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<title>Alaskan Natural Gas: How Real An Alternative Is It?</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:</small></strong></font></p>
<p align="left"><font face="Arial"><!--webbot bot="HTMLMarkup" startspan --><A name=olsoinfo><!--webbot bot="HTMLMarkup" endspan --></font><font size="2">Joseph
P. Mathew is the President of Hybrid Energy Advisors, Inc. Hybrid Energy
Advisors, Inc., based in Houston, TX, </font><span lang="EN">
<font size="2">provides independent business advisory services to the
natural gas industry and related markets. Their advisory services include
business development, risk management, asset and corporate valuation and
optimization analysis, corporate, project and public finance, general
industry research and analysis, and corporate credit risk analysis.</font></span></p>
<p align="left"><font size="2">For more detail, please visit their website
at
<a href="http://www.hybrid-advisors.com/" style="color: blue; text-decoration: underline; text-underline: single">
www.hybrid-advisors.com</a> or contact Hybrid Energy Advisors, Inc.
directly by e-mail at
<a href="mailto:[email protected]" style="color: blue; text-decoration: underline; text-underline: single">
[email protected]</a> or call 713-666-9007.</font></p>
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<font SIZE="6"><p><b><br>
Alaskan Natural Gas:<br>
How Real An Alternative Is It?<br>
</b></font><b><i>Joseph P. Mathew<br>
President<br>
Hybrid Energy Advisors, Inc</i><span style="font-size: 12.0pt">.</span></b><strong><br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2003/01</em>)</font></p>
<p> </p>
<p class="MsoNormal" style="text-align:justify">One of the biggest energy
godsends in United States history was the discovery of Alaskan crude oil
reserves and the construction of the Trans Alaska Pipeline System (“TAPS”)
to bring it to market. Expected to provide over 30 years of crude oil at an
average rate of approximately 1,000,000 barrels per day, TAPS has not
disappointed.</p>
<p class="MsoNormal" style="text-align:justify">With TAPS, questions arose
as to whether market prices would support such large-scale energy
infrastructure projects, and would those expected prices make it feasible to
build such a mammoth pipeline to get crude oil from stranded reserves closer
to market?</p>
<p class="MsoNormal" style="text-align:justify">The questions were asked,
and the questions were answered. Yes. But who would have known this project
would work? Who could afford the costs? Who took the risk? Simply, the
answer is some very big energy companies. Equipped with large balance
sheets, large-scale research and development efforts, fluid access to
capital, experience, and risk appetite, these behemoth companies launched an
unprecedented effort in energy history.</p>
<p class="MsoNormal" style="text-align:justify">Like any major energy
infrastructure development project, much analysis, estimations and
calculations had to be ascertained regarding:</p>
<ul style="margin-top: 0in; margin-bottom: 0in" type="disc">
<li class="MsoNormal" style="text-align: justify"><font face="Arial">
exploration (supply),</font></li>
<li class="MsoNormal" style="text-align: justify"><font face="Arial">
development, processing and gathering of reserves,</font></li>
<li class="MsoNormal" style="text-align: justify"><font face="Arial">
pipeline asset construction and engineering costs,</font></li>
<li class="MsoNormal" style="text-align: justify"><font face="Arial">
regulatory costs and risks,</font></li>
<li class="MsoNormal" style="text-align: justify"><font face="Arial">
political costs and risks,</font></li>
<li class="MsoNormal" style="text-align: justify"><font face="Arial">
financing,</font></li>
<li class="MsoNormal" style="text-align: justify"><font face="Arial">
accounting methods,</font></li>
<li class="MsoNormal" style="text-align: justify"><font face="Arial">tax
implications,</font></li>
<li class="MsoNormal" style="text-align: justify"><font face="Arial">
market risk and demand expectations,</font></li>
<li class="MsoNormal" style="text-align: justify"><font face="Arial">
overall project valuation (cost-benefit),</font></li>
<li class="MsoNormal" style="text-align: justify"><font face="Arial">
expected market prices, and</font></li>
<li class="MsoNormal" style="text-align: justify"><font face="Arial">a
plethora of other parameters. </font></li>
</ul>
<p class="MsoNormal" style="text-align:justify">This was no different for
TAPS, as this project was analyzed for almost a decade. After exhaustive
study, the producers, financiers, governments, engineering firms et al
