Beginning with the posting for September 10, 2010, this page also will start including, for reference, the “Henry Hub” price reported for the same day. The “Henry Hub” price will be taken from the same source as used for the value of “ANS West Coast” oil in the calculation of the estimated netback value of ANS oil. Both are reported on the homepage of the Alaska Department of Revenue, Tax Division (http://www.tax.state.ak.us/).
The reason that the Henry Hub price will be included on this page is to provide a frame of reference for assessing the effect on oil and gas investment decisions of the estimated netback values of Alaska gas. In most instances, estimates of future levels of the Henry Hub price are used by oil and gas companies as a starting point for assessing alternative investment options. Generally speaking, investment decisions are based on a relative analysis of the options – in other words, I could invest a dollar here or I could invest a dollar over there, which will give me the better netback and return.
The Henry Hub price is a relatively widely used starting point for developing an estimate of the netback value of making an investment in large parts of the Lower 48 (because of the interconnected nature of the L48 gas grid, adjustments for location can be made to the price to estimate similar values in other regions). As a result, it is a useful starting point for assessing whether the netback price for Alaska gas is sufficient to attract investment dollars to the development of additional Alaska gas supplies. While additional adjustments would need to be made to refine the analysis, generally speaking to the extent the Henry Hub price exceeds the netback values for the various Alaska gas options, it is more likely that oil and gas investors will favor investments in additional L48 projects over developing Alaska North Slope gas.
Attracting such investments is critical to the success of any Alaska gas project. The North Slope currently has about 30 Tcf of known gas reserves, which is not insignificant. However, at the withdrawal rate of 5.3 Bcf/day (the level estimated by the State which will be required to support the proposed volume associated with the AGIA pipeline project[1]), those existing reserves will last only about 15 years.
That reserve life falls well short of the 25-year commitment which Trans Canada requires of shippers to qualify for the transportation rates necessary to make the Alaska gas remotely marketable in the first place. As a result, in order to make producers comfortable that they will have enough gas to meet their obligations to Trans Canada, the producers must be comfortable, as well, that making the investments necessary to develop the additional reserves required to fill the remaining years of the pipeline will be a prudent investment of their available funds.
Comparing the current netbacks against the current Henry Hub price is a reasonable way of assessing whether those investments make economic sense. As the numbers demonstrate, Alaska gas currently is far below the resulting water line established by the Henry Hub price, indicating, at least under today’s conditions, that those additional investments are unlikely.
[1] See http://bit.ly/9fkVT7 (“This option includes the construction of a 4.5 billion cubic feet (BCF) per day gas treatment plant (GTP) to clean and condition gas for shipment. Current plans for this facility include four treatment trains, with an initial capacity to treat 5.3 BCF/D of raw gas and deliver 4.5 BCF/D of treated gas for shipment.”)
Thoughts on Alaska Oil & Gas 