A new study at the University of Houston suggests Arctic gas will come to market through a pipeline "corridor" down the Mackenzie Valley. This outcome is less a function of political, financial or price scenarios than it is a historical and modern imperative of market forces.

The Alaska Legislature and US Congressman Don Young (R-Alaska) have taken deliberate steps to block an "over-the-top" pipeline, though many feel it is the leading option to bring Arctic gas to the US market. An over-the-top pipeline would transport North Slope gas through the Beaufort Sea to the Mackenzie River Delta and south to market through Canada. In mid-January, Alaska State Senator John Torgerson said he was working on a second piece of legislation to "put the final nail in the coffin" of the proposed route.
Political roadblocks notwithstanding, Arctic producers and pipeline consortiums are proceeding with their plans for a Mackenzie pipeline and over-the-top options. Language in the Senate version of the pending energy legislation is deliberately route-neutral.
A University of Houston study shows the position of the Alaska political leadership to be untenable, out of step with the needs of the United States and Canada, and not even in the best interest of Alaskans. Several imperatives of Arctic gas development are established.
America needs the gas
Demand for gas in the United States will grow 40% to 50% from its current level of 22 Tcf/year during the next decade. The National Petroleum Council estimates US gas consumption will reach 31 Tcf by 2015, while other widely respected industry estimates peg consumption at 33 Tcf by as early as 2010. The ongoing shift to gas as the primary fuel of the US economy is a robust secular (and irreversible) trend, motivated not only by real or imagined environmental concerns but also by compelling efficiencies and technological evolutions.
Within 10 years, half of the US domestic supply of gas will come from sources that are yet to be developed. Major and laudable new efforts are under way in gas production from ultradeepwater areas in the Gulf of Mexico, unconventional resources and gas hydrates. Early steps are visible and should be supported to develop domestic import facilities for liquefied natural gas (LNG) and compressed natural gas, matched by a diverse geopolitical and geographic global supply base.
Yet Arctic gas remains the most identifiable new source of domestic supply. The North Slope of Alaska holds an estimated 36 Tcf of gas and fields in the Mackenzie Valley another 9 Tcf. These commonly reported reserve numbers are expected to grow by several multiples as the market develops and the resource moves from waste product to premium fuel status.
The Arctic gas resource will potentially supply 12 Bcf/d (4.4 Tcf/year) to the US market, far more than the 4 Bcf/d to 6 Bcf/d of gas contemplated by the current set of proposals.
A recent detailed US supply and demand analysis suggests the $3/Mcf gas price floor needed to justify the huge investment, ultimately US $30 billion to $40 billion during 20 years, will emerge in the next 24 months.
The pipeline corridor
Notwithstanding the much-debated standard financial variables, risk and uncertainty are the greatest roadblocks to Arctic pipeline development. Arctic producers are likely to be less concerned with achieving a 12%, 15% or 18% return on investment than they are with not losing $10 billion if, for example, a major project encounters delays after the start of construction. The material way to reduce costs, risks and uncertainty is through staged construction. Regulatory incentives are of second-order importance. Regulatory mandates are a nonstart, as evidenced by the 20-year impasse on Arctic pipeline development.
The University of Houston study concludes the Mackenzie Valley will develop as a pipeline corridor under almost any political, financial or price scenario (Figure 1). This is the historical and modern imperative of market forces, and modeling corroborates it. The Trans-Canada pipeline, with a capacity of 7.6 Bcf/d of gas, for example, is a series of five pipelines ranging from 34 in. to 42 in. in diameter. The extensive pipeline corridor on the Texas Gulf Coast provides another compelling example.
An initial 30-in. or 36-in. pipeline segment built down the Mackenzie Valley will develop infrastructure, environmental protocol and market connections that will, in turn, reduce cost and uncertainty of future expansions.
The forecast impact on Canadian employment will be huge: peak construction employment of 23,161 man-years in 2013 and 39,694 permanent new jobs by 2020.
Alaska impact
Development of the Mackenzie Valley corridor clearly portends access to Alaska North Slope reserves over the top. As one of the study's authors is a native Alaskan, they attempted to quantify issues important to the state, from in-state gas supply to jobs to Permanent Fund income to the environment.
The study offers several observations. First, any pipeline route from the North Slope will be 60% or more in Canada, so routing decisions based on Alaska construction jobs must be heavily discounted. This also means Canada will have a dominant say in routing decisions.