decided it was worth the effort. They were not disappointed.</p>
<p class="MsoNormal" style="text-align:justify">The success of TAPS proved
that energy commodities can be explored, processed and taken to market if
the price is right and the returns exceed the relative risk, despite the
titanic size of such a project. The bottom line is that the fundamental
expectations of crude oil prices were higher than expected costs. Can the
same be said about the stranded gas that accompanies the crude oil
extracting, currently being re-injected back into the ground? Can a huge
natural gas project also be economical? That is one of the most prevalent
questions today regarding new sources of domestic natural gas and one of
great debate.</p>
<p class="MsoNormal" style="text-align:justify"><b><u>Current State of
Domestic Gas Supply and Prices<br>
</u></b>United States gas supply is of key relevance in a market that is
exhibiting continued upward natural gas price pressure. In the 1990’s,
natural gas supply was abundant, coming predominantly from areas such as the
Gulf Coast and the importation of Canadian gas from the Western Canadian
Sedimentary Basin (“WCSB”). Prices averaged approximately $2.00/mmbtu for
the decade. However, notwithstanding the alleged corporate malfeasance that
led to certain exaggerated regional gas price spikes in 2000-2001, supply
constraints, diminishing exploration returns and changing weather patterns
are leading to an ever increasing price trend.</p>
<p class="MsoNormal" style="text-align:justify">Hybrid Energy Advisors, Inc.
(“HEAI”) expects gas prices to increase further until more abundant sources
are brought to market, with the marginal cost of these sources dictating
future gas price “floors” and competitive fuel sources providing theoretical
“ceilings”.</p>
<p class="MsoNormal" style="text-align:justify">In analytically forecasting
natural gas prices, one can label the expected gas price a “dependent”
variable and the underlying fundamentals as “independent” variables that
influence the dependent variable. Using quantitative techniques, HEAI
predicted in the spring of 2002 that Henry Hub financial prices, the
dependent variable, would range between $3.35 and $4.10 through the winter
months of 2002/2003. They also calculated ten-year price forecasts of
$2.25-$2.80/mmbtu during the summer months and $3.70-$4.25/mmbtu during the
winter months. HEAI believes that ten-year city gate prices of gas on the
West Coast and Midwest United States will trade approximately equivalent
(“flat”) to Henry Hub prices, and upper East Coast prices to trade at
approximately 45-65 basis points (cents/mmbtu) above Henry Hub prices.
These forecasts include a greater gas import as a percentage of total
domestic gas assumption, most imports coming from liquefied natural gas and
Canadian gas.</p>
<p class="MsoNormal" style="text-align:justify">United States gas demand is
approximately 65 bcf/day and growing. Current economic slowdown, demand
side management, and efficiency programs have led to slight declines in
demand, but HEAI feels that such declines related to the buy-side in the
long term are economically unhealthy and unrealistic.</p>
<p class="MsoNormal" style="text-align:justify">While natural gas
consumption growth rates are expected to increase over the next twenty years
by 50% as compared to current levels (most growth coming from electricity
generation), the solution to providing the supply to mitigate that growth is
not quite as transparent as just evaluating the face-value economics of
alternative sources, whether it is from deeper United States Gulf Coast
drilling, United States East and West Coastal exploration, Canadian
production, Alaskan production, or liquefied natural gas (“LNG”) imports.</p>
<p class="MsoNormal" style="text-align:justify">Reserves that contribute or
can contribute to the United States natural gas supply stack are
predominantly from the WCSB, Mackenzie Delta, Mid-continent and Gulf Coast,
deep-water Gulf Coast, the Rockies, western coal-bed, Alaska and abroad in
the form of LNG. Below is a table that exhibits the amount of proven
natural gas in each region and its approximate percentage contribution to
the natural gas supply stack (LNG and other sources, such as San Juan,
Williston, and Permian Basins and East Canada are excluded at this time).</p>
<table class="MsoTableGrid" border="1" cellspacing="0" cellpadding="0" style="border-collapse: collapse; border: medium none">
<tr>
<td width="223" valign="top" style="width: 167.4pt; border: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify"><b>Source</b></td>
