It’s official. This summer is “open season” for the Alaska Highway natural gas pipeline, when pipeline builders go to market and seek enough firm commitments from gas producers to build a pipeline.
There are two proposals on the table: one from Transcanada and its partner ExxonMobil, and the other from a consortium named Denali backed by ConocoPhillips and BP Chevron, the other big producer in Alaska, is still in play. With Denali’s open season announcement last week, both consortia will be hitting the road this summer to sign up customers.
There won’t be two $35 billion pipelines, so the outcome of the open season is being played for high stakes.
It will also be a revealing process for the public, as we see which gas producers make legally binding commitments to which pipeline proposal. Or if they refuse to commit to backing either project, or make their support conditional on things like further tax sweeteners from governments.
Tens of billions of dollars are at stake and the five giant companies involved, plus the State of Alaska, have some big dollar questions to figure out.
The first question is whether the four big oil companies that would produce the Alaskan gas believe in the long-term economics of shipping North Slope gas to the Lower 48. If they think the pipeline’s costs are too high, or that shale gas will keep market prices low, they won’t sign on.
Or they’ll sign but with conditions, perhaps looking for tax and other favours from governments along the route.
This will be a revealing moment, clarifying the debate about Alaska pipeline economics that has been dragging on for more than 30 years.
There are wildly different opinions out there, but the mood overall has become gloomier as shale gas production in the South grows. “I used to think the pipeline was ‘when not if,’” a Whitehorse analyst told Yukonomist recently, “but now it’s back to ‘if.’”
And if the economics of shipping Alaskan gas to market are attractive, the next question that the open season will illuminate is whether the Yukon will be in the picture.
When former Alaskan governor Sarah Palin passed the Alaska Gasline Inducement Act, which offered hundreds of millions of dollars of subsidies to the selected proponent (Transcanada), a condition was that an all-Alaska option be offered. This would ship gas parallel to the existing oil pipeline to Valdez, where it would be liquified for shipment on LNG tankers to California, Taiwan or wherever. The Yukon leg of the pipeline might never be built in this scenario.
LNG is typically more expensive than a pipeline, but LNG technology and economics have been improving. Canada has a new LNG terminal on the East Coast to receive gas imports from the Caribbean. The facility can import a billion cubic feet of gas per day, roughly a quarter of the planned Alaska Highway pipeline capacity.
In addition, the big oil companies are all too aware of the time-consuming and difficult-to-predict political and permitting environment they face in Northwestern Canada, especially after the five-year fiasco on the Mackenzie pipeline Joint Review Panel and the difficulties Enbridge’s Gateway pipeline has faced. Like the Alaska Highway route, Gateway passes through areas in BC with unresolved land claims.
So big oil will be weighing the extra cost of LNG versus the challenges of building a pipeline through Canada. Furthermore, a Valdez LNG route would give them “market diversity” since they could sell gas to fast-growing markets in Asia if prices were weak in the United States.
The open season will show us what they think of these trade-offs.
Finally, the open season may push us into the endgame of the multi-billion dollar chess match between the five huge corporations involved. Denali alone has invested over $100 million in planning so far, doing its best to show it is a credible alternative to the long-standing Transcanada project. At some point, if a pipeline is viable, it is highly likely that all four producers will coalesce behind a single project. The key points of who owns it and who controls it will probably be determined in some Houston boardroom, and will depend on how well the rival projects do during this summer’s open season.
Throughout the process, Alaskan Governor Sean Parnell, a former lobbyist for ConocoPhillips, will be under pressure to sweeten the economics of the project with fiscal concessions.
So enjoy your summer and remember that, as you sit at the cabin pondering whether to enjoy a Yukon Gold or a Chilkoot, Alaskan oil executives will be faced with some even tougher decisions.
Keith Halliday is a Yukon economist and author of the Aurore of the
Yukon series of historical
children’s adventure novels.