Natural Gas Markets: Good News for Some Can be Bad for Others

Natural gas has been gaining global market share from oil for several years, but gas markets remain fragmented and a true global market for natural gas has yet to emerge. The North American shale gas revolution significantly altered gas supply, demand and pricing dynamics in many regions and dramatically changed the situation in Alaska.

“Alaska wants to ride the coat tails of Asian demand,” Larry Persily the Federal Coordinator for Alaska Natural Gas Transportation Projects recently told the audience at the USAEE/IAEE North American Conference held this week in Anchorage, Alaska.

“I’m here to explain why Alaska cares about global gas markets,” he said.

The state has struggled to find a way to monetize its significant natural gas resources for decades, oscillating between various pipeline schemes that could supply gas to the lower 48 states. The proliferation of shale gas development throughout the continental US effectively put a dagger in any such plan because Alaska’s gas is no longer required on the continent, where companies are looking to export excess supply.

Mismatched supply and demand within the vast Arctic state complicates and challenges potential gas development plans. “There’s lots of gas on the North Slope, but that’s 800 miles from here [Anchorage],” said Persily. And there are mountains, river crossings, variable permafrost, military bases and other obstacles that make pipeline construction technically complex and expensive.

“We are a small market, North Dakota flares more gas than we consume,” he said. Anchorage’s population less than 300,000. The city’s gas is supplied from a declining field in nearby Cook Inlet, and while the local utility holds an equity stake in the field – ensuring affordable supply for many years – new supply will need to be sourced by decade end.

“Utilities are worried they may need to import LNG, which would be politically embarrassing,” said Persily. No politician wants to be on the dock for photo ops when a ship carrying Russian or Indonesian gas comes in to supply the city, he said.

Despite relatively low domestic demand, Alaskan communities need gas. Centrally-located Fairbanks residents burn coal, wood and diesel fuel to heat their homes, which creates significant particulate air emissions problems and is very expensive, Persily explained. It can reach 40 to 50 degrees below zero for days at a time during winter and seasonal home heating costs can reach $5,000. A Fairbanks resident and conference participant told Breaking Energy the cost can be as high as $7,000.

The Fairbanks legislature put money aside for a micro LNG project that would liquefy northern gas resources and truck modest volumes down to the central market. The project would be expensive, but the gas would probably be cheaper than $4 per gallon diesel fuel, Persily said.

BP, ConocoPhillips and ExxonMobil are considering a large-scale 15 to 18 million ton per annum LNG project targeting Asian markets that would cost $45 to $65 billion. In addition to the price tag, numerous other challenges stand in the way. “Alaska’s fiscal regime is designed for oil, not marginal gas,” he said.

For more detailed treatment of this project and its obstacles, read Breaking Energy’s recent coverage from an interview with Larry Persily here.