<td width="170" valign="top" style="width: 127.8pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: 1.0pt solid windowtext; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center"><b>Proven
Reserves</b></td>
<td width="166" valign="top" style="width: 124.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: 1.0pt solid windowtext; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center"><b>
Contribution</b></td>
</tr>
<tr>
<td width="223" valign="top" style="width: 167.4pt; border-left: 1.0pt solid windowtext; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify">WCSB</td>
<td width="170" valign="top" style="width: 127.8pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">54 Tcf</td>
<td width="166" valign="top" style="width: 124.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">19 %</td>
</tr>
<tr>
<td width="223" valign="top" style="width: 167.4pt; border-left: 1.0pt solid windowtext; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify">Mackenzie Delta</td>
<td width="170" valign="top" style="width: 127.8pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">11 Tcf</td>
<td width="166" valign="top" style="width: 124.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">4 %</td>
</tr>
<tr>
<td width="223" valign="top" style="width: 167.4pt; border-left: 1.0pt solid windowtext; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify">Mid-Continent & Gulf
Coast</td>
<td width="170" valign="top" style="width: 127.8pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">78 Tcf</td>
<td width="166" valign="top" style="width: 124.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">28 %</td>
</tr>
<tr>
<td width="223" valign="top" style="width: 167.4pt; border-left: 1.0pt solid windowtext; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify">Rockies</td>
<td width="170" valign="top" style="width: 127.8pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">46 Tcf</td>
<td width="166" valign="top" style="width: 124.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">16 %</td>
</tr>
<tr>
<td width="223" valign="top" style="width: 167.4pt; border-left: 1.0pt solid windowtext; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify">Deep Water Gulf Coast</td>
<td width="170" valign="top" style="width: 127.8pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">14 Tcf</td>
<td width="166" valign="top" style="width: 124.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">5 %</td>
</tr>
<tr>
<td width="223" valign="top" style="width: 167.4pt; border-left: 1.0pt solid windowtext; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify">Western Coal-bed Methane</td>
<td width="170" valign="top" style="width: 127.8pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">16 Tcf</td>
<td width="166" valign="top" style="width: 124.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">6 %</td>
</tr>
<tr>
<td width="223" valign="top" style="width: 167.4pt; border-left: 1.0pt solid windowtext; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify">Alaska</td>
<td width="170" valign="top" style="width: 127.8pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">39 Tcf</td>
<td width="166" valign="top" style="width: 124.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">14 %</td>
</tr>
<tr>
<td width="223" valign="top" style="width: 167.4pt; border-left: 1.0pt solid windowtext; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify">Other (Non-LNG)</td>
<td width="170" valign="top" style="width: 127.8pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">22 Tcf</td>
<td width="166" valign="top" style="width: 124.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">8 %</td>
</tr>
<tr>
<td width="223" valign="top" style="width: 167.4pt; border-left: 1.0pt solid windowtext; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify"><b>TOTAL</b></td>
<td width="170" valign="top" style="width: 127.8pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center"><b>280 Tcf</b></td>
<td width="166" valign="top" style="width: 124.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center"><b>100 %</b></td>
</tr>
</table>
<p class="MsoNormal" style="text-align:justify"><b><u>Brief History of the
Alaskan Natural Gas Topic<br>
</u></b>Alaskan natural gas has been a market consideration for quite some
time now, even during the construction of TAPS. What to do with the
abundance of natural gas reserves that coincided with the massive oil
recovery has been debated stridently. To date, almost all of the gas has
been re-injected back into the oil wells. Heavier liquids have been
stripped out of the gas and shipped down via TAPS to oil tankers in Valdez
that carry such heavier particles mixed with crude oil to the United States
