Oil companies getting enthusiastic about gas

Posted: Sunday, May 20, 2001

BROOKS RANGE (AP) -- John Moran loves the North Slope.

The geologist from Houston, Texas, told the Anchorage Daily News he's particularly fond of a low ridge that sticks out from the Brooks Range like a hitchhiker's thumb. At Moran's company, Anadarko, the exploration area is known as K2 -- a potentially ''world class'' natural gas find.

The North Slope's natural gas reserves haven't made economic sense, but now with gas prices climbing and economists forecasting booming demand, the state's big-three gas owners -- BP, Exxon Mobil and Phillips -- are assessing a pipeline to the Lower 48. Others back an Asian export project or a sprawling plant to liquefy the gas for the oil pipeline.

Natural gas development is a heady thought in Alaska. It echoes of the 1970s oil boom.

The North Slope oil fields hold at least 35 trillion cubic feet of natural gas. Until now, no company has pushed a serious gas exploration project here. Geologists suspect the entire Slope may hold 100 trillion cubic feet of natural gas, making it the largest reserves in North America with enough gas to fire the nation for almost five years.

For now, the huge amounts of gas roaring out of the wells with the oil are injected unused back into the ground.

This winter, Moran and two crews spent three months tramping over the tundra, gathering geologic data of the rock below, looking for a place where gas might be trapped. A find would need to be a big one to be a money maker for Anadarko.

Moran is optimistic.

''For us, it's not a question of if, but when,'' he told the Daily News.

Anadarko so far has spent roughly $9 million on this natural gas exploration venture here in the low hills of the Brooks Range, about 70 miles south of Prudhoe Bay.

In the next decade, Ed Kelly of Cambridge Energy Research Associates,Kelly expects U.S. gas demand to grow 33 percent to 30 trillion cubic feet per year. That huge demand will require new large supplies, from Alaska or somewhere else. He predicts that long-term prices will hold above historic averages at more than $3.

BP, Exxon and Phillips are spending $75 million to study a 48-inch pipeline that would carry gas to Chicago.

There are two possible routes. One runs offshore along the Arctic coast from Prudhoe Bay to gas fields at the Mackenzie River delta, before heading south to the Lower 48. The route is shorter and, possibly, cheaper. But it packs environmental permitting problems, potential delays and opposition from Gov. Tony Knowles and the state's congressional delegation.

The alternative route to Fairbanks then down the Alaska Highway may be more expensive but it promises an in-state construction boom, long-term jobs and gas for Fairbanks and other cities.

For now, the oil companies will only say they plan to announce their preferred route late this year.

''We're in the process of convincing ourselves that we're ready to spend $10 billion,'' says Joe Marushack, Phillips' natural gas pipeline development head.

The Northwest Territories and Yukon Territory in Canada are deeply divided over the wisest pipeline route.

A Lower 48 pipeline is not the only option. Yukon Pacific Corp. is pushing a plan to ship gas to Asia, or perhaps Mexico, as liquefied natural gas, or LNG.

This project would involve a second trans-Alaska pipeline, a huge chilling plant in Valdez and specialized tankers to carry the LNG.

For now, the oil companies have dismissed LNG. A smaller project coupled with a Lower 48 pipeline could be economic, but as a stand-alone venture the project is too expensive and the gas couldn't be priced low enough to compete in Asia, said George Findling, a spokesman for a group researching the project.

Heresy, said Yukon Pacific president Jeff Lowenfels. LNG construction costs have come down. Asian demand is accelerating. The West Coast, in particular Mexico, has emerged as a potential market. An LNG project would mean a huge in-state investment, hundreds of permanent jobs and gas for Alaskans.

But Yukon Pacific and other independent LNG developers are stuck.

The producers will not agree to sell their gas to them. Asian buyers will not commit to an unbuilt project. In limbo between a balking supplier and a skeptical buyer, Lowenfels can only fume.

''We could do this project right now,'' Lowenfels insisted.

A fourth option for the North Slope gas reserves is to convert the gas to a crude-like liquid, through a process known as gas-to-liquids, or GTL. Not only would the process make use of the existing oil pipeline, the clean-burning fuel could command a premium price, as much as 40 percent over crude oil.

BP, Phillips and Exxon Mobil are pursuing research projects.

BP's GTL research chief Shane O'Leary describes the technology as ''tantalizingly close.'' But for now, the technology is uneconomic. According to the state Revenue Department, GTL would be competitive only with oil selling for more than $30 per barrel.

''GTL is a tempting second option,'' O'Leary said.

Gov. Tony Knowles supports a pipeline down the Alaska Highway, citing gas and jobs to Alaskans. The Legislature is divided on gas development. Some support the Knowles highway pipeline. Others want an LNG project.

At around $10 billion, gas development would cost less than half as much as the 800-mile oil pipeline when those costs are adjusted for inflation. Also, Alaska's economy is far larger than during the pipeline days, which would dampen the economic impact.

And money to the state would be far less than from oil. Gas is much more expensive to move. Where oil taxes and royalties yielded as much as $4 billion a year for the state, gas development would likely yield $200 million to $300 million, according to the state Revenue Department, and would not be enough to solve the state's fiscal problem.

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