A broad swath of energy industry insiders will be converging on Anchorage for the USAEE North American conference next month, giving the state’s governor an ideal forum to lay out his plans to extract and market the state’s massive gas resources. But geologic features of some of Alaska’s most well-known fields may mean that the gas is more valuable right where it is, according to Doug Reynolds, professor of petroleum and energy economics at the University of Alaska Fairbanks.
Governor Sean Parnell is pushing to turn massive North Slope gas resources into lucrative exports to Asia, and to open up Arctic National Wildlife Refuge area 1002 to exploration for the first time in decades. But political battles, harsh weather conditions and high costs are widely-known challenges to North Slope gas extraction. And there are other, less well-known geologic complications to moving forward with Alaska’s ambitious plans, Reynolds told Breaking Energy.
One of the first complications is accurate assessment of what’s there. “There’s a lot of gas on the North Slope, that’s clear,” Reynolds said. “Exactly how much is hard to say.”
Reynolds acknowledged the often-cited 35 trillion cubic foot resource figure for the North Slope. “But that’s just a round figure,” he said. “There might be less than that because of all the reinjecting they’ve done.”
Oil is Worth More
Gas is already on production on the North Slope, where companies have been producing oil since the 1970’s. But the gas is not marketed, said Reynolds. It is reinjected into oil reservoirs to maintain reservoir pressure, which allows for the extraction of more oil.
The need to maintain pressure for oil production is a critical consideration in determining how best to monetize Alaska’s North Slope gas, Reynolds said. Producers will have to decide whether it is worth more injected into the ground, with returns coming via more oil production and sales, or piped to an LNG plant for liquefaction and export.
The Point Thomson field, for example, where the state and leaseholders – including ExxonMobil – recently overcame a legal impasse to development, is “a very complex field”, Reynolds said. “You need to maintain high pressures in Point Thomson in order to get liquids out, so you may need to reinject a lot of gas to keep the pressure high.”
“If you do a lot of offtake, you may lose some of that pressure and destroy liquids value,” he said.
The same may be true of the Prudhoe Bay field, he said. “You can also destroy liquids value at Prudhoe Bay…but it’s probably got a little more possibility to do offtakes than Poitnt Thomson,” he said. Still, at Prudhoe Bay, “if you lower the [gas] offtake, you’ll probably manage a higher liquids value.”
“The liquids are more valuable than the gas,” and “they [drillers] want the big dollar figure”.
Not Enough Gas
If Alaska opts to move ahead with monetizing North Slope gas via LNG exports to Asia-Pacific markets, another critical consideration is how to supply an LNG plant over several decades. North Slope gas is “probably enough to backstop an LNG plant…But it will take more than North Slope gas alone to make an Alaska LNG plant viable over a 30-50 year period,” Reynolds said.
Other sources of gas for the project could include the ANWR, the Beaufort Sea, or Canada’s gas-rich Mackenzie Delta.
ANWR remains closed to development, and the rapid growth of oil and gas production in the Lower 48 states of the last few years has undermined the rationale for opening it to exploration and development. Additional political questions might arise if future production were to be destined for export. “Why are we going to open up ANWR just to go to China?” Reynolds said.
Recent drilling complications in the Arctic waters offshore Alaska have put a spotlight on the technical and environmental challenges of operating in the Beaufort Sea. And while Canada’s National Energy Board approved a proposed Mackenzie Valley project to build a gas pipeline from the Mackenzie Delta to North American markets in 2011, the same lower 48 dynamics that may make it tough to open up ANWR have undermined Makenzie pipeline project economics.
The National Petroleum Reserve – Alaska (NPR-A) also holds gas, but “they’ve really restrained NPR-A”, said Reynolds. “Right where all the gas and oil is, they just locked, it looks to me like the environmentalists are really locking that down,” he said. “And then you need a pipeline.”
“There’s a difference between what is economically valuable and politically valuable,” Reynolds said.
Alaska’s Fiscal System
Alaska’s fiscal system could present another obstacle to North Slope gas development, Reynolds said.
To encourage development of the state’s gas fields, Alaska could offer tax contracts guaranteeing leaseholders that tax rates will not change over the course of 50 years. “They can be sure that if they build this and start selling gas, all the investment they make won’t get taxed away, and they’ll make a return,” Reynolds said.
“Producers have stated absolutely, in no unwavering terms…that they will not sell it unless they get a fiscal stability or tax contract,” but “the Alaska State Constitution forbids a tax contract”, he said.
Alaska may seek to employ another strategy in which Alaska maintains ownership of royalty gas, but in the event of a change in oil taxes, the gas price used in calculating gas royalties changes in an offsetting manner, Reynolds said. “That may or may not fly in the Alaska Supreme Court.”
