Gas supply glut curbs pipeline spending
Gas prices hit decade low, curtail projects
The dampening of support for two proposed northern frontier natural gas pipelines to Alberta by their backers indicates an economic awakening that’s been at least three years in the making.
Energy firms that have long planned for two separate multibillion-dollar pipeline projects to connect stranded northern gas supplies with North American economic centres are now stepping back, acknowledging a meteoric rise in natural gas production, thanks to shale and tight gas plays across the continent that are pricing their projects out of the marketplace.
A curtailment of funding for the Mackenzie Valley pipeline project in the Northwest Territories, confirmed Thursday, follows a similar monumental shift less than a week earlier by backers of the Alaska gas pipeline project, who are now studying an alternative instate line and liquefied natural gas facility to export gas to more lucrative markets across the Pacific.
A Transcanada Corp. spokesman confirmed it has asked the Alaska government, which is providing some funding, to let the project proponent suspend planning for a line to Alberta so it can focus on an instate line.
Pipeline supporters are sending signals about the economic viability of the projects, but have yet to officially take them off the table.
“These big projects are facing the reality that there’s enough economic gas in Canada and the U.S. to obviate the need for the more expensive large pipeline projects,” said Michael Zenker, managing director of commodities research at Barclays Capital in New York.
A resurgence in North American gas output was behind the mass cancellation and idling of continental liquefied natural gas import plants starting in 2009, an early sign the energy landscape was being redrawn.
The U.S. Energy Information Administration noted in its most recent short-term energy outlook that U.S. marketed gas production grew in 2011 by an estimated 4.8 billion cubic feet per day — or 7.9 per cent — the largest year-over-year increase in history, driven largely by shale gas production.
In 2012, burgeoning gas production has pushed prices to their lowest in a decade, as technological advances are increasingly bringing down extraction costs for producers. Analysts say the twin challenges mean northern pipeline transportation costs would exceed what buyers will pay for gas, for years to come.
Imperial Oil Ltd. and partners Conocophillips Canada, Shell Canada, the Aboriginal Pipeline Group and Imperial parent ExxonMobil Corp. are slashing an undisclosed amount of funding for the Mackenzie Valley line and closing several project offices. Partners cited weak natural gas pricing and an inability to thus far strike a funding deal with the federal government.
The budget cuts were first acknowledged by ConocoPhillips, which said it would write down $525 million US tied to the project, and speak to a similar waning of support for an Alaska-to-alberta gas line proposed by Transcanada and Exxonmobil, a major state producer.
BP PLC and Conocophillips, also large producers in Alaska, dropped plans for the rival Denali pipeline in Alaska last May after failing to gain commercial support.
Conocophillips spokesman Tim Bryant said market challenges are similar for the two lines.
“They are faced with that (Alaska) pipeline bringing gas down through Alberta into the North American market, and prices are depressed,” Bryant said.
The 2,700-kilometre Alaska pipeline to Alberta, at least $32 billion to build, would link about 35 trillion cubic feet of discovered and known gas in the Alaska North Slope with Transcanada’s gas system, carrying 5.9 bcf/d.
The 1,196-kilometre Mackenzie Valley line — at $16.2 billion to build — would connect some 5.8 tcf of discovered gas from three Mackenzie Delta fields with continental markets, carrying 1.2 bcf/d.
“In today’s environment and for the foreseeable future, I don’t see either one of them making any sense at all,” said Peter Howard, president of the Canadian Energy Research Institute think-tank.
Howard’s organization a few years ago determined gas prices would have to reach nearly $7.00 US per million British thermal units on the New York Mercantile Exchange to make the Alaska pipeline economic. On Thursday, gas futures closed at $2.09 US per MMBTU.
Energy consultancy IHS CERA assumes no natural gas from the continent’s northern frontier will flow south, said Mary Lashley Bartella, a director of North American natural gas. The consultancy found there’s likely 1,850 tcf of recoverable gas in 17 shale and tight sandstone gas plays in Canada and the United States, outside of conventional gas, most of the proved reserves in North America and other emerging plays.
“Nine hundred tcf — half of it — could be produced at a price of $4.00 (per MMBTU) or less. That’s more than a 30year supply,” Bartella said. “You’re looking at a real serious competitive challenge to higher cost resources.”