AGIA, Denali, Exxon, Shale Gas, and all that

The announcement this week that the ConocoPhillips / BP Denali project is over (link) has the pundits punditizing. The alternative plans are rampant: terminate AGIA, built a LNG plant in Valdez, build a small line to _______fill in the blank, make petrochemicals, make methanol, make ethanol and so on.

Concerning AGIA. It's all about unintended consequences and timing. Amanda Coyne of the Alaska Dispatch assembled a good timeline of recent efforts to build an Alaska Gas Pipeline (LINK). Let's add price data to the pivotal points in the timeline:

March 2007, Sarah Palin rolls out AGIA, well head gas price = $6.65/mmbtu.

January '08 AGIA has five bidders, gas at $7.38/mmbtu

April '08 ConocoPhillips & BP form Denali, gas at $8.87/mmbtu

June '09 ExxonMobil joins the TransCanada AGIA licensed project, gas price $3.38/mmbtu

December '09 Exxon announces acquisition of shale gas producer XTO, gas price $4.66/mmbtu.

What this data shows is that AGIA imposed a delay of about 4 years at the precise time that gas prices and support for a pipeline surged. It also shows that Exxon joined the TransCanada project near the lowest point in the gas price cycle. It also shows that Exxon made it's big move in natural gas about the same time and also at low gas prices - Exxon clearly picked a shale gas winner (XTO) and bought in at a cyclic low, and built a foundation for a future Alaska gas pipeline. In May '09 Exxon was drilling in the gas-rich Point Thomson field, gas price $3.23/mmbtu.

I'm going to go with the premise that Exxon got it right and that the State of Alaska got it wrong. Got it wrong in several ways, but mainly via AGIA and oil and gas taxes.

So what's next? Denali's collapse shows that a couple of well financed oil and gas firms can't fund an Alaska gas pipeline any time soon. At least they can't get it done without Exxon. AGIA may get chased out of town by villagers with pitch forks sometime soon, but I think we can judge Exxon's intentions by their actions, specifically why are they drilling at Point Thomson unless they believe in a pipeline? I don't like the 2020 date proposed for Alaska Gas flowing, but that's probably what we can expect. We're probably 3 years and 150 hopeful blog posting away from kicking off the project.

Exxon and other producers, and maybe TransCanada will move forward because natural gas will become a bigger part of the power generation mix, and because the lower 48 will begin to export LNG (LINK: Cheniere Unit Wins US Approval To Export LNG From Louisiana). The potential Cheniere export volume (2.2 BCFD) equals roughly half of the proposed Alaska gas pipeline volume (4.5 BCFD). Moves like this will be the game changer, this time back in the favor of Alaska.

Keep in mind any optional use of natural gas is less expensive to execute in the lower 48. LNG export plants, petrochem plants, gas to liquids (GTL) plants, methanol, plastics you name it - I can build it cheaper on the Gulf Coast and feed it with cheap shale gas from Texas and Louisiana.

LNG export and the Fukushima effect will sponge up $4/mmbtu shale gas and prices will move back to $6/mmbtu by the end of this decade. $100/bbl oil will drive heavy oil production in Canada and that will drive gas demand.

BP, ConocoPhillips OUT

The Denali Pipeline is discontinued for lack of customer interest. We can't says this is a real shocker. From day one we realized that two mainline projects was one too many.

Denali News release (LINK). Quote"

Denali – The Alaska Gas Pipeline announced today that its open season efforts have not resulted in the customer commitments necessary to continue work on its Alaska North Slope gas pipeline project, which has an overall estimated capital cost of $35 billion (2009 dollars). Denali will withdraw its Federal Energy Regulatory Commission pre-file application and, over the next few months, close out its operations.

“Denali is ending its efforts because of a lack of customer support,” said Bud Fackrell, Denali President.“Denali is a market-driven company. As such, we cannot spend the billions of dollars necessary to advancethe project unless we have binding agreements with shippers. Although we have been in discussions with potential shippers for nearly a year and half, we have been unable to secure the financial commitmentsnecessary to advance the project.”

Bloomberg article (LINK) Quote:

Larry Persily, the U.S. government’s federal coordinator for Alaska gas transportation projects, said in a statement that he hopes BP and ConocoPhillips can someday work with Exxon and TransCanada on a pipeline project.

“There could be a place in the market for North Slope gas in the 2020s and beyond, and the gas line is too important to Alaska’s economy not to keep trying,” Persily said.

The real question now is whether or not ConocoPhillips and BP will become customers of the last project standing - the Alaska Pipeline Project.

The Globe and Mail sees a possible win for the Mackenzie pipeline if the APP also stumbles (LINK).

The latest

The latest news coming out on the Alaska Gas Pipeline is not good. Former Governor Frank Murkowski says AGIA is dead. The worst news I've heard is the Denali Pipeline is reducing staff down to a skeleton crew.

The pundits and politicians carry on about bullet lines, in-state lines for an LNG terminal, and even building a petrochemical industry in Fairbanks. The value of these proposals range from "Almost feasible" to "Complete rubbish". The report on the in-state gas line shows that the idea lacks economies of scale. The idea of an LNG terminal at Valdez falls into the "almost feasible" category, but continues to fail to gain traction in the marketplace.

The bright side: Development and expansion of production of tar sands continues. Communities in the lower 48 complain and protest new tar sand pipelines, but the economics are good for squeezing oil out of sand in Canada. The process requires lots of energy - energy that could come from inexpensive Alaskan natural gas.

The other bright note: Lower 48 natural gas is so cheap that LNG import terminals are being modified to export LNG (example: Cheniere Energy Sabine Pass). Moves like this signal a bottom in gas prices - I hope more Gulf Coast LNG plants can sponge up shale gas for export.

Bottom Line: I'm still in the "wait and see mode" but the project is drifting into oblivion. I'm beginning to think that external events will determine the fate of the project.

Denali Timeline

The latest FERC filing by Denali includes this time line for the current and near term open season activities: This fragnet ends with filing confidential precedent agreements with FERC on 23 March 2011.

There's a few wiggle words about "highly conditioned bids" and resolving "conditions within its control" but overall progress continues.

BP-Apache Deal: Prudhoe Bay Was Too Complex

From the Wall Street Journal Blog: (LINK).

The BP- Apache deal is a no-go. Alaska Gas Pipeline effect: Assuming the TransCanada / ExxonMobil project and the Denali project merge BP will still be a player. A cash strapped, weakend player but in the game all the same.

The upside: BP's current unfortunate situation may help all the producers over the conceptual hump to merge the projects sooner rather than later.

Denali Open Season Starts Tuesday 6 July 2010

See the detailed FERC filing (LINK)

The link contains one letter and three volumes of open season information. The In-State Demand Study is in Volume II- Good reading if your #1 issue is In-State industrial development and the $8 Billion Bullet Line.

Volume III has technical stuff, and the cost estimate ($35.5 Billion)

Some quick ratios to think about: $35.5 Billion moves 4.5 BCFD ($7.9 per cfd capacity) vs. $8 Billion for up to 0.5 BCFD for a bullet line ($16 per cfd capacity). The economies of scale work for the big line and against the Bullet Line.

Good Luck Denali ! Let's start building this damn thing!

Note: the competing TransCanada / ExxonMobil Alaska Pipeline Project open season is in progress and end 30 July 2010. Good luck to you guys too - I looking forward to the Kumbaya moment when all the producers join together.