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MidAmerican Proposes to Build the Alaska Portion of Pipeline to the Lower 48

MidAmerican Proposes to Build the Alaska Portion of Pipeline to the Lower 48

MidAmerican Energy Holdings Company (MEHC) Chairman and CEO David Sokol joined Alaska Gov. Frank Murkowski in Fairbanks Thursday in announcing a preliminary filing with the state for favorable tax treatment to build the Alaska portion of a 4.5 Bcf/d gas pipeline to deliver North Slope natural gas to markets in the Midwest.

MidAmerican is the primary sponsor of the proposed MEHC Alaska Gas Transmission Co. project, with Cook Inlet Region Inc. and Pacific Star Energy, a coalition of Alaska native groups, holding minor interests. The group proposes to build a 745-mile 48-inch pipeline from the North Slope near Prudhoe Bay to the Alaska border with Canada's Yukon Territory.

TransCanada PipeLines stepped forward immediately with an offer to complete the 1,000-mile Canadian half of the revived Alaska natural gas project for $5-$6 billion.

"We are very encouraged that a credible group has filed an application," TransCanada communications officer Heidi Feick said. She reported co-operation is already under way with the arms of Nebraska tycoon Warren Buffett's Berkshire Hathaway conglomerate that are sponsoring the new edition of the Alaska project.

A press release issued by MidAmerican says the line would connect with a new pipeline to be built in Canada either by TransCanada PipeLines' Foothills Pipe Line subsidiary "or others." TransCanada claimed legal rights to build the Canadian leg along the Alaska Highway to hook up to its established gas grid at Boundary Lake, near the intersection of the Alberta, British Columbia, Yukon and Northwest Territories borders.

"We're definitely ready to work with any party in Alaska that recognizes our entitlement to build the Canadian part," Feick said. TransCanada has provided the Buffett group with engineering, environmental, routing and cost plans done on the megaproject to date by Foothills Pipe Lines, she reported.

As owner of Foothills, TransCanada is heir to the original 1970s version of the Alaska project, which was approved by a Canada-U.S. treaty and international regulatory rulings. While the Arctic leg stalled, Foothills laid "prebuild" lines that have taken Alberta gas to southern California and Chicago since 1982.

"We believe there is a significant timing advantage to working with TransCanada," said Mark Moench, a vice-president in the Buffett organization working on the Alaskan proposal.

"We've had some very good meetings with TransCanada. There's a very positive relationship. They have done a great job of preserving those (treaty and regulatory) rights in Canada."

"It has long been Alaska's dream to see commercialization of our vast gas reserves, believed to be well over 100 Tcf," Murkowski said. "My administration has been working very hard over the past several months to move the gas pipeline project along." He said the members of the MAGTC group "have a level of financial vitality, pipeline expertise, consumer market base, and Alaska business association that is far beyond anything we have seen to date."

MidAmerican is a privately-held company of which Berkshire Hathaway Corp. owns 80%. In the last two years it has branched out from its base as a relatively small midwestern utility and into the pipeline business in a big way with the purchases of stranded assets, including Kern River Gas Transmission (August 2002) and Northern Natural Gas (April 2002).

The application seeks to qualify the project under Alaska's Stranded Gas Act, which allows for favorable tax treatment and financial support. Murkowski said the next step will be to negotiate a draft contract with the MidAmerican-led group. Once negotiations are complete, the contract will be submitted to the Legislature for its approval.

The huge cost of the line from Alaska to deliver gas to the lower 48, has been a stumbling block for the project. The currently dormant energy bill in the U.S. Congress, if enacted, would provide a federal loan guarantee for the bulk of the pipeline cost. Another issue is whether gas transported through the long line would be competitive pricewise when it reaches the lower 48. A provision for price supports was stuck from the bill.

But, neither the Buffett organization nor TransCanada called for gas price guarantees or subsidies. The Alaskan producer group of BP, ConocoPhillips and ExxonMobil said it was willing to consider the new proposal as a way to spread risks of the megaproject.

Alaskan gas will be needed because Alberta's aging gas fields show clear signs of running down, said Rob Woronuk, senior analyst on the Canadian Gas Potential Committee, a supply forecaster relied upon by industry and government agencies in both Canada and the U.S.

Exports to the U.S. fell about 11% in 2003 because Alberta gas output dropped more than 2% and Canadian consumption grew, Woronuk said. He also said he doubts the U.S. can build proposed import terminals for liquefied natural gas tankers from overseas fast enough to replace Alberta supplies.

By the time northern gas starts flowing, Woronuk said the market will likely be so tight that it will not depress prices. He pointed to similar projections by the U.S. National Petroleum Council and the U.S. Energy Department's Energy Information Administration.

The plan poses no direct threat to the $3.8-billion Mackenzie Valley project it intends to make construction applications as soon as possible, project spokesman Hart Searle said. "The sooner the better, there's no question we would like to file as early as we can this year."

Any negative effects of the Alaskan development on the Mackenzie Valley project are expected to be indirect. Searle said Canadian concerns center on potential for cost inflation due to competition for materials and labor, especially if the Mackenzie proposal runs into delays, and on the future availability of delivery capacity on TransCanada and Foothills.

"This announcement is not a surprise...it reminds us time is of the essence," Searle said. "Our current plan is still to file applications this year, leading we hope towards regulatory approval in 2006, with the objective of getting the gas on stream in 2009."

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