Ken Silverstein EnergyBiz Insider Editor-in-Chief

The construction of this pipeline is considered vital in the effort to bring Alaska's vast natural gas reserves to the rest of the United States. That gas would help alleviate price pressures that have been driving up consumers' heating bills. And that's why Alaska Governor Frank Murkowski and ConocoPhillips have agreed to a potential deal whereby the state would finance the project to the tune of $4 billion while energy producers would ante up $20 billion.

"The time is right to move forward," says Jim Bowles, president of ConocoPhillips Alaska in a news conference. "We are now one step closer to making the Alaska natural gas pipeline a reality."

BP and ExxonMobil are the two other central figures in the discussion. The three oil companies applied to the state last year in an effort to negotiate how the pipeline would be financed. Congress had previously authorized loan guarantees that would require the government to pick up 80 percent of the first $18 billion if the project should not be completed.

Clearly, conditions are better than ever before. For starters, the price of natural gas is now at record highs -- $14 per million BTUs for January deliveries. That's well beyond the $3.25 floor that the principals said they would need to offset the risks associated with the 10-year project. For its part, Alaska gets some valuable financial guarantees as well as millions of dollars in new tax revenues associated with the effort and hundreds of new jobs for state residents.

The final deal has not been made public but must still go through a comment period before it would be approved by the state legislature. Ultimately, the project needs permission from federal regulators who will listen to all sides, some of which fear the potential route any line might take for environmental and economic reasons.

Congress has said it wants to promote the development of natural gas resources in Alaska. As such, the Federal Energy Regulatory Commission has been given 20 months to review the deal once it gets the paperwork. "We are under mandate to streamline the processes," says Robert Cupina, a deputy director at FERC.

The pipeline was originally authorized by the FERC under Alaska Natural Gas Transportation Act that went into effect July 1, 1979. Construction began soon after but stopped in the early 1980s, largely because of the availability of low-cost Canadian gas. Developers have spent more than $125 million studying the project.

Significant Milestone

The pipeline would be a 3,400-mile project that would send 4-5 billion cubic feet per day from Alaska's North Slope to the Lower 48. The fields where the gas is found hold 35 trillion cubic feet of known reserves and would undoubtedly help serve America's energy needs. Some experts say the region holds even more natural gas resources.

The natural gas and the oil have been separated during processing and the gas has subsequently been re-injected into the ground in the Alaskan fields in an effort to keep the crude flowing. Now, it's just waiting to be tapped and used by electric generators but the transportation costs to get it to the Lower 48 are high.

"There's no question, this is a significant milestone," says Gov. Murkowski, at the news conference announcing the deal with ConocoPhillips. BP and ExxonMobil are withholding formal comments but have said that some "outstanding issues" remain but that they don't feel those matters will impede progress.

The loan guarantee passed earlier is considered by many a critical financing provision because it assures investors they will not lose money should gas prices drop so dramatically as to prevent completion of any line once construction starts. The guarantee could reduce the interest rate needed to attract financing for the line. If so, that would cut its cost, while also protecting investors who would be financing the largest private construction project in the nation's history.

Beyond the financial exposure, logistical, environmental and political risks are present. Alaska wants the gas line to follow the oil pipeline down to Fairbanks, and then go eastward to Canada. This would assure that only Alaska gas gets transported through the line. But the Canadians want the route to go due east from Prudhoe Bay to the Mackenzie Delta, where huge natural gas deposits are thought to exist. The Canadians fear that a pipeline from the north that does not include their Mackenzie region would leave them with "stranded" gas.

The country's thirst for new energy sources is propelling forward the idea of an Alaskan pipeline. But that thirst would remain unquenched if it were not for record-high natural gas prices that are giving producers added confidence. The economic factors in combination with some past legislative action and potentially favorable regulatory rulings might finally bring this project to fruition.

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