EXECUTIVE SUMMARY INTRODUCTION Jensen Associates, Inc. has been asked by Northwest Alaskan Pipeline Company (NAPLINE) to analyze the marketability of "rolled-in" Alaskan natural gas and to establish its competitiveness both with other gas sources and with alternate fuels. It is important to recognize that this study was commissioned to review the commercial--as distinct from the policy--aspects of Alaskan gas utilization. As such, major national policy issues in the decision to develop an initially high-cost U.S. gas source, such as security of supply, balance of payments, and national cost/benefit relationships were deemed to be beyond the scope of this assignment. The study was to pay particular attention to the short/ medium term, defined as the period of construction and early operation of the pipeline. The period of major interest of this study, therefore, is the decade of the 1980s. SUMMARY AND CONCLUSIONS The market environment for natural gas in the United States has undergone a major structural transformation over the past decade. The industry entered the 1970s with a record of rapid and stable growth only to see its expectations falter in the face of shortages of low-cost conventional gas supply. It successively encountered the problem of shortage allocation, a search for gas supplements, a restructuring of the market through user conservation, major legislation which altered its regulatory climate, and, finally, a deterioration in the fortunes of competitive fuels, particularly, fuel oil. While forecasts of the future of gas markets made in 1979 bear little resemblance to projections made ten years earlier, we believe that it is possible to lay out the market prospects for high-cost gas supplements with greater confidence today than has been possible for several years. We believe the market prospects for Alaskan gas are excellent at the cost levels anticipated in this report. 57-087 080 34 Several of the recent changes in the natural gas market environment have served to cast doubt on the prospective attractivenes of high-cost gas supplements. Demand is much less today than was anticipated even five years ago, since a substantial degree of user conservation has already taken place and more is expected. Natural gas prices have risen rapidly and still greater increases are expected as a result of Natural Gas Policy Act (NGPA) wellhead pricing provisions and the price implications of supplementary supply. But gas supply has also failed to live up to earlier expectations so that a shortfall of conventional supply still remains. More importantly, however, the Iranian revolution and the resulting OPEC oil price increases have signalled the end of an implicit policy whereby oil imports are used by default as the U.S. energy supply of last resort. As long as imported oil is constrained from displacing gas markets, we believe that the demand for gas supplements to augment conventional supply will remain strong. Our projections are based on an anticipated excess demand for natural gas-a "gas gap"--over and above likely gas supply. Thus, despite our conservative projections of growth in demand (because of our expectation of continuing conservation), supplements are needed to offset expected continued decline in conventional supplies. Our estimates of potential demand, expected supply, and the resulting "gap" are summarized in Table 1. Even with Alaskan supply we expect a growing gap to 1990. In our view, the combination of accelerating oil prices with the various actions of administrative policy to limit oil imports will virtually insure that U.S. natural gas will retain markets which oil could otherwise serve. Thus, we believe the gas gap projection is realistic in the context of energy policies and economics of the 1980s and it virtually assures that Alaskan gas--rolled-in as permitted under the NGPA--will be marketable. 2 |