By Jeffrey Jones

 

CALGARY, Alberta, May 7 (Reuters) - The energy industry's decades-long dream of tapping vast Alaskan and northern Canadian gas reserves faces perhaps its biggest threat yet -- a flood of new unconventional supply located closer to markets.

 

Multibillion-dollar Arctic pipeline proposals, first envisioned in the 1970s and rekindled in the past decade as gas supplies tightened, have been buffeted by regulatory delays, government wrangling and rising costs.

 

Now, industry experts wonder if rapid development of gas trapped in shale formations throughout the United States and Canada could render Alaska and Northwest Territories pipelines obsolete even before any steel is put into the ground.

 

"It certainly threatens to do that," said Robert Ineson, senior director of North American natural gas at Cambridge Energy Research Associates. "The increase in onshore, lower-48 production since 2004 is equivalent to more than two Alaska pipelines. The only thing that's keeping it from growing further at the moment is lack of demand."

 

Even as the recession pushed gas prices to multiyear lows, the buzz over shale gas intensified as companies have announced finds pegged in the trillions of cubic feet.

 

With drilling and production technology advancing quickly, unconventional plays in such locales as Texas, Louisiana, Pennsylvania and British Columbia have erased most fears of North American supply shortages.

 

Backers of the $26 billion Alaska pipeline proposal and C$16.2 billion ($13.8 billion) Mackenzie pipeline had said a main rationale for their projects is the threat of price spikes as conventional production wanes.

 

Neither project is currently expected to be in service until the middle of the next decade or later.

"The amount of gas that's been found over the last 24 months was clearly inconceivable to forecast five years ago," said Manuj Nikhanj, vice-president of Ross Smith Energy Group, a Calgary-based institutional research firm.

 

"So at no fault of people's thinking five years ago, there's been a huge paradigm shift with respect to the natural gas market, and really it just comes down to a cost analysis."

 

SUPPLY RENAISSANCE

 

North America is undergoing a "supply renaissance" due to unconventional gas, CERA has said. In a recent study, it pointed out U.S. production climbed to 56.7 billion cubic feet a day by last July from 48.9 in February 2007 -- a 14 percent gain in 17 months. Before 2006, production was in decline.

It predicted overall output in the lower 48 U.S. states will climb to 60.6 bcfd by 2018. Canadian production could jump to 19.6 bcfd by that year from 15.8 bcfd in 2009, CERA said.

 

To keep production of gas from shale formations growing, companies drill at a brisk pace and use expensive, specialized techniques to fracture the rock deep underground.

 

But costs of developing shale plays like the Barnett in Texas, Haynesville in Louisiana and Horn River in British Columbia are dropping as producers gain experience with the technology and coax more output from each well, Nikhanj said.

 

Recent gas prices well below $4 per million British thermal units due to a current glut made many plays uneconomic, but operators have kept up activity, partly to boost know-how.

 

Executives have said this is necessary, as expected gains in production future years will keep a lid on prices.

 

In Alaska, TransCanada Corp is leading a state-approved effort to build a 1,700 mile (2,800 km) pipeline to Alberta, and will seek support from shippers next year. It has access to $500 million in state money and is pushing for more federal loan guarantees.

 

It faces competition from North Slope producers BP Plc and ConocoPhillips , whose Denali line would also tap the region's 35 trillion cubic feet of reserves.

 

The Mackenzie pipeline in Canada, led by Imperial Oil Ltd , is stalled as environmental regulators pore over a mountain of evidence. It is now expected by the end of this year, months later than previously targeted.

 

The Mackenzie backers are in talks with Ottawa over a package of fiscal incentives to make the 760 mile (1,220 km) pipeline through the Northwest Territories viable.

 

POLITICS THE WILD CARD

 

Analyst Martin King of FirstEnergy Capital Corp said he questioned the need for those pipelines even before the shale boom, as rising capacity to take imported liquefied natural gas in North America looked set to fill the market void.

 

"Now if you believe some of the shale can come on fairly economically at $4-$5 (per mmBtu), that's probably still just barely, or not even, economic for some of those big Arctic pipes," King said.

The wild card for Arctic gas, however, is politics. The United States and Canada both view their Arctic gas as strategic and key to future security of supply, which puts more than just economics into the mix, analysts said.

 

Pipeline megaprojects can also create thousands of jobs and major economic activity, not a tough sell during a recession.

 

"But as a commercial proposition, given the very large capital costs associated with it, you can expect everyone involved to be ultra-cautious, from the company to the government -- and that makes it very challenging just to get a deal," Ineson said.

 

($1=$1.17 Canadian) (Reporting by Jeffrey Jones)