Wanted: New gas supplies

Posted: Tuesday, February 25, 2003

It heats homes, fuels industry and returns comfortable profits. Too bad it's running out.

The known reserves of natural gas beneath the Cook Inlet basin are being depleted. Predictions suggest there may be enough for 10 more years. If gas is to continue feeding the demands of Kenai Peninsula residents, businesses and major industries like Agrium's fertilizer plant and Conoco-Phillips' liquefied natural gas operation, it is imperative another source be found.

Locating ample quantities nearby is the aim of ongoing exploratory drilling operations. Meanwhile, the U.S. Minerals Management Service is preparing to offer vast offshore tracts in the federal waters of lower Cook Inlet and Shelikof Strait to oil and gas companies. According to MMS officials, gas appears to be the main target of companies expressing an interest. Lease Sale 191 is tentatively scheduled for 2004. Another, Lease Sale 199, is set for 2006.

The only quantities of gas known to be sufficient to supply the growing demands of Southcentral Alaska, however, are some 800 miles away on the North Slope -- 35 trillion cubic feet of gas near Prudhoe Bay alone, according to state Department of Natural Resources estimates. Quite a bit more may lie undiscovered along the entirety of the North Slope.

But the only way to get any of that gas here is by pipeline -- a hugely expensive piece of infrastructure that at this point is little more than a pipe dream.

Still, dreamers abound -- industry and government officials who have proposed various routes for transporting the gas to market. One would build a pipeline across the North Slope to Canada where it would link to existing trans-Canada pipelines. State law has effectively rendered that option moot.

Kenai Peninsula officials are backing a route along the Alaska Highway. Bill Popp, the Kenai Peninsula Borough's oil and gas liaison said a spur line off the main line would make gas available to peninsula consumers.

Various proposals for developing North Slope gas all have inherent advantages, but they also have major hurdles to overcome, Popp said.

In November, Alaska voters took a step toward one of those options -- a pipeline to Prince William Sound where gas would be liquefied and shipped

overseas. They overwhelmingly approved creation of the Alaska Natural Gas

Development Authority, which will have the authority to acquire land, issue

tax-exempt bonds, design, build and operate a gas pipeline system bringing

North Slope natural gas to Prince William Sound and create a spur line from

Glennallen to the Southcentral Alaska gas distribution network, including

the gas-hungry Kenai Peninsula.

Many questions remain, however, about how viable such a pipeline would be

and whether the costs - including the construction of a gas processing plant

near Valdez - would permit a price low enough to compete with other Pacific

Rim producers. No other Pacific Rim gas producer needs an 800-mile pipeline

to deliver its product.

The gas is in their backyards. Thats an immediate cost advantage, Popp


There are options being explored that might reduce the need for North Slope

gas on the peninsula. Preliminary exploration is getting underway searching

for gas in the Nanana and Susitna river basins.

If successful, they could bring gas supplies on line hundreds of miles

closer than the North Slope, Popp said.

Still another project would tap methane gas trapped in shallow coal beds. A

company called Evergreen Resources (Alaska) Corp. is exploring near Wasilla.

The recovery method, used in parts of the Lower 48, involves pumping water

out of the coal beds permitting methane to escape under low pressure. No one

is certain, however, if the geology of Alaskas shallow coal seams will make

recovery viable, Popp said.

In theory, the most likely scenario (for supplying gas to Southcentral) is

a pipeline along the Alaska Highway. But that is 10 to 12 years out, he

said. A spur line would be built only after the main line is constructed, he

added. You probably wont see that for at least 14 to 15 years, he said.

The big question for would-be developers is whether the market price of that

gas would compete.

DNR estimates, assuming a spur line without any price support or tax

offsets, that gas will be about $5 per thousand cubic feet.

Cook Inlet gas today is roughly $3 per thousand cubic feet.

Four things need to happen before a pipeline project from the North Slope

can be built, said Dave MacDowell, BP's director of external affairs for

Alaska gas.

I call it the four-legged stool, he said.

There must be federal enabling legislation leading to an efficient

regulatory process that offers risk-reduction incentives, he said.

This is a very big, very expensive and very risky project. Some sort of

government involvement will be needed, MacDowell said.

Canadian regulatory issues must also be addressed, and there must be

continued resolution of land claims between the Canadian government and

Canadian Native groups.

Project costs must be reduced. New technologies may help do that, he said.

Finally, MacDowell said Alaska must provide a more certain fiscal

environment with tax and royalty terms that investors can count on.

The one thing this state can do to move a gas line forward is provide a

clear, predictable and certain fiscal environment, he said. What you

(investors) dont want to do is make a huge investment commitment without

understanding the rules. There is a great deal of uncertainty around fiscal


How gas is valued is one of those uncertainties.

That sounds simple, but its not, he said. There is not a clear answer


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