you gotta know when to fold em

BP and ConocoPhillips are the first to fold in the northern gas pipeline game. The two oil giants announced last week that they were shutting down their Denali project to build a gas pipeline from Alaska through the Yukon to Outside markets.

BP and ConocoPhillips are the first to fold in the northern gas pipeline game. The two oil giants announced last week that they were shutting down their Denali project to build a gas pipeline from Alaska through the Yukon to Outside markets.

Denali never had a strong hand. Convincing investors to plough $35 billion into a northern pipeline was never going to be easy, especially when Exxon and TransCanada Pipelines were pursuing a rival project with the backing of the State of Alaska.

But it is the astounding growth in shale gas that really did in Denali. Technological innovation is allowing truly enormous quantities of gas to be extracted from previously uneconomic fields in the Lower 48. According to the US Department of Energy, annual shale gas production went from around 300 billion cubic feet in 2000 to over 4.5 trillion last year. That’s already 12 per cent of US gas consumption, a figure the DOE expects to rise to 45 per cent in 25 years.

Denali’s president Bud Fackrell told KVTA News 11 in Anchorage that shale gas is the “overwhelming issue on this project now.”

It’s not cheap to keep a project like this going. Denali said that it had spent $165 million so far, including a staggering 760,000 person hours of work.

It’s hard to tell what Exxon and TransCanada are really thinking right now. Officially, their project is still proceeding. They recently filed some regulatory reports, but they don’t plan to submit a formal application to the Federal Energy Regulatory Commission until October 2012. This gives them time to watch the shale gas phenomenon develop. Keeping their application moving forward will cost a few million dollars, but this is a relatively cheap price to keep an option open to build a pipeline if shale gas disappoints the market or there is a major shift from coal to gas for electricity generation or transportation.

Nonetheless, Alaskan politicians are worried. Alaska gets far less of its budget from federal transfer payments than we do, and makes up the difference with oil revenues. However, the oil is running out. The Wall Street Journal reports that the decades-old Alaska oil pipeline is pumping oil at about a third the rate it did during its heyday.

So speculation is mounting in Juneau about what Alaska’s “Plan B” should be if the Alaska Highway gas line never happens. A few Republicans in the State House are pushing for an in-state line to serve Alaskan needs, although the economics would be challenging. Others are wondering about liquefied natural gas exports (LNG) to Asia if a line from the North Slope to Anchorage can be built.

Other lateral thinkers have pointed out that the Koreans are designing “ice class” LNG tankers for use in the Arctic Ocean, and it might be possible to ship directly from Barrow to Asia. In a quote that will give greens the vapours, Samsung Heavy Industries’ CEO said that “polar region-running icebreaking tanker market is a blue ocean for us.” Apparently the Russians are already running crude oil around the Arctic in tankers whose hulls are as thick as old-fashioned battleships.

None of these Plan Bs include the Yukon. That will please those worried about the environmental impact, but we should remember that the pipeline was going to pay around $100 million in Yukon property taxes. That’s a lot, considering the Yukon government’s total tax and fee revenue this year will be around $123 million, and doesn’t include the jobs and income tax revenues that would come in.

Denali may have folded, but there are still a few rounds left to go in the game. Governor Sean Parnell is a former ConocoPhillips lobbyist and knows the game well. Exxon and TransCanada lobbyists are undoubtedly ensconced in Juneau’s Westmark Baranof Hotel, a well-known haunt for Alaskan politicians and just a scotch bottle’s throw from the legislature. The big questions will be how the economics look for the Alaska Highway route versus exporting LNG to Asia, and how much Alaska is willing to sweeten the pot.

Exxon is involved in similar issues through its other northern gasline, the Mackenzie project. It will be trying to extract subsidies from the Canadian and NWT governments and Exxon executives will have some fun trying to play the various governments off against each other.

The next few cards will be fascinating to watch. But we shouldn’t assume the big oil companies are deeply committed to the Alaska Highway gasline.

“You gotta know when to fold ‘em” isn’t just a Kenny Rogers song, it’s a corporate best practice in the world of multi-billion-dollar projects.

Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels.

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