West Coast market for refining and product sales. However, the stripping and
shipping of the heavier liquids is limited to the amount of capacity
available via TAPS (taking into consideration ambient temperatures, specific
gravity and such).</p>
<p class="MsoNormal" style="text-align:justify">Alaskan producers are
injecting over 9 bcf/day of gas back into the reserves (albeit much of it is
recycled gas already recovered coincidentally with oil in the past). This
gas to date has been used to maintain compression and oil extracting levels
(similar to the effect of an aerosol spray can). Generally speaking, the
higher the gas pressure, the more efficient the oil extraction process, to a
limit.</p>
<p class="MsoNormal" style="text-align:justify">However, with natural gas
making up the majority of volume component in many of the main oil reserves
in the Alaskan North Slope concurrent with the growing United States natural
gas needs, its extraction and release is becoming a more prevalent
consideration. </p>
<p class="MsoNormal" style="text-align:justify">In the early 1980’s, a
variety of natural gas producers formed consortiums to explore these
possibilities after the enactment of the Alaska Natural Gas Transportation
Act (“ANGTA”). ANGTA was enacted in 1976 for the express purpose of
providing an expedited procedural vehicle for governmental approval and
construction of a transportation system to bring newly discovered Alaska
natural gas supplies to the lower 48 states. At the time, the nation was in
the throes of an energy shortage and existing gas supplies, as well as
reserves, in the lower 48 states were expected to decline (much like the
scenarios today) in the coming years. The Federal Power Commission (“FPC”,
the precursor to the Federal Energy Regulatory Commission, or “FERC”)
required hearings under the Natural Gas Act (“NGA”) prevailing under NGA
Section 7. Congress decided to act as a result of the delays associated
with competitive gas hearing processes. This action was a result of prior
observations in the TAPS procedures, such as delays, roundabouts, and cost
overruns. Canada’s National Energy Board (“NEB”) worked with the FPC in
creating a joint policy.</p>
<p class="MsoNormal" style="text-align:justify">Thus, ANGTA was enacted to
provide a facile, direct method to make competitive offerings on gas
projects from Alaska to the lower 48 states a reality, and would award such
projects the necessary federal permits and rights-of-way. This Act was
structured on the assumption that a single approved transportation system
would be selected by the President of the United States, such as the
Alaska-Canada (“ALCAN”) Highway project (to be discussed later), and
ratified. Upon ratification, ANGTA would become law. Since the projected
pipeline was to transverse Canada on its way to the lower 48 states,
Canadian producers and transporters were entitled to certain benefits and
assurances as well as the commensurate project cost allocations. FERC later
issued certificates for a ‘pre-build’ for an Eastern and Western leg
facilities, but due to the fact that ANGTA never legally disqualified other
competing proposals for a multiple-line build scenario, much debate
eventually followed as to cost-recovery on work-in-process and compulsory
award rights.</p>
<p class="MsoNormal" style="text-align:justify">The Alaska Natural Gas
Transportation System (“ANGTS”) consortium (who proposed and researched the
ALCAN project) has regularly maintained that federal agencies have an
obligation to ensure the completion of the ANGTS project superceding any
other project due to ANGTA language, the history of ANGTA and foreign policy
implications of the Agreement.</p>
<p class="MsoNormal" style="text-align:justify">One other main project
consideration that competed in terms of viability and economics was the
Trans-Alaska Gasline System (“TAGS”). This project was predominantly
supported by a company called Yukon Pacific Corporation (“YPC”). Instead of
delivering gas from Alaska to the lower 48 states via a large pipeline
system like ANGTS, this project was to use the North Slope gas to create LNG
to be shipped cryogenically to ports in Asia, including but not limited to
Japan, Taiwan and Korea. These countries historically have consumed
approximately 70% of the world’s LNG market (TAGS will also be discussed
later).</p>
<p class="MsoNormal" style="text-align:justify">Although this competing
project has been evaluated for about 20 years and its sponsors have attained
certain federal, state and local approvals and permits, no real progress had
ever been made on the market viability of LNG. The economics of the entire
project, while shown to have been cheaper from a cost perspective than the
