REPORT ACCOMPANYING A DECISION ON AN ALASKA NATURAL GAS TRANSPORTATION SYSTEM PREFACE The Alaska Natural Gas Transportation Act (ANGTA) established a unique and comprehensive process designed to make use of the collective expertise of various branches and departments of government in reaching a final decision on an Alaska Natural Gas Transportation System. By statutory direction, after months of hearings, the Federal Power Commission issued on May 1, 1977, a one-volume report, Recommendation to the President, which urged the designation of an overland pipeline system. After the FPC Report, pursuant to Section 6(a) of ANGTA, ten Federal interagency task forces were organized to report, not later than July 1, 1977, on the impacts and considerations of an Alaska natural gas transportation system. The July 1 Reports submitted by these task forces covered the following subjects: 1. The energy policy impacts of an Alaska natural gas project; 2. Environmental considerations; 3. Sources of financing for capital costs; 4. The impact on competition; 5. Safety and design; 6. International relations; 7. National security, particularly security of supply; 8. Impact on the national economy; 9. Potential cost overruns and time delay; and 10. Socioeconomic impact of the transportation system. Pursuant to Section 6(d) of ANGTA, the Council of Environmental Quality submitted a report on July 1, 1977, which found that the environmental impact statements submitted by the FPC with respect to Alcan, pursuant to Section 5(e) of ANGTA, are legally and factually sufficient. In the preparation of this decision, all the interagency reports, the FPC Recommendation, and many other submissions and public comments received from Governors, local officials and other interested individuals have been carefully considered. This Report to the Congress on an Alaska Natural Gas Transportation System, as well as the President's decision which precedes it, are the product of this collective study process. As required by the Alaska Natural Gas Transportation Act, this Report explains in detail the basis for the decision favoring the Alcan project. 287 CHAPTER I-DESIRABILITY OF AN ALASKA NATURAL GAS PROJECT NATURAL GAS SUPPLY United States There is currently estimated to be a potential natural gas demand in the United States of 25 to 30 trillion cubic feet per year. The U.S. will have to use every source it can to maintain the early 1970 production level of approximately 20 trillion cubic feet per year. As our dependence on foreign sources of energy continues to rise, the nation can use all the reasonably priced domestic natural gas it can produce to displace oil imports. Because of its premium nature, the more gas the U.S. produces, the more it will be able to use. Looking toward 1990, even under the most optimistic conservation and production assumptions, natural gas shortages are a very real possibility, even with the delivery of Alaska gas. This is so because of the expected tapering off of domestic gas production in the lower-48 states, and a reversal in the decline of natural gas demand when conservation measures have had their full effect and the nation experiences a renewed increase of demand growth from normal economic activity. This situation could be further aggrevated by the expiration and nonrenewal of Canadian gas export contracts through the 1980's. The Alcan project maximizes our chances for avoiding such curtailments. The most optimistic 1985 projection for U.S. domestic production of gas is 17.5 tcf without Prudhoe Bay gas. This is 15 percent less production than in 1970. Yet during this same period-1970 to 1985-it is estimated that total energy demand will increase by over 40 percent. Further, a more pessimistic but still plausible estimate of the domestic resource base would reduce 1985 production of gas by an additional 0.9 tcf per year. On the demand side, it is apparent that this nation could use all the reasonably priced natural gas it can produce. Even with the ambitious coal conversion program proposed earlier this year by the Administration, projections indicate that Alaska natural gas will be needed to meet demand in the coming decade. Additionally, such projections do not make any allowance for unusually cold weather, such as that experienced last winter. The increase in gas demand last winter for space heating in the residential sector alone was estimated to be over 0.4 tcf. Under these probabilities, gas shortages are likely in the near future and throughout the 1980's with or without substantial new sources of supply. In general, there are three economically attractive means to supplement traditional domestic gas supplies by 1985. The first is to accelerate OCS leasing in the Gulf of Mexico, which could produce as much as an additional 0.2 tcf per year by 1985 and 0.6 tcf per year by 1990. The second is to import gas from Mexico, which could be as much as 0.5 tcf per year by 1985 and 0.7 tcf per year by 1990 if the recently-announced gas sales contracts should be completed and approved. The third is to proceed with an Alaska gas project. Proved saleable gas reserves of 20.6 to 22.8 trillion cubic feet (tcf) in the Main Pool accumulation in the Prudhoe Bay Field represent more than a full year of natural gas consumption at the current consumption rate of about 17.3 tcf per year. Prudhoe Bay production at 2.4 bcfd of gas will include production from other reservoirs which have been identified in the field, the Kuparuk and the Lisburne. Production at that rate would increase domestic gas production by approximately 5 percent in the years when