG into the market would be extremely difficult.

Alaska gas has a lot of low-cost competition in the Asia Pacific market — Australia, Papua New Guinea, Indonesia, Malaysia, Russia and Qatar — none of which need a multibillion-dollar 800-mile pipeline to get their gas to a liquefaction plant.

For those who look at past, high-value long-term LNG contracts in Asia, look again. Spot market and lower-priced short- term sales contracts now comprise almost 20 percent of the Asia Pacific LNG trade — and growing.

The bigger market is at home. North America consumes three times as much natural gas in an average day as Japan, Taiwan, China, South Korea and India combined.

I also would like to comment on the push to build a smaller pipeline to serve Alaskans. While I understand the frustration that led to the proposal, I caution Alaskans to be careful. A large pipeline moving gas out of state is Alaska’s best bet for tens of billions of dollars in tax and royalty revenues, the availability of gas for in-state use and the lowest tariffs for in-state deliveries. Anything else comes up short in one of those categories.

ExxonMobil, BP, ConocoPhillips and TransCanada have spent about $400 million total since 2000 to look at the viability of the gas line. They’re still looking, still spending.

Wait for the open seasons to close, wait for the commercial negotiations that will follow. Wait to see what the producers ask of the state. Wait to see what the White House can do to help.

If it doesn’t work, I’ll be the first to admit it. But it’s worth waiting just a little bit more.

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