Despite the Alaskan gas pipeline project being deemed uneconomic at the end of a study conducted by BP, ExxonMobil and ConocoPhillips, David Welch, BP president of Alaska-Canada Gas, said Thursday the company’s new fiscal package could not only make the project viable, but more importantly, could get it up and running by the end of 2011 if the energy bill goes through this year.

With the over-the-top pipeline route for transporting Alaskan North Slope gas to the Lower 48 pretty much dead in the water due to a provision in the federal energy bill, an Alaskan law banning the route and environmental concerns, the Alaska Highway route, or southern path, has producers’ undivided attention as the Lower 48 — absent new supply — is expected to see a supply gap of 15 Bcf/d or more in the next 10 years, Welch said. He estimated Alaskan gas could fill up to a third of the expected supply gap.

“We really need to get some additional frontier gas coming into the country,” Welch said. “This is a 10-year lead time project, so it’s very timely to get this gas online within time to help fill this gap. We can’t wait two years, five years, 10 years to get [started], or else this gas is going to be too far out in the future to really have a significant contribution to fill in this gap.”

The Alaska Highway route is expected to cost $20 billion and would span 3,652 miles from the North Slope, where there is 35 Tcf of discovered reserves and a 100 Tcf potential, to Chicago. The 4.5 Bcf/d pipeline with expansion capability to 5.6 Bcf/d also would tie into Alberta infrastructure. Welch noted that the project would help to balance trade because it is a domestic project. He added the pipeline would accrue roughly $40 billion in revenue to the federal government, $50 billion to Alaska and $10 billion to Canada.

Currently, the Senate energy bill contains a provision that sets a $3.25/MMBtu floor price at the Alberta Hub on Alaska gas, which Welch said would be sufficient for the project to go forward. However, the current provision has “drawn some criticism” from the White House, Canadians and other parties. At the request of people within the federal government, Welch said BP has come up with a “hybrid fiscal package” that would replace the current Senate provision and “mollifies” a lot of the concerns that Canada has. “We think it would be a politically feasible outcome,” Welch said, noting that it would be about half as rich as the current Senate package from the standpoint of the investor.

BP’s four-component hybrid package is a combination of tax and loan guarantees. The proposal provides $0.52/MMBtu for Alaska gas transported to market. Full credit would apply when the field price is less than or equal to $0.83/MMBtu, and phases out to zero at $1.35/MMBtu. Welch said the estimated toll rate of moving gas from the North Slope to Chicago would be $2.39/Mcf.

The package would also include a federal loan guarantee where the U.S. government would guarantee payment on up to 80% of total capital costs. The hybrid plan also would accelerate the depreciation rate on the project to a seven-year recovery period as opposed to the current 15-year provision. Welch said the plan also allows the Alaskan pipeline’s gas treatment plant to qualify for existing enhanced oil recovery tax credits on 15% of its construction costs.

He said the plan has been worked through the House, Senate and White House. “I can’t say there is 100% agreement on this thing, but it is pretty close to something that we believe is a viable way to go forward.” He said the hybrid language is currently under consideration in the energy conference. “We think it is being seriously considered.”

The hybrid plan is an option “that gets the resource owners and investors to the point where we would be willing to take the next step, which is to spend about another $400 million to do detailed engineering and permit application work on the pipeline,” he noted.

As for whether there is enough demand for both the Alaskan gas pipeline as well as the Mackenzie Delta line to go forward, Welch said BP not only thinks that the market needs both lines, but it will also need other sources of gas. He listed Eastern Canada gas and LNG as being additional options to keep adequate supply of gas coming into the country. “We also think the Mackenzie line will be built three years or so before the Alaska line.”

In addition to the new hybrid plan, Welch said BP needs to find a couple billion dollars in cost savings in order for the project to be economic. “We’ve got about five or six things like high strength steel, automatic welding, new technology on the gas treatment plant and optimization of the refrigeration on the pipeline” to shave costs.

As for the politics of it all, Welch said it is difficult to know how Tuesday’s election outcome — which favored Republicans — will play on the project because people on both sides of the aisle wanted the Alaskan natural gas pipeline built. “It’s really hard to say what the election is going to do in terms of, is it going to speed the process up, or slow it down?”

While it’s true that the Alaskan pipeline is one of the few issues in the omnibus energy bill that has bipartisan support, the odds of House-Senate negotiators voting out a conference report on the bill during the upcoming lame duck session are growing increasingly slim, industry observers say. If Congress fails to approve a bill before it adjourns this year, it will have to start all over when it returns in 2003.

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