The Alaska House of Representatives has sent a strong message to gas producers, who so far have been pessimistic about building a privately-owned pipeline system to transport Alaska’s vast natural gas resources to markets in the Lower 48 states: “Build it or we will.” The House passed a bill last Monday sponsored by Rep. Jim Whitaker (R-Fairbanks) to authorize a feasibility study of the state building its own gas line.

The legislation creates the Alaska Gas Group, a state-owned company that must complete the study and will become the vehicle through which the state would pursue pipeline construction. The study would address all questions related to state pipeline development and ownership and would be completed by early 2004. The bill still must be approved by the Alaska Senate.

ExxonMobil, BP and Phillips, Alaska’s three major gas producers, already have concluded that the enormous cost of the project, an estimated $15-20 billion, would make it uneconomic. And a study recently completed for the governor recommends that the state not be among the investors in a major natural gas pipeline project (see Daily GPI, Dec. 5, 2001).

However, Whitaker said in an interview with NGI that significant details apparently have been overlooked. “The contrived negatives were greater than the positives,” he said regarding a study by Petrie Parkman. “I’ve spoken with the governor for years about state ownership, and he is definitive that under no circumstances will he support a state-owned project. I don’t want to be critical; I’ve never made a nickel being critical and I don’t want to start now, but the governor has been nearly blindly supportive of BP through the years and I’ll leave it at that.”

Whitaker said the numerous existing studies on Alaska pipeline development make it perfectly clear that “a substantial return to the state will accrue given state ownership. That return is indeterminate at this point, but nonetheless…it [would be] substantial,” he said. “In addition to that, it’s very clear that state ownership will reduce the tariff someplace in the range of 8-18%. That is a huge differential and makes Alaska gas significantly more competitive.

“If you are a British Petroleum or an Exxon or a Phillips, certainly it is not advantageous to discuss state ownership. However, regardless of what [their] perspective is, we have an obligation to consider independently the merits of state ownership and that’s what House Bill 302 requires.”

Whitaker noted that the railroad bond financing that the governor has proposed would in fact provide the mechanism for lowering Alaska pipeline tariffs by up to 18%. “There are a number of ironies associated with the report and subsequent actions [by the governor].

“The producers have concluded they don’t want to [build a pipeline], but that doesn’t mean that it’s not economic, and in fact, various models that have been conducted are indicative of favorable economics. We can go back to [all of the studies that have been done] and the industry’s own initial report, which indicated a rate of return someplace in the 12% range, and it should not be forgotten that was based upon the premise of a 54-inch pipe operating at half capacity. There were tremendous inefficiencies built into that model and still the rate of return was 12%. For a conclusion to be drawn that it is uneconomic is an amazingly subjective conclusion.”

Whitaker said the state is obligated to further consider pipeline ownership because of its unique position regarding ownership of the resource base. “No other state owns the resource or has a basic structure of governance that is even remotely similar to that of Alaska — the so called obligation of ownership. If we didn’t own this stuff, we wouldn’t be having this conversation because there would be no basis for the state to get involved. However, given that the state does own it and it is under lease, it would be an abrogation of our responsibility to not explore every opportunity to take that huge resource to market.”

He said it was not his intention to restart the process of studying a pipeline. A significant amount already is known. “It’s a matter of organizing what we know into a mechanism that will allow us to proceed, and that in part will be a function of the study.

“The bill has a couple of functions: it sends a very strong message to the industry that if you don’t build a project, we may; the other is that given that a decision is made to proceed, then we have a mechanism to proceed.”

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