Gas Pipeline Litmus Test

It has finally been agreed in the last year that Alaska should pursue an All Alaska gas pipeline over a project through Canada. Such a pipeline allows access to the Asian liquefied natural gas (LNG) markets, a factor that is necessary for shipment of volumes sufficient to provide cheap in-state energy and a market able to fully consume our resource potential. However, there is still a lot of noise and political posturing about which project the state should pursue.

Governor Parnell appears to be supporting two competing yet conceptually incompatible concepts. This includes the low volume bullet line sponsored by a state agency, the Alaska Gasline Development Corporation. As currently configured, it would be a state subsidized 36” low pressure project that can transport a maximum of 1.6 billion cubic feet per day, and which cannot ship natural gas liquids due to the cheaper, but thin steel selected for the pipeline. This project will take 10 years to build. The legislature is being asked to fund a total of approximately $400 million in engineering and permitting efforts on that project.

The other proposal is a producer pipeline, nominally proposed under the Palin era Alaska Gasline Inducement Act (AGIA) framework, to an unnamed South Central port, which is presumably either a location in Cook Inlet or Valdez. The Governor has asked BP, Exxon and ConocoPhillips to provide site, volume, and other project details by February 15th. The producer project has access to the $500 million in state matching funds previously authorized to TransCanada.

Like other Alaskans, I have worked for many years to try and monetize North Slope gas. During that time, I have become a reluctant expert in recognizing when various producer and other proposals are real, and when they are delaying tactics. There are at least three litmus tests that a proposed project must meet for Alaskans to take it seriously.

First, the pipeline needs to be able to handle large volumes of both natural gas and natural gas liquids. Although advisable, it is not absolutely necessary to build a large project right out of the gate. We can always expand gas conditioning, pipeline compression, and export liquefaction facilities to meet future demand. But if we undersize the pipe itself, we will stifle future exploration and development of one of the most productive untapped gas basins in the world. The bullet line proposal will not be able to transport substantially above its proposed 1.6 billion cubic feet per day, and it cannot handle the natural gas liquids that will fuel growth of an in-state petrochemical industry. Not only have Japanese, Korean and Indonesian buyers already expressed a written demand for over 5.0 billion cubic feet per day in TransCanada’s September AGIA mandated Solicitation of Interest, but there are hundreds of trillions of cubic feet of unproven reserves on the North Slope. A system that cannot ship these volumes will not only result in current demand going unmet, but no further exploration of the basin for decades to come. It would be insanity to spend over ten billion dollars on a small volume low pressure pipeline that leaves most of the North Slope gas resources stranded. Thus if the legislature funds further work on the Alaska Gasline Development Corporation project, it should mandate a 48” high density steel pipeline.

Second, the pipeline must terminate at a port that can handle large LNG tankers. That means a deep water port taking into consideration wind, ice, dredging needs and other environmental conditions that would allow the world’s largest class of LNG ( Q-Max. Q-Flex) tankers year round access for economy of scale in shipping costs. Alaska will not compete in the global market if our export facilities cannot berth the most economic ships, and any serious project sponsor will know that. All proposals should be required to identify its export site, and if it cannot handle the large LNG ships required for economic export, the project should be rejected out of hand.

Third, the project must be market based. Over the past ten years, I have made frequent trips to Asia meeting and negotiating agreements with market participants and have bought Asian market participants to Alaska. What is so consistent about real gasline/LNG projects around the world is that they start in the marketplace. Some LNG projects in Australia signed up the market prior to the project even finding any gas. We have just the opposite situation in Alaska. Alaska’s gas has been referred to as the “most proved gas in the world,” but while others are signing up the markets with long term contracts, Alaska has focused for decades on studying and debating different routes. Ten years were wasted with efforts to take Alaska’s gas into Canada

So Alaska needs to pay close attention to what announcements may be coming. Is it a real project with solid commitments to build a gasline, anchored in long term contracts with the Asian markets? Or is it just an effort to gain a reduction in oil taxes in exchange for more gasline studies?

Bill Walker owns an Anchorage law firm that focuses on oil and gas/municipal law. He is the general counsel for the Alaska Gasline Port Authority and was a candidate for Governor in the 2010 Republican primary.

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