TransCanada and ExxonMobil
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Supermajor ExxonMobil has thrown its considerable weight behind a project proposal by TransCanada to build its first dedicated interstate natural gas pipeline.
IHS Global Insight Perspective
Significance
TransCanada and ExxonMobil have reached an agreement to jointly develop the long-awaited Alaska gasline—a project designed to connect the state’s vast but stranded natural gas resources to markets in the south.
Implications
ExxonMobil’s backing substantially improves the prospects for TransCanada’s project moving forwards, and together the pair will work on all aspects of the development, from technical to financial and regulatory issues. The supermajor’s decision, however, leaves a competing project by BP and ConocoPhillips in the balance.
Outlook
The implications of Alaskan gas supplies reaching North American markets are potentially far-reaching, but much work remains to be done before a line is ready, perhaps sometime by 2018; at US$26 billion, the project would be the largest in U.S. history, so nothing less than full industry participation will be required to turn the dream into reality.
TransCanada’s plans to build Alaska’s first large-scale interstate natural gas pipeline have received a tremendous boost with news yesterday that the company had reached an agreement with supermajor ExxonMobil to develop the project. Speaking of the agreement, TransCanada noted that “our combined activities with ExxonMobil, along with the support of the state of Alaska, the U.S. and Canadian governments, and other interested parties will result in the timely completion of the project”. Together, the pair will work on all aspects of the project, from technical and regulatory issues to financial considerations, though TransCanada will maintain a majority stake in the line.
Unlike oil, which benefits from the Trans-Alaska Pipeline System (TAPS), Alaska’s vast natural gas reserves, located mainly in the remote north of the state on the North Slope (ANS) have long been left stranded for lack of a means to connect fields to markets in the south of the state, in Canada and the lower 48 states. Despite proved and potential gas reserve estimates as high as 250 trillion cubic feet—sufficient alone to meet current U.S. demand for a decade—the gas has been left in the ground. There have been numerous efforts over the years to get the ball rolling on a dedicated gasline but these have all come to nought, largely due to industry disagreement, prohibitively high project cost estimates, lack of political support, and—perhaps most important—historically low gas prices. In recent years, with the exception of high project cost expectations, these past realities have essentially been reversed. With Alaska’s oil production in long-term decline, the state has cast a longer, harder look at its gas predicament, leading in 2007 to legislative support for a pipeline. A subsequent project bidding process saw TransCanada last year being awarded with a licence to pursue plans to build the line.
The pipeline envisaged by TransCanada, with ExxonMobil’s backing, consists of a 2,800-km long line connecting fields on the ANS to a distribution hub in Alberta, Canada, before continuing south to Chicago in the United States. The line would be able to deliver around 4.5 bcf/d of natural gas. Cost projections for the line have been put at US$26 billion, and construction could start as early as 2014, before coming online about four years later.
Out in the Cold
ExxonMobil’s decision to side with TransCanada has effectively left BP’s and ConocoPhillips’ competing pipeline project, Denali, on the bench. That development involves a 4-bcf/d, 3,200-km line connecting Alaskan gas reserves to Alberta and then the continental United States. The pair do not enjoy legislative support from Alaska, however, and have in the past been derided for their relative lack of detail on the project. Nonetheless, this has not stopped them from carrying out preliminary work on Denali.
Outlook and Implications
ExxonMobil’s move is a massive vote of confidence in TransCanada, and its involvement significantly and decisively tips the scales in favour of the company’s project proposal. It also substantially improves the prospects of Alaska eventually monetising its substantial gas reserves while supplying the continental United States with domestic access to much more gas. Marketed gas production in the country peaked in the early 1970s and has essentially been flat since then, at around 20 tcf/yr. Access to Alaskan reserves could therefore see gas output rising again, with widespread implications for the industry. In combination with increased unconventional gas production in the lower 48 states, the pipeline has the potential to vastly improve the gas supply situation in North America. Target markets for the gas could include Canada’s oil sands industry, which currently accounts for around a fifth of Canada’s total natural gas demand. The possibility of U.S.-based LNG exports also becomes a distinct reality, as is the partial displacement of coal-fired power generation capacity with cleaner gas-fired generation from around 2020 onwards.
Much work, however, remains to be done and numerous challenges overcome before then. More immediately, with momentum building behind TransCanada’s project proposal, the prospects for the BP and ConocoPhillips-led Denali project are falling by the wayside. Given, however, that the two companies between them hold substantial North Slope gas leases, their eventual participation in TransCanada’s project looks more likely than not. ConocoPhillips in particular has been quite circumspect in its reaction to ExxonMobil’s move, suggesting that it would not be inherently against working with TransCanada. It has made similar comments in the past. TransCanada has also made numerous overtures to the majors for greater participation. Whatever the case, the scale and cost of the Alaska gasline would make it North America’s largest engineering project and the most expensive in U.S. history. Nothing less than full industry support, and not a little luck, will be needed to realise Alaska’s conventional gas potential. The opportunity is there for the taking.
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