ANGTS route (ALCAN Highway route), has still yet to be proven when taking
into consideration delivered prices.</p>
<p class="MsoNormal" style="text-align:justify">Needless to say, with the 39
Tcf of proven reserves in the Prudhoe Bay region alone, and an expected 65
Tcf more along the Beaufort and Chukchi Sea shores, Alaska gas as a
compelling and economic alternative as compared to other traditional sources
of gas for the lower 48 states has yet to be shown. However, with gas price
economics and forecasts ever increasing, all Alaska gas projects are
becoming a more prevalent subject of considerable debate.</p>
<p class="MsoNormal" style="text-align:justify"><b><u>Major Proposed
Projects & Routes to Market<br>
</u></b>There are many projects and sponsors that provide independent and
consortium studies on the validity of Alaskan gas and its ability to be
delivered to a viable market. Some projects have been active since the
ANGTA era, some have been shelved, some are new, and some were formerly
shelved but now are being dusted off. Some have already participated in the
lower portion of the pre-build as referenced previously under ANGTA. Firms
such as El Paso, Foothills (TransCanada), Williams, West Coast (Duke
Energy), Marubeni, Phillips, BP Amoco, Chevron and others have valiantly
brought about a resurgence in this topic, but each firm has their own
internal estimations on the true validity of the project, what risk they are
willing to bear, in what capacity they are willing to participate in such a
project (transporter, marketer, producer, processor, etc.) and what time any
project would come to market.</p>
<p class="MsoNormal" style="text-align:justify">The great majority of
Alaskan projects can be distilled into four major routes of consideration:</p>
<p class="MsoNormal" style="text-align:justify"><b><i>I. The ALCAN Highway
Route</i></b></p>
<p class="MsoNormal" style="text-align:justify">This route is proposed to
bring between 3 and 6 bcf/day of natural gas from a gathering and processing
station in the North Slope (Prudhoe Bay) down through a large pipeline that
crosses mountainous terrain (as does TAPS) to the city of Fairbanks, where
it will turn eastward and follow the Alaska-Canada Highway into the Yukon
territories of Canada (where there are varying proposals to have it join
with another pipeline from the Mackenzie Delta region), then flow southerly
in Canada, where it can potentially connect into the Nova/AECO/TransCanada/Foothills
pipeline system or a totally new build. This route is the choice endorsed
under ANGTA, and has as recently been supported and lobbied by outgoing
Alaskan Governor Tony Knowles. Although incoming Governor (and former
United States Senator) Frank Murkowski has not committed to a specific
route, it is believed that this route may also be a consideration of his
office.</p>
<p class="MsoNormal" style="text-align:justify"><b><i>II. The TAGS Route</i></b></p>
<p class="MsoNormal" style="text-align:justify">Sponsored by the Yukon
Pacific Corporation, this route is proposed to deliver between 2 and 4 bcf/day
of natural gas from a gathering and processing station in the North Slope
(Prudhoe Bay) down through a large pipeline that crosses mountainous
terrain, through the city of Fairbanks, and on to the City of Valdez or
Nikiski. This route is to follow almost exactly the route of the TAPS.
Unlike the ALCAN Highway route, the natural gas in converted into LNG
utilizing liquefaction “trains” and other LNG-related on- and off-shore
infrastructure. The LNG was originally planned for delivery into Japan,
Taiwan, Korea or other Asian destination through a Presidential Decree, but
ran somewhat contrary to the language of the resurgent ANGTA.</p>
<p class="MsoNormal" style="text-align:justify"><b><i>III. The Over-the-Top
(“OTT”) Route</i></b></p>
<p class="MsoNormal" style="text-align:justify">Sponsored by the Arctic
Resources Commission (headed up by former Enron Oil & Gas Chief Executive
Forrest Hoglund), this route is proposed to deliver between 2 and 4 bcf/day
of natural gas from a gathering and processing station in the North Slope
(Prudhoe Bay) to northern Canada (Yukon Territories) via a large artic
sub-sea pipeline, then passing into the Mackenzie Delta (where it has also
been considered to join with other proven Mackenzie Delta gas reserves owned
by a plethora of producers aching to bring that gas to market) down into
British Columbia or Alberta. This route, like the ALCAN Highway route can
connect into the Nova/AECO/TransCanada/Foothills pipeline system, or a
totally new build. The sub-sea portion of this pipeline is the subject of
