Alaska's Endless Endeavor

Alaska's Endless Endeavor

Location: New York
Author: Ken Silverstein, EnergyBiz Insider, Editor-in-Chief
Date: Monday, April 21, 2008

An Alaskan natural gas pipeline would certainly help feed America's energy appetite. But financial and political impediments are delaying construction.

Alaska's Prudhoe Bay produces about 8 billion cubic feet of natural gas a day, or roughly 13 percent of this country's daily consumption. But, that gas never reaches the Lower 48 states because it waits for a pipeline to be built. While the state is now in serious talks with a Canadian pipeline developer, the project must still overcome a host of opposition that is bound to be formidable.

The current thinking among state leaders is to grant an exclusive contract and license to TransCanada Corp., which would guarantee that the pipeline operator receives a $500 million state subsidy. It would also get favorable regulatory considerations that include a streamlined permitting process at both the federal and state levels.

By awarding such a contract, the state is simultaneously rejecting a deal put forth ConocoPhillips that bypassed the bidding process and the public seed money offered and instead has focused on tax and royalty treatment. Governor Sarah Palin reasons that the line should be owned and operated by an independent developer and not by Big Oil that already controls 35 trillion cubic of natural gas supplies there, although such producers would also receive state support under the plan.

Alaska's state legislature must still approve the agreement between TransCanada and the state. Opponents of it, however, say that it enriches the pipeline operator at the expense of gas producers. In the end, the state would receive fewer taxes and fewer royalties.

"We are slipping and cannot afford to slip further," says U.S. Senator Lisa Murkowski, R-Alaska. "Our competitors are moving ahead. There is nothing stopping us from getting a gas line built but possibly ourselves."

She is urging the governor and the state legislature to act, noting that the rest of the nation is not waiting for Alaska: Sempra's LNG receiving terminal on Mexico's Baja Peninsula is expected to open this year and later expand. Meantime, Cheniere Energy has put together two LNG projects along the Gulf Coast of Texas totaling 4 billion cubic feet of natural gas per day. And, the $4 billion, 1,600-mile Rockies Express will start moving 1.8 billion cubic feet of gas from the Rockies to the Midwest next year.

Other Options

The Alaskan pipeline was originally authorized by the Federal Energy Regulatory Commission under the 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.

Now, conditions are ripe. For starters, the price of natural gas has remained relatively high -- above the $3.25 floor that producers have said they would need to offset the risks associated with the 10-year project. And Alaska, which would be making a hefty initial investment, would do well too. It would reap millions of dollars in new tax revenues associated with the effort and hundreds of new jobs for state residents.

Congress is favorably disposed and in the past has authorized generous loan guarantees. At the same time, FERC has put the Alaskan project on "fast track" and has 20 months to review the deal once it gets the paperwork. Nevertheless, the expected operational date has been pushed back once again: Now, the U.S. Energy Information Agency is predicting a start date of 2020 whereas two years ago it was saying 2015.

Delays are not just the result of financial risks. They are also a product of political tussling. Calgary-based TransCanada wants to build a 1,700-mile pipeline at a cost of $26 billion. It would run down the Alaska Highway to Alberta, Canada where the gas would then be routed into an existing Canadian pipeline network.

Regulators are now scrutinizing potential pipeline profits, which critics say would initially yield 14-percent and possibly generate as much as 25-percent returns during inflationary times. Shippers say that they would be the ones to support such generous results. They would pay higher fees to use the lines -- expenses that would not just diminish their own returns but also the state's tax collections.

TransCanada says that if it wins the state license and is subsequently given approval by FERC and its Canadian counterpart, the National Energy Board, then it would expect the state to support its endeavor. The allowable rate of return is a function of project risks and project size and what would be considered reasonable under similar circumstances. It adds that Canadian pipelines would increase the market potential of Alaskan gas -- not hold those supplies hostage as critics have complained.

Meantime, Conoco and BP say that they are following through on their own plan to deliver natural gas to the Lower 48. It would initially be a 2,000 mile pipeline that would move gas from the North Slope's Prudhoe Bay to Alberta. The companies say that they may later add another 1,500 miles so that the gas could be routed directly to U.S. markets. No timeline has been announced but the enterprises say that field work will begin this summer and that it will work to secure shipping contracts.

The country's longing for new energy sources gives added credence to an Alaskan pipeline. But that desire may remain unfulfilled. Political and financial hurdles still stand in the way and as such, the proposed project suffers from one delay after another. If Alaskan policymakers can't resolve the conflicts, though, other entities appear willing and able to help meet America's natural gas energy demand.