Thursday, June 22, 2006

Question No. 4 Of Natural Gas Pipeline Roundtable - Does Prospective Output Justify Effort?

Special Note: Revised and reposted on March 8th, 2007 to delete superseded links.

On June 7th, KTUU-TV's John Tracy met with Jim Clark, Joe Marushack, Bill Walker and David Gottstein to discuss the natural gas pipeline. The 15 questions discussed aired on the "5 O'Clock Report," the "NewsHour" and the "Late Edition." While KTUU has since dumped their archives of all 15 discussions, the account of the fourth discussion survives in this post.

The Panel: John Tracy, News Director of KTUU, serves as the moderator.

1). Jim Clark: Governor Murkowski's chief of staff and the state's chief negotiator. He represents the executive branch.

2). Joe Maruschak: ConocoPhillips' vice president of gas commercialization and one of the primary negotiators representing the producers.

3). David Gottstein: A financial analyst and a co-chairman of Backbone 2, a resource watchdog group.

4). Bill Walker: General counsel for the Alaska Gasline Port Authority, the organization promoting an LNG project (the "all-Alaska gas line") from Prudhoe Bay to Valdez. Since he's relying upon work done by Econ One for the legislature, he can be considered a "proxy" representative of the legislature.

By now we’ve heard of the amount of known gas reserves on the North Slope: some 35 trillion cubic feet of natural gas. It turns out that's only enough gas to keep a pipeline running for 21 years. The gasline contract counts on discoveries of another 20 trillion cubic feet or so to keep the pipeline in operation for 35 years.

Question No. 4: The project relies on the exploration and the discovery of an additional 15 to 20 trillion cubic feet of gas. Is there enough gas available to justify the pipeline>

David Gottstein responds: “This is an important reason to build the All Alaska line first. To be economic it requires much less gas than the Canadian line. An all-Alaska line is much shorter than a Canadian line, will cost much less and therefore is much less risky. It will follow the existing oil pipeline. It is already almost all permitted and will be much more valuable to the state in the long run without any concessions or studies needed”.

John Tracy asked Jim Clark: “Jim, is there enough gas available on the North Slope to justify the pipeline?”

Jim Clark responds: “Yes. And we have started with 35 trillion cubic feet of the 50 we’d need at 4.5 billion cubic feet per day, but what we want to do is expand the line, which is going to be designed so it can be expandable up to about 5.9 billion cubic feet per day, that takes 70 trillion cubic feet of gas. We are expecting and have access provisions in this contract for active exploration by third party independents, by the producers themselves to access what we think could be, for example 200 trillion cubic feet of gas hydrates on the North Slope, which is frozen gas that we believe we can access. So what we see this as an infrastructure for Alaska for the next 50 to 75 years”.

Bill Walker responds: “The only project that qualifies for the gas we have now is the all-Alaska gas line. I guess what concerns me, John, is that now we’re now moving into an exploration phase. I mean after 30 years of re-injecting gas, now we’re going to go out and find another 20 trillion cubic feet of gas to make a 4.5 to 6 BCF project viable. A number of problems I have with that, but one is, the world is awash in gas. Projects are being pushed and contracts (are being) signed every day of the week around the world as we begin an exploration mode, as we begin a study mode, we will lose an opportunity to get that gas into the market. The only project that’s sized appropriately is the LNG (all-Alaska) project”.

Joe Marushack responds: “Conoco is probably the only company, at least at this table here, that actually spends money on exploration. This project doesn’t get built by small pipelines. This project gets built by shipping commitments. Shipping commitments are what the producers will take and the state will take in order to bring 4 BCF down the pipeline. What doesn’t make any sense off the LNG project, as I understand what it is today, is it must be huge infrastructure with small volume. That’s an economic disaster”.

Bill Walker responds: “The world isn’t stopping. The very same producers that are ready to sign this contract are the same ones that are building LNG projects from around the world to bring into the United States”.

Jim Clark responds: “In terms of moving now, we have a signable contract; we are ready to go with this thing. The challenge of those LNG projects around the world coming in front of us, all of that is taken on if we don't move forward with what we’ve got. We’ve got a plan, a contract in hand, as opposed to ideas out in the Bush”.

David Gottstein responds: “It’s an outrageous comment to say that any one of the projects is not economic. The price of gas worldwide is high enough that all of the projects are economic, the issue is how do we evaluate what’s best for the state of Alaska”.

Analysis: David Gottstein continued to put forth the best arguments for the LNG (all-Alaska) project: Shorter, costs less, less risky, all permitted since it will parallel the oil pipeline. To this argument, Bill Walker adds that because the world is "awash in gas", the greater volume which could be immediately realized from a cross-Canada line could drive prices down too much.

However, the producers counter that only a project the magnitude of the cross-Canada line could justify the large infrastructural investment intended up on the North Slope. The size of the investment requires the larger return to be generated from the Canadian line.

Click here to read discussion on Question No. 1.

Click here to read discussion on Question No. 2.

Click here to read discussion on Question No. 3.

Click here to see the proposed gas line contract and other associated documentation.

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