In an attempt to prod producers and pipeline companies into action on the long-stalled Alaska natural gas pipeline, the Senate comprehensive energy bill (S. 517) would authorize the federal government to consider the possibility of a government corporation stepping in to build the mammoth project if the private sector fails to come through.

If an application to build the pipeline isn’t filed with regulators within six months after President Bush signs an energy bill into law, the Democrat-sponsored measure proposes that the Department of Energy (DOE) study “alternative approaches” to construct and operate an Alaska gas transportation system, including the “feasibility” of establishing a government corporation to carry out the task.

It also authorizes the DOE to examine “alternative means of providing federal financing and ownership” for the project, including alternative combinations of government-private corporate ownership. No individual company could take on the estimated $17 billion, 1,400-mile pipeline project because of the risk centering around natural gas prices. Even the consortium of northern producers that is studying the prospect of building the pipeline is dubious about the return such a project would garner.

Sen. Jeff Bingaman (D-NM), chairman of the Senate Energy and Natural Resources Committee, inserted the provision in the energy legislation as a “backstop,” but the “preferred method” is for “producers and pipeline companies to get together on the building and routing of the pipeline,” said committee spokesman Bill Wicker.

“We feel the pipeline is very important from a national security standpoint as well as from an energy standpoint,” he noted. Bingaman is a major backer of an Alaska pipeline. He believes it would help to reduce the nation’s growing dependency on liquefied natural gas (LNG) imports. The long-line pipeline, as envisioned, would deliver gas supplies from Alaska’s North Slope to the continental United States to help meet a projected 30 Tcf market by 2010-2015. While analysts rate the economics of imported gas from LNG as about equal to those of gas arriving in the Lower 48 from the far North, individual LNG receiving terminals are much smaller projects, requiring much less in capital commitments.

The threat of the federal government potentially moving in to build the pipeline is intended to “incentivize” the private energy sector, Wicker said. “We want to see this pipeline built. That’s the bottom line.”

A federal role in building the Alaskan line, some believe, could portend disaster. “I would think if that’s the case then the industry would want to get its act together” on choosing a route for the pipeline and moving ahead with construction, he noted. If the gas industry continues to stall on the project, “government is prepared to step in and do it.”

Unlike the House energy bill, the Senate measure does not dictate a route for the Alaskan pipeline, but rather believes that decision should be left up to the pipeline companies. Bingaman is “route neutral,” said Wicker. The House energy legislation (H.R. 4), which was passed in August 2001, designates that the pipeline follow the Alaska Highway route, as opposed to the Mackenzie Delta route that would go south through western Canada..

As an added incentive to industry, the Senate bill also would offer a loan guarantee to the first “entity” that files an application to build an Alaska pipeline. The loan guarantee would cover 80% of the construction costs up to $10 billion.

While an Alaskan pipeline enjoys wide support in the Senate, the provision calling for a possible federal role in building the pipeline, as well as a $10 billion loan guarantee, could encounter strong opposition when the Senate debates the issue on the floor. It would be an unusual item for the federal government to fund. Cost estimates for the Alaskan pipeline, depending on the route preferred, have ranged anywhere from $12 billion to about $17 billion.

But either route would be too expensive to build and too risky, according to a preliminary study by Exxon Mobil Corp., Phillips Petroleum Co. and BP Plc, the three largest lease holders along the North Slope. The producers told Alaska Gov. Tony Knowles’ natural gas development team last September that the Alaska project looks like a long shot at best. The proposed pipeline would yield a rate of return on investment of about 10-11%, far less than the 15% sought by the producers. Neither the Alaska Highway route nor the Mackenzie Delta route would provide attractive enough returns to justify the enormous up-front costs associated with such a massive construction project, according to preliminary analysis by the producers. (see Daily GPI, Oct. 1, 2001).

The Senate is scheduled to take up S. 517 on Feb. 26, when it returns from the Presidents Day recess. Wicker predicts that debate on the entire Senate energy bill will take a couple of weeks, but he said it will likely be in conference committee for months. S. 517 is the revised version of S. 1766, which was introduced last December by Senate Majority Leader Tom Daschle (D-SD), Bingaman and other senators.

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