Looking forward – is there room for Alaska gas?

By: Larry Persily, Federal Coordinator

A good thing about shale gas — from Alaska’s hopeful perspective — is that all that new supply could reduce price volatility, making natural gas more attractive to electrical utilities and other large-volume customers that in the past have worried about price spikes.

More long-term customers for more gas could, under the right conditions, improve the chances for an Alaska natural gas pipeline. Though, certainly, gas prices would have to be high enough to cover the cost of getting Alaska gas to market — at a profit.

Despite its good reputation as a clean-burning fuel, natural gas has a bad reputation of not being "price reliable." Stability has been a common refrain among speakers and reports in recent weeks.

Price spikes "are of particular concern to electric power generators and other large end-users," according to IHS Cambridge Energy Research Associates’ recent report, "Fueling North America’s Energy Future."

Natural gas prices have ranged between $2 per million Btus in 2002 to more than $14 in the summer of 2008, with several painful ups and downs along the way. Prices today are at the lower end — around $4.40 as of May 17, with $5 to $5.50 prices going out almost two years on the futures market.

"Still, price volatility remains the Achilles’ heel of natural gas, particularly when compared to coal," said a briefing paper prepared by the Worldwatch Institute, a Washington, D.C.-based think tank focused on climate change, resources, population growth and nutrition. The paper, "The Role of Natural Gas in a Low-Carbon Energy Economy," promotes the possibility that abundant, domestic shale gas reserves could help gas capture a growing market share for power generation, industrial uses, even transportation.

Natural gas looks much more attractive as a stable fuel source than it did in the late 1970s, the paper said. "Most experts believed that natural gas had entered a period of inevitable decline. Policymakers were so worried that, for a time, Congress made it illegal to build gas power plants in the United States."

A Cambridge Energy director offered the same history lesson at a May 13 forum organized by the Canada Institute of the Woodrow Wilson International Center for Scholars in Washington. "Remember it was once illegal in the United States to use natural gas to generate electricity or run boilers," said Mary Lashley Barcella, who follows North America natural gas markets for CERA.

The market has changed dramatically since the 1970s, especially in the past couple of years with the strong growth in U.S. shale gas production. "Nobody drills a dry hole in a shale play," Barcella said. "If they did, they’re not very good."

Shale gas production is estimated to average as much as 10 billion cubic feet a day this year (17% of domestic gas production), an increase from 1 bcf a day in 2000. All that shale gas most likely will chase after future demand from power plants, the only growth area for gas consumption, Barcella said.

In addition, the gas industry is looking to grab market share from coal, especially older plants due for retirement. Replacing 80 of the least-efficient, smaller, older coal-fired power plants (7.5% of existing U.S. capacity) with gas-fired plants would consume 3 billion cubic feet of gas per day, said Adam Sieminski, chief energy economist for Deutsche Bank, a panelist at the Canada Institute forum.

Regardless of the environmental benefits of lower emissions, gas has to win over buyers that prefer the price stability of coal. Customers look for "shock absorbers" that allow the fuel market to respond to an increase in demand or a loss of supply, CERA said in its report. "The advent of shale gas brings on a major new shock absorber — an abundant new supply source that can respond relatively quickly to changes in demand."

The Alaska project needs to hope that gas buyers feel comfortable enough to significantly ramp up their long-term demand, giving Alaska gas a shot at a share of a growing market.

Confidence in stable, long-term buyers is as important to producers and pipeline companies making investment decisions as long-term price stability is important to utilities considering new gas-fired power plants, said speakers at the Canada Institute forum, Unconventional Gas and the North American Energy Market. One speaker called it, "security of demand."

How much shale gas enters the market will, in part, determine when, or if, an Alaska gas line gets built. The U.S. Energy Information Administration’s annual energy outlook, released May 11, shows Alaska gas coming to the Lower 48 by 2023 in its reference-case scenario, though that could be delayed to 2027 or 2030 depending on the pace of shale development and market demand. Regardless of potential delays, the agency continues to see Alaska gas as part of the nation’s energy future.

Shale production also has created its own need for more pipelines to move the new supplies to market. In addition, new and expanded pipes have been built — and more capacity is planned — to bring Rockies gas to markets east and west, helping to relieve the constraints that held down prices for Rockies producers while also relieving supply constraints that boosted prices in the East.

Billions of dollars of new and expanded gas pipelines in the past few years have changed the market, hopefully easing regional worries of supply shortages and price spikes. "The United States is closer than ever before to being a single natural gas market, with congestion limited to a few markets for a few periods during the year," the Federal Energy Regulatory Commission said in its annual State of the Market Report last month.

Donald Santa Jr., president of the Interstate Natural Gas Association of America, made the same point in his presentation May 13 at the Canada Institute forum, though he added even more pipe will be needed to move new discoveries to buyers in the years ahead.

Shale, meanwhile, is not free from trouble, Santa said. It will face problems in the years ahead, particularly the availability of sufficient water supplies for hydraulic fracturing to break open the rock. Acceptable and cost-efficient disposal of that produced water also will be an issue in some areas, he said.

Water availability could impose a limit on shale production, CERA’s Barcella said. The view is shared by Worldwatch Institute: "The sheer volume of water consumed during hydraulic fracturing could make unconventional gas production costly and unsustainable in many areas of the world that are water-constrained."