intense political, technical and economical scrutiny. Also, the fact that
none of the natural gas explored gets sold into Alaska stands to be
problematic and is vociferously challenged from a state perspective.</p>
<p class="MsoNormal" style="text-align:justify"><b><i>IV. The Y-Line Route</i></b></p>
<p class="MsoNormal" style="text-align:justify">Simply put, this route is
sponsored by several consortiums, but has many permutations. The major idea
behind this route is its “hybrid” structure of the ALCAN Highway route and
the TAGS route. That is, 3 to 6 bcf/day of natural gas from a gathering and
processing station in the North Slope (Prudhoe Bay) down through a large
pipeline that crosses mountainous terrain (as does TAPS) to the city of
Fairbanks, where it will turn eastward and follow the Alaska-Canada Highway
into the Yukon territories of Canada, then flow southerly in Canada,
potentially connecting into the Nova/AECO/TransCanada/Foothills pipeline
system, or a totally new build. However, there is a “fork” at the city of
Fairbanks, where approximately half of the volume is planned to go to Valdez
or Nikiski for liquefaction into LNG. Thus, this route can serve many more
markets of varying types, but is much more capital intensive and complex.</p>
<p class="MsoNormal" style="text-align:justify">Since the natural gas from
Prudhoe Bay is inherently rich (or “wet”, “hot”, “heavy”), that is, it
contains gas that is well over the 1050 btu/cf approximate United States
heat content quality, it is very likely that this gas would have to be
injected with inert gases or more likely “stripped” of its heavier
elements. These heavier elements can in turn be marketed as liquids and
serve as a revenue enhancement or a contra-expense to the project. The only
case in which this is not necessarily true is when the gas is taken to the
Asian markets in the form of LNG, where allowable heat content of natural
gas is much higher.</p>
<p class="MsoNormal" style="text-align:justify"><b><u>Expected Costs of Each
Route<br>
</u></b>HEAI has provided below some approximate costs of each of these
routes, assuming different volumes that are relevant and sensible to each
scenario, but a constant rate of return on infrastructure capital.</p>
<p class="MsoNormal" style="text-align:justify">Within each cost is a
detailed estimation of relevant figures, such as engineering costs,
infrastructure costs (gas conditioning plants, pipelines, compressor
stations, fractionation plants, and where applicable, LNG plants and
LNG-related infrastructure (including shipping charges)), regulatory costs,
ANGTA sunk costs (where applicable, and assumed not ‘written off’ as many of
the former ANGTA consortium have plowed hundreds of millions of dollars into
the feasibility studies and construction of initial phases and would
proclaim recoverable under ANGTA provisions), operational costs,
fractionation efficiencies and other related “soft” costs.</p>
<table class="MsoTableGrid" border="1" cellspacing="0" cellpadding="0" width="631" style="width: 473.4pt; border-collapse: collapse; border: medium none">
<tr>
<td width="105" valign="top" style="width: 78.45pt; border: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center"><b>Route</b></td>
<td width="108" valign="top" style="width: 81.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: 1.0pt solid windowtext; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center"><b>Hard &
Soft Costs ($/mmbtu)</b></td>
<td width="114" valign="top" style="width: 85.15pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: 1.0pt solid windowtext; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center"><b>
Shipping Costs ($/mmbtu)</b></td>
<td width="88" valign="top" style="width: 66.0pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: 1.0pt solid windowtext; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center"><b>
Producer Netback 1 ($/mmbtu)</b></td>
<td width="88" valign="top" style="width: 66.0pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: 1.0pt solid windowtext; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center"><b>
Producer Netback 2 ($/mmbtu)</b></td>
<td width="129" valign="top" style="width: 96.6pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: 1.0pt solid windowtext; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center"><b>Total
Costs Range** ($/mmbtu)</b></td>
</tr>
<tr>
<td width="105" valign="top" style="width: 78.45pt; border-left: 1.0pt solid windowtext; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify">ALCAN</td>
<td width="108" valign="top" style="width: 81.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$3.50</td>
