Monday, September 28, 2009

Alaskan Pipeline Open Season Might Fail?

Last week, representatives of TransCanada Corp. suggested that an open season for the proposed Alaska/Lower 48 gas pipeline supported by the Alaska Gasline Inducement Act (AGIA) might fail. Open season is a period when potential customers commit certain quantities of gas to a pipeline project in anticipation of signing long term transportation contracts. These contracts then make it possible to finance the pipeline project. The belief among pipeline officials is that the bids received during open season, which will not be until early 2010, will be conditional bids.

I've been following the controversial AGIA pipeline because it comes at a time when the natural gas supply paradigm has been flipped on its head by shale gas. Suddenly the Lower 48 has plenty of gas and the prospect of building a $30 billion pipeline to deliver more gas from Alaska doesn't seem smart.

The situation is a complicated one. There are only a few major producers on the North Slope of Alaska and two, BP and Conoco, are proposing a competing pipeline called Denali. Exxon recently joined the AIGA project, albeit in a non-committal way. I believe along with the fear of new supply in the Lower 48 is the concern that the price of natural gas might be rather low for a prolonged period of time. If nothing changes to juice up demand, oversupply from shale deposits will be a long-term problem and will keep a damper on natgas prices. I think Alaskan producers are looking at that situation carefully.

Ultimately I think they will look at creating an LNG export center in the Valdez area. Alaska is reasonably close to the Asian market, which will pay more for gas than the North American market. Already plans are underway for an LNG export facility in Kitimat, British Columbia for these same reasons.

Just another fun story to watch in the ever changing world of natural gas.

[UPDATE 9/29/09: The AGIA vs. in-state pipeline to Valdez has become a major issue in Alaska and has prompted one official to announce a run for governor with the "all Alaska pipeline" as the cornerstone to his candidacy.]

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