The proponents of a multibillion-dollar North Slope gas pipeline got a sobering report Tuesday from a global energy consultant who ticked down the many obstacles to the project's success.
Chief among those obstacles is cheaper gas from other places: massive unconventional gas basins in the Lower 48 that are conveniently located next to major metropolitan areas, said the Calgary-based consultant, Gerry Goobie of Purvin & Gertz Inc.
"They could eat Arctic gas's lunch. I'm not saying they will, but they could," Goobie told an audience of more than 100 people at the Alaska Oil & Gas Congress, a four-day conference under way this week in downtown Anchorage.
Goobie predicted that the competition among gas suppliers would be "fierce" and that the North Slope project would not succeed unless its costs are tightly controlled. That statement echoed the mantra often repeated by Tony Palmer, a vice president for TransCanada Corp., one of the companies seeking to build a gas pipeline from the North Slope to Alberta.
Palmer agrees that the project's costs will make or break it, and his company is spending millions to deliver a new cost estimate by the end of March. But he's more optimistic about the North Slope project's ability to compete.
The project's high cost -- paired with gas prices that until this decade were too low -- kept the Alaska project nothing but a pipe dream since the discovery of the massive Prudhoe Bay's oil and gas field in the late 1960s. But early this decade, gas prices started to rise strongly, reviving the North Slope oil producers' interest in a gas project.
Last year, the state awarded TransCanada, a major Canadian gas pipeline company, a license to develop a North Slope pipeline, and Exxon Mobil -- the single biggest holder of gas reserves on the Slope -- recently joined that project.
The duo is vying against the Denali Gas Pipeline, a competing project launched by the other two major gas leaseholders on the Slope, BP and Conoco Phillips. Palmer said he hopes the two projects will eventually merge.
A Denali project spokesman could not be reached for comment Tuesday afternoon. Like TransCanada, Denali has been spending millions refining its project's cost estimates.
For now, the pipeline companies are watching the new meltdown of natural gas prices amid a dramatic rise in gas production and the sharp U.S. recession. The price decline hasn't just created the concern Goobie expressed about the North Slope project -- it's already idled natural gas drill rigs in Canada and the Lower 48.
Last week, natural gas prices were at their lowest level in nearly eight years, according to the federal Energy Information Administration. They remain well below the price needed to make North Slope gas competitive. A key Lower 48 index priced gas at $3.25 per million BTU on Tuesday. The North Slope's gas would be competitive at prices between $6 and $8 per million BTU, according to the companies vying to build the gas line.
At today's prices, it would be difficult for developers to raise the cash they need to move the North Slope gas line forward, Goobie said.
"Gas prices are going to be depressed for a while," he predicted, and that could stall lenders' interest in investing in the Alaska project.
If Lower 48 suppliers can sell gas for roughly $3 per million BTU, "you have to be worried," Goobie said.
But Palmer pointed out that North Slope gas developers will not need to seek capital from banks and other investors until 2014.
He said the New York futures market for gas -- where traders invest based on what they think prices will be in coming months and years -- is predicting that natural gas prices will rise by late 2010 to the level needed for North Slope gas to be competitive.
Copyright (c) 2009, Anchorage Daily News, Alaska. Distributed by McClatchy-Tribune Information Services.