Arctic Marathon

Arctic pipeline schemes are as bold as the aurora borealis that dances across the northern sky. But there is a difference. The northern lights are pure inspiration. Arctic pipelines alternately tempt and then torment those they once beguiled

By Sydney Sharpe

February 01, 2009

The outlook for gas supply sources remains far from settled and wide open to change as the industry evolves. The chief energy analyst for ARC Financial, bestselling author Peter Tertzakian, notes there are also “high-cost producers who don’t have good land.”

Compounding uncertainty created by new developments on the energy market’s supply side, demand for natural gas in North America isn’t growing and, in fact, is flat. Unless gas consumption rises convincingly, Arctic pipelines risk becoming pipe dreams. “The Alaska Pipeline is supposed to give us four billion cubic feet a day. We can likely get that much from shale gas,” says Tertzakian.

His view is conservative by the standards of rising expectations among supporters of unconventional production. Within three years, U.S. shale gas production is forecast to reach 14.5 billion cubic feet per day, up from a current estimate of 6.6 billion. And the current total, developed mostly since Canada’s northern regulatory marathon began, is already five times higher than the proposed initial capacity of the Mackenzie pipeline and 50 per cent greater than planned deliveries by the Alaska project.

Whether it takes a year or two for the economic situation to normalize, shale gas isn’t going away. Horizontal drilling and high pressure fracturing can free gas from the shale and the technology is only going to improve.

“It’s hard to see how the companies are going to finance the Arctic pipelines and how they can make [northern gas] cost-competitive,” says Tertzakian. The aging northern development dream will come true “only if there’s a long-term vision for the future and a parallel commitment to see other uses of natural gas in the overall energy mix, whether in transportation or power generation.”

there is a modicum of momentum with TransCanada’s open season but the uncertainties for Arctic pipelines still prevail. FirstEnergy Capital Corp. analyst Steven Paget wonders how these multibillion-dollar Arctic megaprojects will stack up against older conventional pipelines – the ones that shale gas will fill.

“Short old pipe beats long new pipes,” Paget states. “There are different projects to move gas from point to point in southern Canada and the U.S. lower 48. They are usually around $2 billion, and $5 billion gets you a big pipeline from the Rockies to Chicago markets.”

Paget points out that pipeline construction in the established production and market areas of the U.S. and Canada costs little more than half the Arctic projects’ forecast price tags. New field development and gathering systems are also required, making entire northern ventures hugely expensive. What’s currently in play is industry determination to develop new resources that breathe life into established gas-producing areas formerly thought to be on their last legs. “It’s not a change to develop more of what’s already being developed,” Paget notes. Arctic gas is also a brand new template, but it could take yet another generation to materialize.

“It’s hard to tell,” adds Paget. “There certainly seems to be a lot of gas closer to existing pipelines and populations.”

That’s key. What’s really needed to bring on Arctic projects at last, many believe, is a sea change in the way energy is used. With environmental challenges and greenhouse gas concerns, natural gas could – and should – replace polluting coal-fired generation. As a clean burning fuel, natural gas could go a long way toward reducing greenhouse gas emissions.

“If there is widespread acknowledgement that we have lots of gas in lots of places, that it’s not hard to get to market and it’s seen as a long-term supply, there may well be a change in thinking,” says Paget.

There is a precedent for expensive resources to enter the market on a large scale. The oil sands were once seen as a niche play to replace Canadian production and meet market demand. Now Canadian oil could conceivably expand from its common market and drive out Venezuelan production.

Shale gas could well be in the same position as the oil sands were in 1999. The B.C. government is offering royalty incentives for unconventional natural gas plays like shale. That certainly didn’t hurt Kitimat LNG, which abruptly turned an initial proposal to import liquefied natural gas from overseas to one that exports B.C. production. The revised scheme points to “growing markets in Asia and increased supply of natural gas in B.C.” Rather than importing, Canada could be on its way to exporting gas and LNGs.

As for multibillion-dollar pipelines that dare to carve across the North, they still risk becoming phantoms in the dark.

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