<td width="114" valign="top" style="width: 85.15pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">N/A</td>
<td width="88" valign="top" style="width: 66.0pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$0.75</td>
<td width="88" valign="top" style="width: 66.0pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$1.00</td>
<td width="129" valign="top" style="width: 96.6pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">
$4.25-$4.50</td>
</tr>
<tr>
<td width="105" valign="top" style="width: 78.45pt; border-left: 1.0pt solid windowtext; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify">TAGS</td>
<td width="108" valign="top" style="width: 81.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$2.10</td>
<td width="114" valign="top" style="width: 85.15pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$0.70</td>
<td width="88" valign="top" style="width: 66.0pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$0.75</td>
<td width="88" valign="top" style="width: 66.0pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$1.00</td>
<td width="129" valign="top" style="width: 96.6pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">
$3.65-$3.90</td>
</tr>
<tr>
<td width="105" valign="top" style="width: 78.45pt; border-left: 1.0pt solid windowtext; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify">OTT</td>
<td width="108" valign="top" style="width: 81.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$2.60</td>
<td width="114" valign="top" style="width: 85.15pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">N/A</td>
<td width="88" valign="top" style="width: 66.0pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$0.75</td>
<td width="88" valign="top" style="width: 66.0pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$1.00</td>
<td width="129" valign="top" style="width: 96.6pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">
$3.35-$3.60</td>
</tr>
<tr>
<td width="105" valign="top" style="width: 78.45pt; border-left: 1.0pt solid windowtext; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" style="text-align:justify">Y-Line*</td>
<td width="108" valign="top" style="width: 81.2pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$2.50</td>
<td width="114" valign="top" style="width: 85.15pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$0.70</td>
<td width="88" valign="top" style="width: 66.0pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$0.75</td>
<td width="88" valign="top" style="width: 66.0pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">$1.00</td>
<td width="129" valign="top" style="width: 96.6pt; border-left: medium none; border-right: 1.0pt solid windowtext; border-top: medium none; border-bottom: 1.0pt solid windowtext; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; padding-bottom: 0in">
<p class="MsoNormal" align="center" style="text-align:center">
$3.50-$4.00</td>
</tr>
</table>
<p class="MsoNormal" style="text-align:justify"><i>
<span style="font-size:9.0pt">* one spoke is gaseous gas to Canada, the
other is LNG to Asia, thus the total cost range encompasses the differences.</span></i></p>
<p class="MsoNormal" style="text-align:justify"><i>
<span style="font-size:9.0pt">** calculated total costs do NOT include
pipeline capacity to US markets from Canada for ALCAN, OTT and Y-Line
routes. If assuming US market delivery for such ANGTA portions, add
approximately $0.60-$0.70/mmbtu for delivery to Midwest and Northeast
markets.</span></i> </p>
<p class="MsoNormal" style="text-align:justify"><b><u>Expected Market Prices
and Issues at Market<br>
</u></b>As stated previously, HEAI expects long term domestic gas prices to
be approximately $3.50/mmbtu for Henry Hub per calendar year until 2010, and
over $4.00/mmbtu thereafter. Assuming that basis prices in the Midwest and
West Coast are flat to Henry Hub and about 60 basis points higher than Henry
Hub in the Northeast in the long term, there is compelling evidence that any
current Alaska pipeline scenario that delivers gas to the United States via
a transcontinental pipeline would be marginal <b><i>at best</i></b>, from a
pure economics perspective. Opinions would vary on this interim conclusion
depending on what price forecast is assumed. In addition, assuming that
Asian LNG prices continue to average approximately $4.00 - $4.50/mmbtu
(based on the standard Japanese Crude Composite Index (“JCCI”) historical
figures), the LNG scenarios are a bit more compelling at face value.</p>
<p class="MsoNormal" style="text-align:justify">But the analysis cannot end
there. Consideration must to be given to the fact that every scenario will
result in a massive amount of natural gas volumes delivered to any market.
