Unconventionals boom puts Arctic pipe plans on ice
North America’s shale gas revolution has stymied plans for two multi-billion dollar pipelines to tap Alaska’s North Slope and Canada’s Mackenzie Delta
Once at the forefront of North America’s natural-gas ambitions, the economic viability of both projects is now under question given the glut of unconventional production in the Lower 48.
To underscore the point, natural-gas prices fell to decade lows in New York this week, barely above $2 per million British thermal units (Btu). At those levels, a $30 billion pipeline from Alaska is a moot point; the same holds true for a smaller, C$16 billion ($16.07 billion) Mackenzie Valley line from Canada’s Beaufort Sea to Alberta’s oil sands.
As Lower 48 gas output continues to increase, Alaskan gas is becoming less of a priority for the big reserves holders, which include ExxonMobil, BP, and ConocoPhillips.
Big Oil on the sidelines
In Canada, ExxonMobil-owned Imperial Oil is leading a consortium that includes Shell and ConocoPhillips to build the Mackenzie Valley pipeline, which, after a decade of delays, was formally approved by Canada’s national regulator in 2011.
But if history is any guide, it’s not clear if the pipeline will ever be built. Mackenzie was initially rejected in 1977, before being revived in 2000. Hearings finally began in 2005 and took more than six years to conclude. Although lead backer Imperial has expressed support – many think it will supply gas for oil sands expansion – the project has yet to be formally sanctioned.
In the time the project took to get approved, North American gas underwent a fundamental shift that threatens an economic lifeline for Canada’s northern communities. After decades of opposing oil and gas, aboriginal communities are now desperate for economic benefits. Many have compared Mackenzie to the Canadian Pacific Railway in terms of its historical and economic importance to the country.
The Canadian government has promoted oil and gas as a way of asserting sovereignty in the Arctic, and has been under pressure to support the line with monetary incentives and subsidies. But so far, the government has yet to make financial concessions that would move the project forward, to the frustration of northerners.
“Our oil and gas is in the hands of some corporate strategy out there,” Joe Handley, a former premier of the Northwest Territories and pipeline advocate, said. “What we’re talking about is bigger than oil and gas development, it’s about development of the North.”
Which way to the Yukon?
Alaska’s administration has taken a heavier hand in its bid to shape the future of the North Slope. In 2006 Sarah Palin was elected governor of the state with a vow to force oil producers to build a pipeline from Prudhoe Bay, and introduced legislation aimed at doing just that.
Under terms of the Alaska Gas Inducement Act (AGIA), enacted in 2007, the state legislature authorised Calgary-based TransCanada to build and operate the line, which it proposed to do with the backing of ExxonMobil. A competing $35 billion pipeline, the Denali link, proposed by BP and ConocoPhillips, was dropped last May in favour of TransCanada’s proposal.
What form that pipeline will take – indeed, the route itself – is shifting with present-day market realities. Rather than build a conduit from Alaska to the Lower 48, via the Yukon, the favoured option now seems to be a shorter bullet line to Valdez to supply liquefied natural gas (LNG) exports.
TransCanada would much rather send the gas to Alberta; its Canadian mainline that connects the US northeast is only half full and it would dearly love the additional volumes to fill its system. Its Alberta gathering network, Nova, has capacity to handle a fifth of the gas produced in North America, and move it to San Francisco, Chicago and New York.
But it also has to bend to the will of the shippers, which own the resource.
Thus, the LNG option is a “consolation prize”, said Ian Nathan, the head of global gas research for New York-based Energy Intelligence. It makes much more strategic and practical sense to ship that gas to the continental US, if it were not for the new reality of perpetually lower gas prices. Like the northern winter, the Lower 48 pipeline option is fast disappearing, he added.
Thus LNG seems to be the only economic alternative, given that Asian buyers are prepared to sign long-term contracts linked to oil prices, which are higher by a factor of 10. With natural gas selling for the equivalent of $12 a barrel of oil, plans to build LNG export terminals are being fast-tracked.
However, that strategy is also risky. With a clutch of LNG facilities planned along the west coast of North America and Australia – all targeting the same Asian buyers – market share could easily trump margins, eroding expected returns. Eventually, spot markets could emerge in trading hubs like Shanghai, fed by North American unconventional gas.
Future shale gas sources in Russia and China itself could add further “gas-on-gas” competitive pressure. An expanded Panama Canal will allow exports from the Gulf of Mexico to reach Asia after 2014, adding even more competition. “US shale gas has created a market situation where a lot of gas needs to find a home. It’s all about finding that oil-linked market,” Nathan said.
However, Nathan added that he’s “advising caution that China is going to be a bottomless pit for all this gas ... all shale gas has to compete with each other.”
Sooner or later, LNG prices are going to disconnect from oil, just as they did in North America, much to the benefit of consumers over producers.
Over the top
In 2002, planners had given thought to an “over the top” route that would run from Prudhoe Bay to the Beaufort Sea, before following the Mackenzie Valley to Alberta and on from there to the southern US.
The combined length and cost of each line would be significantly lower, tapping a larger reserve base that could increase the economics of moving a combined 5.5 billion cubic feet a day (cf/d) – 4 billion cf/d from Alaska and 1.5 billion cf/d from Canada.
Alaska presently re-injects about 31 trillion cf of associated gas from the Prudhoe Bay oilfield, while discoveries in the Beaufort and onshore Mackenzie Delta are conservatively estimated at 14 trillion cf.
But governments on both sides of the border rejected the northern plan outright. Alaska went so far as to pass a law banning it under the guise of protecting the shoreline.
Now that neither pipeline is needed urgently, it may be time for some lateral thinking. According to Handley, Canada and Alaska should team up to build a single line, paying for it with public funds if necessary. “Is it time for us to get together and make some compromises,” he said. “Is there a way of doing this differently?”