In a “dear colleague” letter, top Senate Democrats have asked senators to support building a long-line Alaska natural gas pipeline along the “southern” route through Alaska, as well as a production tax credit to spur construction of the line.

An Alaska pipeline to the Lower 48 states is critical to bridging the widening gas supply-demand gap in the United States, which is on the “brink of a major natural gas shortage that has serious price implications for businesses, households and the U.S. economy,” wrote Senate Minority Leader Tom Daschle (D-SD), Minority Whip Harry Reid (D-NV) and Sen. Jeff Bingaman (D-NM), the ranking minority member of the Senate Energy and Natural Resources Committee.

“It is estimated that, by 2010, the supply deficit may be as much as 4.5 billion cubic feet of gas per day,” they said. An Alaska gas line would be capable of filling that supply shortfall in the Lower 48 states, the senators noted. But they stressed that the “southern” route and production credit were key to making the project a reality.

Both the Senate and House energy bills, which are being reconciled in conference committee, mandate that the Alaska pipeline follow the “southern” route, which runs along the existing oil pipeline from the Alaska North Slope to Fairbanks, then parallels the Alaskan Highway into Canada to existing distribution facilities in Alberta, and then would turn southward to the Lower 48 states.

Construction of the line along the alternate “northern” route under the Beaufort Sea into Western Canada is opposed by the state of Alaska and its Eskimo population and environmentalists, and would require the use of untested technology, according to the Senate Democratic leaders.

Only the Senate bill would offer Alaska gas producers a tax credit (52 cents/MMBtu) in the event gas prices fall below a certain floor. “We believe that…some modest fiscal incentives are necessary and warranted. This pipeline project would be the largest private construction project ever undertaken in North America. The magnitude and duration of the operation underscores the need to bring some certainty to the price of the commodity,” the three senators said. “It is highly unlikely that the Alaska gas pipeline will be built without the Senate commodity risk provision, or something comparable to it.”

The “dear colleague” letter was in response to a “continuing campaign to change the way the pipeline [is being] incentivized” in the energy bill’s tax title, which still is being worked on by the Senate Finance Committee and House Ways and Means Committee, said Bill Wicker, a Democratic spokesman for the Senate energy panel. Objections to financial incentives for an Alaska pipeline are coming from the House side, particularly the Ways and Means Committee, and from coalitions of small gas producers, he noted.

The Bush administration is against any kind of incentives for the pipeline as well. “The administration strongly opposes the price-floor tax credit provisions in the Senate bill and any similar provision because it would distort markets, could undermine fiscal responsibility and would likely undermine Canada’s support of the pipeline and set back broader bilateral energy legislation,” Energy Secretary Spencer Abraham said in a recent letter to Senate Energy and Natural Resources Committee Chairman Pete Domenici (R-NM).

The three senators disputed the administration’s claim that a production tax credit would undermine fiscal responsibility. “In fact, given future price projections, it is unlikely that the commodity risk provision will ever become operative, which the Congressional Budget Office acknowledged by giving this provision a zero score,” they wrote.

Nor would it distort energy markets, the Senate Democrats said. “The commodity risk provision does not interfere in the natural gas markets because it does not artificially establish a price floor for natural gas. Under the Senate provision, the market is allowed to operate independently with no government intervention. Instead, the federal government would provide a 52-cent tax credit to make up for low natural gas prices should they fall within a specified range.”

As for the charge of undermining energy relations with Canada, the Democrats noted that “countries around the world, including Canada, provide similar incentives for energy projects considered to be of national importance.”

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