Based on standard microeconomic supply-demand theory, an abundance of supply
will bring down overall market prices until new a new market clearing price
is established. This market clearing price can be substantially lower than
the average price, making even the most optimal current scenario tenuous at
best. Therefore, a cyclical argument will result in relation to project
economics. That is, if the project looks marginally economical now when
comparing costs to current price forecasts notwithstanding additional volume
from Alaska, what will it look like when the project cost is compared to the
<b><i>new</i></b> (and theoretically lower) market price once new Alaska
volume is taken into consideration?</p>
<p class="MsoNormal" style="text-align:justify">For example, HEAI believes
that, assuming any such project were to come on line at earliest would be
approximately the year 2008 (assuming that all infrastructure, construction,
and regulatory approvals are attained in a logical and efficient timeframe,
which is not an easy assumption), 4 bcf/day of volume can bring prices down
in the long term approximately $0.10 - $0.20/mmbtu in the delivered
markets. HEAI assumes that the gas will come in every year after 2008 at 1
bcf/day until full production capacity is reached. Although this downward
price pressure will only exist until demand projections ‘catches up’ to the
temporary oversupply, it is still compelling enough to discourage major
energy firms from strongly participating in such a project, citing
legitimate reasons of economics in the short- to medium term, making the
whole project life economics unstable (again, depending on expected
long-term market prices).</p>
<p class="MsoNormal" style="text-align:justify">Notwithstanding varying
long-term price views on natural gas, HEAI has maintained and continues to
maintain that it would take federal, state and local easements to make these
projects economically viable for the private sector. Although varying
financing structures can somewhat improve its economics, good projects
should not be done on clever financial structures (equity, debt, tax-free
financing, etc.), but on the operational validity of a project on a
stand-alone basis first and foremost.</p>
<p class="MsoNormal" style="text-align:justify">HEAI believes that such
easements would include things that look very much like a government
subsidy, which again in microeconomic terms, will either put a “cap” on the
market gas price (at a level that makes it economical for buyers) or a
“floor” price for the producer and pipeline companies that undertake the
project. This may be a federal energy policy mandate, guaranteed producer
netback, tax relief package, combinations of all, or something equivalent.</p>
<p class="MsoNormal" style="text-align:justify"><b><u>Conclusion<br>
</u></b>Alaska gas can be a viable alternative, if there is sufficient
government intervention, long-term price views above an economically viable
level, or a combination of both. One certainty is that natural gas supply
to the United States is not as abundant as it once was. Continued
deep-water Gulf Coast and WCSB drilling has yielded fewer molecules of
usable natural gas per dollar spent on capital infrastructure (diminishing
marginal returns). Also, with the possibility of medium-term Canadian gas
export curtailment for growing in-country needs, the time is high to
seriously evaluate whether this Alaskan gas could be brought to market. If
it is an inferior gas source to LNG or coal-bed methane alternatives on the
national gas supply stack, then those sources must be prioritized.</p>
<p class="MsoNormal" style="text-align:justify">Demand-side management and
other forms of energy (such as wind, photovoltaic, hydro, nuclear, coal,
etc. for power generation) are being considered. However, HEAI believes
that long-term demand-side management reduces gross domestic product (“GDP”)
and is unhealthy for long-term national economics, while technology
associated with renewable forms of energy don’t quite measure up in terms of
cost, or is still relatively unproven. HEAI further believes that
additional coal and nuclear energy sources can make sense economically, but
once environmental considerations, political blowback and regulatory
measures are added in to the scenario, mixed feelings reign.</p>
<p class="MsoNormal" style="text-align:justify">Alaska gas is one
alternative for the natural gas needs of the United States, but clear,
accurate analysis must be performed on it in combination with an intense
evaluation of other viable sources. Then, a more meaningful domestic
natural gas supply stack hierarchy can be formed.</p>
<hr color="#FFFF00">
<blockquote>
<p align="left"><font face="Arial"><!--webbot bot="HTMLMarkup" startspan --><A name=olsoinfo><!--webbot bot="HTMLMarkup" endspan --></font>Joseph
P. Mathew is the President of Hybrid Energy Advisors, Inc. Hybrid Energy
Advisors, Inc., based in Houston, TX, <span lang="EN">provides independent
business advisory services to the natural gas industry and related
markets. Their advisory services include business development, risk
management, asset and corporate valuation and optimization analysis,
corporate, project and public finance, general industry research and
analysis, and corporate credit risk analysis.</span></p>
<p align="left">For more detail, please visit their website at
<a href="http://www.hybrid-advisors.com/" style="color: blue; text-decoration: underline; text-underline: single">
www.hybrid-advisors.com</a> or contact Hybrid Energy Advisors, Inc.
directly by e-mail at
<a href="mailto:[email protected]" style="color: blue; text-decoration: underline; text-underline: single">
[email protected]</a> or call 713-666-9007.</p>
</blockquote>
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