Alaska Gas Pipeline

on Jul 15 in Pipelines tagged by Trevor Hicks

First I’ll discuss the really super basics. Natural gas is often found and produced in oil wells. Depending on a variety of factors, that gas is marketed, reinjected to pressurize the formation and enhance oil recovery or simply flared, or burned off. It’s probably easy to imagine there’s an economic tradeoff between the value of the gas that can be realized by selling it versus the value of the additional oil production that can be realized by reinjection. But if you don’t know the industry you might be surprised that something as valuable as natural gas would just be routinely burned away and wasted.

The fundamental reason for flaring is in the differences between transporting oil and natural gas. Both can be sent via pipeline, but without getting into too much excruciating detail just trust me that it is not possible to mix liquids and gases in a pipeline, you must use a separate infrastructure. Crude oil can also be transported in batches on tankers, meaning everything from 2 ton trucks for Oklahoma stripper wells to giant ocean-going supertankers. Natural gas can only be shipped via pipeline or by a very expensive LNG process. And so natural gas is often flared when it is produced in remote areas simply because the cost of the transportation infrastructure exceeds the value of the gas.

In Alaska, most of the gas that is produced is reinjected. Of the 10 billion cubic feet per day that is being produced, about 10% is marketed, 90% reinjected and only a tiny fraction is flared off. Now consider that the total US market for natural gas is around 60 to 65 BCF per day and you can imagine that the 9 BCF available from Alaska could make a major impact on the entire industry if there were some mechanism to bring it to the Lower 48. And that 10 BCF being produced is essentially without even trying very hard, since there’s only an oil pipeline today, oil is what they’re looking for on the North Slope. So a gas pipeline from Alaska is a pretty big deal for all Americans.

The situation today is that TransCanada (a pipeline company) and ExxonMobil (Alaska’s largest oil & gas producer) have partnered to propose a $25 billion, 4.5 BCF/day pipeline from the North Slope through Alberta and from there to the Lower 48. BP and ConocoPhillips have a competing proposal, but last year Alaska endorsed and agreed to subsidize the TransCanada plan. No work has commenced, however, because the project lacks federal approval.

So now there are some interesting issues I’ll address in future posts, what impact will the resignation of Sarah Palin have on the state of Alaska’s involvement in the project? Note that the incoming governor used to work for ConocoPhillips. What will the federal government have to say about a route that leads through Canada instead of some “All-Alaskan” route? Domestic supply of natural gas has massively increased in the last two years thanks to technology that has unlocked our huge reserves of shale gas, what happens if we further flood the market with Alaskan gas?

As an aside, note that shale gas is way, way different from what’s popularly known as “shale oil” or kerogen. The hydraulic fracturing technology that has made shale gas economically viable is completely irrelevant to shale oil production.  I don’t expect shale oil to ever amount to anything, the environmental costs and energy inputs are just too high. But there is another issue at play here and that is the environmental impact of fracturing which may limit the growth of shale gas production.