Producers, Politicians At Odds Over Alaska Pipe Route

In what would be a major blow to Alaska officials, especially Gov. Tony Knowles who has pinned the remainder of his term toward getting an Alaska Highway natural gas pipeline, major producers indicated this week that because the cost would be less, they now favor a North Slope pipeline that would move north, through the Beaufort Sea, instead of across the state.

However, thousands of miles away in Washington, DC, the House Energy and Commerce Committee last week voted in a last-minute amendment to prohibit permitting any route other than the trans-Alaska route. The vote rankled producers, who say limiting the choices will only destroy any hopes for a gas pipeline in the near future.

The Alaska Legislature's Joint Committee on Natural Gas Pipelines held a two-day hearing last week to get the lowdown from producers and other stakeholders on what progress has been made toward building a pipe to the Lower 48. Meanwhile, the House Energy committee, disregarding any testimony taking place in Alaska, voted in an amendment that would stop any consideration of the Northern Route.

Ken Konrad, a BP executive, testifying in Anchorage, told the committee that an analysis "so far indicates that the northern route appears more cost efficient than a southern route." Konrad also noted that with a Beaufort line, gas reserves in the Mackenzie River delta also could be taken -- which would be a major victory for Canadian officials.

Konrad and other stakeholders, including producers, analysts and government officials involved in moving gas from the North Slope, were asked to speak before the joint committee and offer their insight on where the project could be headed (see NGI, July 16).

BP and partners Exxon Mobil and Phillips Petroleum, the majority property rights' holders on the North Slope, have been analyzing various routes for a proposed pipe since last fall, which basically would either move supply across the state or go north under the Beaufort Sea and into Canada on a trek toward the Lower 48.

The producer consortium, the North American Natural Gas Pipeline Group, is spending close to $100 million to evaluate the routes and has indicated it could file an application on one of the routes with the Federal Energy Regulatory Commission (FERC) by the end of this year. Konrad's testimony, as well as comments made during the hearings, indicate that the desire of Alaska officials to keep the pipe inside the state may fall apart.

What appears to be the deal maker or breaker is cost. Konrad said only "a few dimes" separate the two major proposals, but transportation costs per thousand Btus would pick up savings in lower investment costs with a shorter pipe and lower operating costs. Economists have estimated the rate for bringing gas to the Lower 48 from the North Slope will be around $2.25/MMBtu. A shorter pipe overall would lead to substantial savings, especially on a project that Konrad noted faces serious challenges economically.

Joe Maruschack, Phillips' natural gas pipeline chief, said his group is aware of the "deep reservations" Alaskan officials have about a Beaufort route, but also indicated that problems associated with the Beaufort route could be risky as well. He cited environmental opposition from aboriginal groups, which would have to approve the routing, construction on a sea route, logistical challenges and additional permitting as part of a daunting, and lengthy task.

If the consortium and other producers chose the Beaufort route, Maruschack indicated that they could explore some way to bring gas to Alaska's residents south of the North Slope. But in Alaska, it's about more than the supply. This past spring the Alaska legislature, with strong support from Knowles, passed a law to prevent construction of a Beaufort route. Without Alaska's support, the Beaufort route could also face defeat.

"We're coming to a divergence," said Harold Heinze, the former Alaska Natural Resources Department commissioner and a former energy executive. "There's a big difference between maximizing the profitability of companies and maximizing the benefit to the state."

Ken Thompson, a former Atlantic Richfield executive and president of Arco Alaska Inc., said one compromise would be to offer tax breaks for building along the Alaska Highway. "They could pressure the governor and the legislature to make a deal," he told the committee.

Roger Marks, a State of Alaska oil and gas economist who has studied the proposed projects, said the cost savings could be as much as $2 billion using the Beaufort route, which would be about 200 miles shorter than an Alaska Highway route. Total construction costs, according to Konrad, now range between $15 billion and $20 billion.

"Several dimes from your transportation costs could remove a lot of risks," Marks told the committee.

Forrest Hoglund, CEO of Arctic Resources Co., which is one of the producer groups working to secure the Beaufort Sea route, was outraged that Washington politicians were attempting to stop any route except one through the state.

"This late night maneuver tried to close down the most viable opportunity for an Alaskan pipeline," he said of the House Energy committee's amendment. "At a time when our energy demands are increasing, this fiasco is a political play and not based on any solid reasoning...I can assure you that all the people supporting new energy sources, including President Bush, will not let this action in the dark go without more real debate of the issues."

Meanwhile, Alaska remains committed to getting a pipe through the state. Foothills Pipe Lines Alaska Inc. signed a Memorandum of Understanding (MOU) with the state on Thursday to complete its review of the Alaskan Northwest Natural Gas Transportation Co.'s previously filed right-of-way lease application to construct and operate the highway pipe. Foothills constructed what exists so far of the Alaska gas line and remains a proponent of the trans-Alaska route.

U.S. and Canadian law has designated the ANNGTC, a partnership of Foothills and TransCanada PipeLines, to construct and operate the Alaska portion. Foothills and its affiliates would construct and operate the Canadian portion.

"This agreement is an important step in completing our land position for this project," said John Ellwood, Foothills vice president. "Together with 400 miles of right-of-way we have on federal lands in Alaska and our extensive right-of-way in Canada, we are in an excellent position to expedite the building of the pipe."

Ellwood said the application review, together with the existing permits and FERC and National Energy Board of Canada certificates, underlines the timing advantage of a trans-Alaska route advocated by Foothills and its shareholder companies, Westcoast Energy and TransCanada.

"One thing that everyone in Washington (DC) and Anchorage agree on is that getting North Slope gas to the Lower 48 is a priority, and our approved route along the Alaska Highway through Canada can deliver that gas two-to-three years earlier than any greenfield project," Ellwood said. "We have invested hundreds of millions of dollars to advance this project and that has enhanced our ability to deliver Alaska gas to the Lower 48."

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