Second, the study's authors believe Alaskans should support the lowest-cost, highest-netback pipeline solution, as this generates the greatest corporate revenues and state income. This translates to permanent jobs and long-term economic growth rather than spasmodic construction jobs, which often are relinquished to out-of-state labor and create various social problems. Parochial and noncompetitive Alaska pipeline projects have been promulgated in the name of construction jobs for decades, with no result.
Third, for the nearest-term stable jobs and in-state gas supply, Alaskans should increase focus on Kenai development. This is an overlooked bright spot for the state. For sure, the hand-wringing in Kenai and Anchorage over forecast constraints in gas supply are overblown. Seven or 8 years of excess supply is short, for example, in a Soviet-style planning cycle, but it is closer to eternity in a market-driven environment. Taken another way, the reserves-to-production ratio in Cook Inlet is 14, much higher than the national average of 9. The lack of exploration activity in Cook Inlet does not suggest a lack of resource but rather a lack of market incentive, the local value of gas having been $1/Mcf to $1.50/Mcf during the past decade. A single contract to supply gas for $2.75/Mcf provided a positive price signal in 2000, and already four companies have established exploration activities in Cook Inlet.
Remaining reserves in the Cook Inlet Basin stand at 2.56 Tcf. The study's authors anticipate 20 Tcf or more of new reserves to be announced in Cook Inlet during the next 24 to 36 months. This observation can be made either from specific knowledge of the prospects or broadly by historic precedent. Gas reserves in Trinidad, for example, jumped from 9 Tcf in the mid-1990s to 25 Tcf in 2000 once the gas was demonstrated to have commercial value as LNG feedstock.
New Cook Inlet reserves will support local residential and commercial demand; gas and power needs in Fairbanks; extended and expanded LNG exports to Asia; and the supply of gas, gas-to-liquids and other product exports to the US West Coast.
All of this is great news for Alaska. The University of Houston model suggests the Kenai development can generate more than 10,000 new Alaska jobs by the middle of the decade. An over-the-top pipeline would add to this 10,412 construction jobs at the peak of construction in 2008. More important, a vibrant gas industry would add 35,386 permanent new jobs by 2020, and more than 60,000 by 2030 (Figure 2). The Permanent Fund balance would grow by an incremental $5 billion in the same period because of gas activities.
Finally, Alaskans should make false environmental claims to impede development of the over-the-top route, a tactic that may be employed out of political pragmatism or commercial self-interest. Unwittingly, this may lead to an Alaska National Wildlife Reserve-size delay in the only viable market solution for North Slope gas.
The University of Houston study concluded US energy legislation should remain route-neutral, while streamlining the permitting process and setting deadlines for action on environmental and other review by the Federal Energy Regulatory Commission and relevant agencies. Any Congressional action to incentivize construction of an Arctic gas pipeline should be consistent with the imperatives of a market-based development. Construction of the stand-alone Mackenzie pipeline will provide the tangible first step. Thereafter, support of the state of Alaska will be needed in order for the corridor to develop fully and in a timely fashion.
References
US House Resolution 4 of the 107th Congress: "Securing America's Future Energy Act of 2001," p. 191.
Cockerham, S.: "Firm asks Canada for gas line OK," Fairbanks Daily News-Miner, Jan. 17, 2002.
US Senate Resolution of the 107th Congress: "Energy Policy Act of 2002," p. 276.
Natural Gas - Meeting the Challenges of the Nation's Growing Natural Gas Demand, Vol. 1-3, Washington, D.C., National Petroleum Council, 1999.
Economides, M. and Oligney, R.: The Color Of Oil - The History, the Money and the Politics of the World's Biggest Business, Round Oak Publishing, 2000.
Economides, M.J., Oligney, R.E., Demarchos, A.S. and Lewis, P.E.: "Natural Gas: Beyond All Expectations," Paper SPE 71512, 2001.
A Review of Cook Inlet Natural Gas Supply and Demand, Anchorage Economic Development Corp., March 2001.
"Estimated 12 Tcf of Recoverable Natural Gas Reserves Located based on Exploration Results in Cook Inlet Basin, Alaska," Escopeta Oil and Gas and BBI Inc. press release, Sept. 26, 2001.
"Caribbean Fact Sheet," Energy Information Administration, May 2001, www.eia.doe.gov/emeu/cabs/carib2.html.

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