Tuesday, October 5, 2010

Alaska Stays in the Picture...But for How Long?

The open season for the Denali Pipeline closed yesterday.  Denali is a joint project of BP and Conoco that would bring natural gas from Alaska's North Slope south to Alberta, Canada and then to the Lower 48.  Denali's operators announced that the project had received "significant" bids from prospective customers, but those bids had unspecified conditions, some of which would have to be negotiated, while others are outside of the parties' control.  TransCanada, the operator of the proposed AGIA (Alaska Gasline Inducement Act) Pipeline reported similar squishy news earlier this summer. For more information on the status of the project, read this article.

Both projects are still alive and vying to be the sole gas pipeline to the south.  The state of Alaska under former Gov. Palin put up $500 million to subsidize the AGIA pipeline, while Denali positions itself as the "market-based project" (kind of ironic).  With the advent of shale gas, the market may not be there for Alaskan gas.  If there is a market for the gas, only one pipeline can be supported.  The wrangling will continue.

I have trouble envisioning anyone spending $35 billion on a pipeline to supply an already oversupplied market.  Current commodity prices certainly don't support the project.  Such a massive project is a long-term proposition, however, but given the market uncertainty I don't see a go/no-go decision in the near future.  Just ask LNG importers how market conditions can shift in the middle of large scale capital projects.

If either project goes forward, it will be several years before a pipeline is in service.  Who knows what the market looks like then?  I've been surprised that the conversation hasn't shifted towards an LNG export facility.  That seems to be the market solution.  Hello, China is building LNG terminals on spec.  Heck, with global warming reducing the northern ice, Alaskan ports are probably more accessible than ever!

I think all parties are playing a waiting game to see if shale gas is for real.  Shale has disrupted the natural gas market and if shale production goes as projected, I doubt you will see a new pipeline from the North Slope to the Lower 48 in the next couple of decades.

No comments: