Despite capacity restrictions and limited end-user demand, a natural gas pipeline from the North Slope to Southcentral Alaska is commercially feasible, according to a much anticipated report released July 5 by the Alaska Gasline Development Corp.
“This is a viable alternative for Alaskans to take a look at,” Dan Fauske, AGDC president, told a group of state legislators during a rollout AGDC’s plan. Fauske himself had been skeptical about the economic viability of the line. He told lawmakers that he had been pleasantly surprised by the favorable pipeline economics determined by the pipeline team.
The in-state pipeline concept was previously referred to as the bullet line but AGDC’s new project name, the Alaska Stand Alone Pipeline, or ASAP, is an acronym presumably chosen to reflect the growing sense of urgency to do something about tightening gas supplies from the Cook Inlet basin.
Under the terms of the Alaska Gasline Inducement Act, or AGIA, an internal Alaska gas line cannot undermine the economics of a potential future gas export line from the North Slope by carrying more than 500 million cubic feet of gas per day from northern Alaska. The key to the commercial viability of the line is optimizing its design for that maximum throughput, coupled with strong interest by potential industrial gas shippers to use the full capacity of the line, Fauske and AGDC Commercial Manager Michael Rocereta told Petroleum News.
Fauske told the legislators that local Alaska gas usage in Fairbanks and Southcentral Alaska amounts to 200-240 million cubic feet per day but that AGDC has received expressions of interest from industrial shippers to fill the remainder of the pipeline capacity.
Industrial interest in the project remains confidential, but the production of liquefied natural gas, or LNG, potentially at the rate of 33,000 barrels per day, is the most likely option for gas shipped from the North Slope, Fauske said. The pipeline design also accommodates the shipping of natural gas liquids, or NGLs, from the North Slope. The monetizing of gas through the use of gas-to-liquids technology is another possibility, but seems the least favorable of the industrial options, Fauske said.
Based on an estimated cost of around $7.52 billion, including the pipeline and an associated gas conditioning plant on the North Slope, gas could be delivered to consumers in Southcentral Alaska at a cost of $9.63 per million British thermal units, compared with a current price of $8.85 per million Btus, Fauske said. That estimate for ASAP-delivered gas represents an all-in cost, including the pipeline tariff, assuming utilities would pay North Slope gas producers about $2 per million Btu for the gas, and that the cost of local gas delivery from the transmission line to consumers would be about $2 per million Btu. Using identical assumptions for the price of North Slope gas and the cost of local gas distribution, Fairbanks consumers would have to pay $10.45 per million Btu for gas, compared with a current price of $23.35, he said.
The bulk of project funding would come from bonds issued through the Alaska Railroad Corp.
The ASAP design envisages a gas conditioning plant on the North Slope, primarily to remove carbon dioxide and sulfur from the gas. A 24-inch pipeline would run south from the treatment plant, following the route of the trans-Alaska oil pipeline to a point near Livengood, northwest of Fairbanks. From Livengood the line would go south, joining the Parks Highway corridor near the town of Nenana. The line would then follow the route of the Parks Highway, passing to the east of Denali National Park and eventually terminating at a connection with Enstar Natural Gas Co.’s Beluga gas line near Big Lake, north of Anchorage.
The pipeline route could accommodate interconnections with possible additional future natural gas sources, such as fields that might be developed in the Brooks Range Foothills (see Anadarko story on page 1) or in the Nenana basin, southwest of Fairbanks, the ASAP report says.
A spur line would run east from the main pipeline to Fairbanks from a point on the line a few miles north of Nenana. The somewhat high tariff required for this spur line is because the estimated cost of gas in Fairbanks is higher than the estimated cost in Southcentral Alaska, despite Fairbanks being closer to the North Slope. Rocereta told Petroleum News that the primary driver for the high spur line tariff is the cost of a gas processing facility, required at the pipeline junction to extract utility grade gas from the gas passing down the main line. The cost of that processing facility would need to be spread across the relatively low volumes of utility gas needed in the Fairbanks area.
Fauske said AGDC had investigated the options of using the Parks Highway route or an alternative route following the Richardson Highway via Delta Junction and Glennallen. Both routes share similar environmental issues, but the Richardson Highway route would cost more because it is longer, he said.
“There is nothing on the Richardson Highway that mitigates the fact that it's about $500 million to $600 million more in cost because it's 93 miles further,” he said. “We have analyzed and analyzed this issue but the facts are the facts.”
Fauske cautioned against any further investigation of alternative routes, saying that a change of route would necessitate a complete restart on the project’s federally-mandated environmental impact statement, a restart that would likely delay the project by 18-24 months.
Under the current schedule, a draft EIS is due out in August, with the final EIS anticipated in the first quarter of 2012, a timeframe that Fauske characterized as “an incredible accomplishment.” The proposed pipeline route crosses 427 miles of state land – AGDC has completed the state right of way document, with the commissioner of the Alaska Department of Natural Resources expected to sign the document soon, he said.
"The route selected in this project plan should be adopted as the final route, in that no more study or analysis of route selection be undertaken or supported by AGDC or any other state agency," Fauske said.
Although the legislation that authorized and funded the ASAP project specified a 2015 completion date, that date is not realistic given the time required for activities such as permitting, holding an open season and securing financing, Fauske said. Instead, AGDC envisages a completion date near the end of 2018, with first gas flowing through the line in 2019. Southcentral Alaska utilities have announced that they anticipate importing LNG, starting in 2014, to meet predicted shortfalls in Cook Inlet gas supplies. But a report published recently by the Alaska Department of Natural Resources implies that the 2015 deadline for the delivery of North Slope gas into Southcentral is not necessary, Fauske said. (See article on page 4 of this issue.)
Fauske also cautioned against attempting to achieve an unrealistic schedule for what he characterized as “an industrial megaproject.”
“It's very clear that where projects of this magnitude run into trouble is they start getting goofy with the schedules,” he said. “There are certain things that must occur.”
The cost estimate for the entire pipeline system is based on an assumption that the State of Alaska would own the system. However, AGDC’s plan only envisages the state putting $340 million into the project, to cover the costs of continuing the project to a point where a final go/no-go decision can be made.
“A builder/owner/operator is not going to come up here and spend $100 million of their own money to see if the project’s viable. That's simply not in the cards,” Fauske said.
Project cost estimates currently have uncertainties in the range of plus or minus 30 percent, but that uncertainty should drop to around 10 percent by the time that the system design is completed, he said.
An essential step prior to project sanction would be the holding of an open season to seek commitments from shippers, thus enabling the issue of bonds to finance the bulk of the project.
With state ownership of the pipeline enabling project financing through the issue of Alaska Railroad bonds, an arrangement that would significantly reduce project costs, state legislators must decide as soon as possible whether to recommend legislation authorizing the public ownership model for the project, Fauske said. A lack of action by the Legislature would amount to a de facto approval of private project ownership, an arrangement that would end up costing more, primarily because any company owning the line would have a lower bond rating than the state, he said.
According to AGDC’s plan, the ASAP project will also verify with the Internal Revenue Service that the Alaska Railroad can raise tax exempt bonds for the project, a capability that the Railroad enjoys under federal law but which has not been tested. A fallback position would be some alternative form of state bonding, the report says.
The main project risks are the possibility of a failed open season, construction cost overruns and project delays resulting from regulatory or environmental permitting, Fauske said. One specific permitting risk is the need for a special federal permit from the U.S. Department of Transportation Pipeline and Hazardous Material Safety Administration – this permit could add significant cost and have scheduling implications, he said.
Fauske emphasized that he sees ASAP as complementary to other projects such as the AGIA line, a planned major hydroelectric project on the Susitna River or the production of gas from the Cook Inlet basin: "I believe the state needs all of these things. We're not an impediment.”
However, delivery of North Slope gas to Southcentral Alaska could have a negative impact on the usage of Cook Inlet gas after 2018, Fauske said. But ASAP is a viable pipeline option that people need to consider, he told the legislators at the July 5 meeting.
Lawmakers will now need to review the ASAP report in detail, presumably questioning the assumptions behind the project economics and deciding where they want to go from here on the vexing question of Alaska gas supplies.