Alaska gas first becomes available. Additional gas discoveries on the North Slope, or in other areas of Alaska through which the pipeline passes, would increase potential deliverability even further. The certain increase in supply from an Alaska gas project is estimated to be 0.7 tcf per year (2.0 bcfd) by 1985. By 1990, a volume greater than 0.9 tcf per year (2.4 bcfd) might be produced. Under the best of circumstances-which assume the most optimistic supply projections, demand reductions and fuel substitutions-the addition of Alaska gas to domestic production will make a substantial contribution toward closing the gap between natural gas supply and demand. Such additional gas supplies could allow some industries with special processes to continue burning natural gas longer, and allow more residential use of natural gas, further displacing oil imports. By 1990, use of every conceivable supply option under any scenario may still leave us with serious domestic gas shortages. By 1990, oil imports are projected to be 9.6 mmbd, provided that supplemental supply sources can furnish gas in the following volumes: 0.9 tcf per year from Alaska gas; 0.7 tcf per year from Mexican gas exports; 0.6 tcf per year from accelerated OCS leasing in the Gulf of Mexico. Clearly, each of these gas supply options will become more desirable and important as conventional gas supplies decline in the years after 1990. Our best efforts will only temporarily stem the decline in conventional onshore gas production in the lower-48 states. The U.S. may increasingly need supplemental sources of gas supply to meet demand. These will include: Geopressurized methane; Devonian shale; Deeper, tighter, formations; Imports of liquefied natural gas (LNG); Although Alaska gas will add about 5 percent to total domestic gas production, it will be a larger proportion of supply for consumers in the Middle West and on the West Coast. For these regions, it will be between 6 and 10 percent of their supply depending on the distribution which is reflected in the final gas sales contracts. These volumes will be important to the availability of gas in these regions, and should be delivered at a competitive price with other supplemental sources of supply. Canada One of the most significant effects of the Alcan project on gas supply will be its effect on Canada's natural gas sales policies. In its July 4th decision on a northern pipeline project, the Canadian National Energy Board (NEB) found that unless the project gave Canadians access to their frontier gas reserves, Canada might not have sufficient supplies available to fulfill its existing gas export commitments to the U.S. If the frontier gas reserves were made available, however, increased supplies would exist to allow continuation of current export levels. A possibility offered by the Alcan project is the effective availability of Alaska gas to the U.S. before completion of the project through pre-delivery of Canadian gas under existing export licenses. The southern portions of the Alcan project could be constructed first, and deliveries of excess gas from Alberta could reach as much as 1.1 bcfd by the winter of 1979-1980. As currently proposed, the pre-deliveries would be repaid by reduced export commitments in the late 1980's, or by time-swaps for Alaska gas. The pre-deliveries would make extra gas available over the next few years when the Nation faces serious and immediate natural gas shortages, prior to the time when supply stimulation and demand reduction measures under the National Energy Plan have had any effect in helping bring natural gas supply and demand back into balance. A pre-delivery arrangement involving Alberta gas would provide stimulus to exploration for additional supplies in that province by providing producers with additional markets for their gas. Similarly, agreement on a project which brings a major pipeline effectively within 500 miles of the Mackenzie Delta region should stimulate further exploration activity there. If that additional exploration is undertaken, the possibility of obtaining additional volumes of Canadian gas in future years will be enhanced. The joint project will thus ensure maximum availability of Canadian gas in the near term, through continued exports under existing contracts and possible pre-deliveries. It will also give the U.S. its best chance of obtaining longer-term supplies of Canadian gas by providing the impetus for broad-scale exploration programs. ECONOMIC CONSIDERATIONS An economic analysis of the Alaska gas projects can be made from both a private market perspective and from a national economic perspective. The utility of the project from a private market perspective is determined by whether there are less expensive alternative fuels available. This depends on the field price of the gas and the transportation cost. The reliance upon the National Energy Plan (NEP) for setting of a field price is discussed in Section 6 of the Decision. For illustrative purposes here, the $1.45 price that would be set under the NEP is used. The transportation cost of service will be determined by the capital and operating costs of the delivery system. The project applicants have filed cost estimates that produce a 20-year average cost of service which ranges from $.80 to $1.07 per mmbtu (1975 dollars). The large cost overruns of the Alyeska pipeline have raised new concerns regarding the accuracy of base capital cost estimates for such major projects. For the Alaska gas project, cost overrun assessments have been made which allow for capital cost increases by factors from about 1.3 to 2.0. |