Northern Gas No Longer A Choice, Reports New Ziff Energy Study

Special to Pipeline & Gas Journal

Northern gas is no longer a choice for North America as natural gas demand continues to grow, pressure for more continental energy supply mounts, and billions are planned to be spent to import liquefied natural gas (LNG).

The Mackenzie Gas Project still needs to resolve several critical regulatory issues. Progress on the Alaska Gas Project has been slower than expected. An agreement between the state of Alaska and the three Alaska producers (ExxonMobil, BP, ConocoPhillips) on fiscal certainty for the project was expected in the second quarter 2005; however, there has been no announcement to date. The future of northern gas and its impact on consumers, gas supply, pricing and pipelines is the single biggest unknown in the U.S. and North American energy picture for the next decade.

To provide an independent assessment, Ziff Energy Group has completed a 140-page, eight-chapter report that analyzes the impacts of northern gas (Alaska and Mackenzie Delta) on existing gas supply, markets, infrastructure, pricing, LNG growth, and western Canada’s natural gas liquids to 2020. The delayed connection of northern gas to the North American pipeline grid and a less robust outlook for western Canada supply, and indeed U.S. conventional gas supply, precipitated Ziff Energy to review the impacts of northern gas, according to CEO Paul Ziff.

“Ziff Energy presents a supply outlook using assumptions that in our opinion are most likely to occur,” he said, pointing out that some of the major issues include:

* Sequencing and timing of northern gas – the study outlines that 1 Bcf/d of Mackenzie Delta gas is anticipated by November 2010, and that Alaska is staged with 2.2 Bcf/d starting in November 2014, an additional 1.1 Bcf/d in November 2016, and a further 1.1 Bcf/d in November 2017.

* Pipeline toll estimates from the North to Alberta – Ziff Energy calculates that due to its size, the Alaska toll should be lower than the Mackenzie Delta toll to Alberta, despite a cost of at least three times.

* Northern gas supply allocation through western Canada pipelines – with the slow decline (1%) in western Canada gas production, coupled with stronger gas demand growth (2%) in western Canada, gas supply availability for downstream markets shrinks and is allocated before and after northern gas arrives. The Ziff Energy study concludes that a new grassroots downstream gas pipeline southeast of Alberta is not required for northern gas.

* Impact on downstream pipeline tolls in 2010, 2015, and 2020 illustrate the benefits to existing western Canada gas shippers and buyers of added throughput without capital additions.

* Western Canada gas storage may become challenged by 2017 when the Alaska Project reaches full throughput, generating storage development opportunities.

* Gas demand will continue to grow for the two dozen Alberta oil sands projects.

* Annual impact of northern gas on gas prices to 2020 at key gas trading hubs (AECO, Dawn, Chicago, New York and Henry Hub) shows northern gas moderates continental gas prices after 2011 for consumers.

* Western Canada Natural Gas Liquids (NGLs) amounting to over 600,000 Bpd will decline and would be supplemented by northern gas NGLs, especially from Alaska.

The study also offers an assessment of northern gas on North American netbacks (producer economic value after expenses) to the Inuvik, Mackenzie Delta plant, and to Prudhoe Bay in Alaska. The study also delves into gas demand growth and the considerable related LNG growth. The authors note that while diversifying sources of energy, the U.S. is becoming even more dependent on foreign energy, thereby making the Alaska project extremely important as a major source of new domestic gas.

Ziff Energy’s analysis also indicates that without northern gas:

* The total incremental amount paid by North American consumers over the 2011 to 2020 period is USS190 billion if these frontier reserves are not connected to the North American pipeline grid.

* The additional cost in pipeline tolls to western Canada shippers would increase US$9 billion over the 2015-2020 time period.

The cost of the northern gas projects is estimated to be over US$20 billion and its impact will affect the entire North American gas industry.

Ziff Energy has also released a related study entitled “Impact Of Industrial Gas Demand Erosion On Power Demand,” which analyzes natural gas requirements for the North American power sector to 2012. The anlysis shows that future power market growth is customer driven, whereas gas market growth is driven by the growing demand for natural gas for the power sector:

* Power generation demand for gas is a major driver for total growth of gas markets, accounting for 70% of all power market growth by 2012.

* Residential and commercial power consumers’ average use has grown (1%/year) since 1991, whereas gas market residential and commercial average use per customer has been flat to declining.

* High gas prices will reduce industrial demand in both the power and gas markets, though to a lesser extent in the power markets.

Cameron Gingrich, Lead Analyst at Ziff Energy confirms, “Seventy percent of power generated in 2004 utilized generation sources which have lower marginal costs than natural gas. This allows industrial users of power to access a commodity price which is diversified and on average lower.”

The conclusions note that:

* Industrial gas consumption represents a third of total gas, whereas industrial power consumption is just over a quarter of total power market.

* Inelastic core market share is 36% for gas and 63% for power.

For information contact: Dennis Elias, Manager, Gas Consulting at (403) 234-4275 dennis.elias@ziffenergy.com or Bill Gwozd, P.Eng. Vice President, Gas Services at (403) 234-4299 bill.gwozd@ziffenergy.com.

Copyright Oildom Publishing Company of Texas, Inc. Aug 2005