March 22, 2009 in Business

Gas pipeline faces uncertain future

Alaska lawmakers question economic value of project
Anne Sutton Associated Press

JUNEAU, Alaska — Alaska’s decades-long efforts to build a natural gas pipeline to deliver gas to the Lower 48 look better than ever.

Or worse than ever.

State lawmakers brought back mixed messages from an energy conference in Washington, D.C., where the merits of a proposed Alaska pipeline — Gov. Sarah Palin’s hallmark project — were viewed against increased competition from both shale and liquefied natural gas.

And before a shovel has even been put into the ground for the pipeline, some lawmakers are having second thoughts about giving Calgary-based TransCanada Corp. up to a half-billion dollars to get the estimated $30 billion project moving.

With the global recession and Alaska’s state coffers dwindling with the low price of oil, state Rep. Jay Ramras, R-Fairbanks, has co-sponsored a resolution asking the Palin administration to revisit the generous financial terms for what some call an uncertain project at best.

The Canadian company won an exclusive state license to build the pipeline under the Alaska Gasline Inducement Act, and with it up to $500 million in state incentives. Another company, formed by ConocoPhillips and BP PLC, is proposing its own pipeline without the incentives.

In addition, Palin has called for an in-state small diameter line to deliver North Slope natural gas to urban Alaska markets.

Palin and her administration defended the state process in news releases and a press conference ahead of the measure’s first hearing Thursday.

The state should be vigilant, Palin said, “but I don’t believe this resolution is necessary, and I certainly don’t agree that there should be an AGIA redo.”’

“AGIA is a contract. Why would we take it off the table, especially in this economy and at a time of great need for energy independence?” she added.

Because, Ramras argues, a “plate tectonics” shift is under way in the energy world.

The global recession, combined with the new sources of natural gas, are creating surpluses in the Lower 48 that could depress prices for years to come, and possibly stall the Alaska project.

Natural gas was trading around $7 per 1,000 cubic feet when the Legislature passed the inducement act in 2007 and briefly soared to more than $10 in 2008, making the project more enticing.

But on Wednesday, prices settled at $3.68 per 1,000 cubic feet, and that’s not the only thing dropping. The state budget is facing $1.3 billion shortfalls this year and next.

Still, the gas pipeline will not be in service until 2019 at best and state officials say lawmakers need to focus on a long-term prize that could be the state’s next economic lifeline.

Mark Myers, Palin’s pipeline coordinator and former head of the U.S. Geological Survey, said he is confident the economics for getting Alaska’s known 35 trillion cubic feet of gas to market are stronger than ever. Natural gas is likely to be a major player in the nation’s push to promote energy independence and clean abundant fuels.

With adequate supplies keeping prices stable, it could serve as a bridge until renewable energy technologies are better developed, even allowing greenhouse-gas-emitting coal plants to be replaced with cheaper, more efficient gas-powered plants to generate electricity.

“If you want to revisit this (AGIA), maybe you should look at how to accelerate it, not slow it down,” Myers said, pointing to a consortium of companies drilling gas wells in the Brooks Range foothills and Exxon Mobil Corp.’s exploratory wells at Point Thomson.

The industry wouldn’t put money into gas exploration if it didn’t anticipate a market for it, he said. “To slow that process down seems crazy to me.”

Natural gas is plentiful in the Lower 48 and becoming ever more so thanks to new sources like shale to bolster dwindling supplies of conventional gas.

In just the last 10 years, more than 20,000 miles of new natural gas pipeline have been built and brought online and another 10,100 miles are planned by 2010, according to the Energy Information Administration. If completed, the nation’s natural gas capacity would jump by more than 38 percent, the EIA said.

Alaska could face stiff competition from shale gas or LNG but each has its own problems.

A new drilling boom is using advanced technology to release gas trapped in huge shale beds found throughout North America — gas thought to be too expensive to recover just a decade ago.

Horizontal drilling and massive injections of water are used to break up the rock and release the gas that’s tightly locked in rock formations. The process comes with a host of environmental concerns, however, especially its water use. Although production has boomed, it’s still unclear how much of the nation’s vast deposits can be tapped.

It also tends to cost more than conventional gas, even if that gas were to come from 1,800 miles away, said Ken Medlock, an energy fellow at Rice University’s Baker Institute for Public Policy.

“Alaska gas can beat shale in the Lower 48,” Medlock said. “It’ll knock the price down and when it does knock it down below where shale’s profitable, you’ll see shale development slow and Alaska gas will take that gas.”

In the meantime, Myers said the steady availability of shale gas over the short term would feed a demand for natural gas and bridge the gap until the Alaska gas line is in service.

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