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Gas Supply:Too little, Too late?

Fortnightly Magazine - September 2004

will prevail. "The jury is still out on how many will be built in the short term," says Steven Sparling, an associate with Sutherland, Asbill & Brennan in Washington, D.C. "The odds are strong you'll see multiple terminals in the Gulf of Mexico, but it's hard to distinguish which projects are in the lead now, except those that have the first-mover advantage."

Delays or cancellations of LNG projects add strength to a rising storm that could cascade through the economy, not just raising consumers' energy bills but also costing jobs and slowing economic growth, as industrial companies close plants or move them overseas to locations with lower gas prices.

Given such dire consequences, pressure is rising on policy-makers to take action to accelerate gas-infrastructure development. Such actions might include streamlining and clarifying the permitting process, offering subsidies and tax incentives, and lowering regulatory barriers-if only temporarily. How effective such steps might be at averting a natural-gas disaster, however, remains to be seen.

Federal Intervention?

Natural gas production in North America has reached a plateau, despite aggressive well-drilling activity (). "People are asking, why [can't we] just drill our way back to $2 gas prices?" Zenker says. "It's just not possible. Already we are seeing record levels of well completions in western Canada, and onshore rig rates in the lower-48 states are at record levels. But they are not giving us real supply growth because we are seeing smaller reserves per well. These are picked-over properties."

Not all North American gas fields have been tapped out. The storied Arctic frontier, for example, holds 35 trillion cubic feet of proven reserves, and another 140 Tcf are estimated to be unproven. Yet they remain undeveloped-largely because historically low gas prices haven't justified the high capital cost.

Impatient with inaction, two Alaska state legislators launched a ballot initiative in July to tax petroleum companies for the gas reserves they leave in the ground. The move is intended to force the hand of oil and gas majors, whom Rep. Harry Crawford, D-Anchorage, accuses of "warehousing" gas supplies to maintain high gas prices. "They will never deal with it [the Alaska gas pipeline] until that sword is hanging over their heads," Croft told the .

The ballot initiative, however, might no longer be necessary. Today's rate trends might make the Alaska pipeline as economically viable as it ever will be, and at least three groups are pursuing proposals to develop it. For example, Trans- Canada Corp. is working to secure rights-of-way to bring a pipeline along the Alaska Highway, through the Yukon Territory and into Alberta.

TransCanada first mapped out the 2,000-mile route more than 20 years ago. The plan has gone through various phases of development and stagnation, and even now TransCanada seems to be pursuing it without much enthusiasm. "Once the right-of-way lease application is approved, TransCanada would be prepared to convey the lease to another corporation or partnership if appropriate commercial agreements are in place," the company stated in a June 2004 press release. (One of those agreements would be an interconnection contract with a