Natural gas pipeline will help, not solve, supply problems

Tentative agreement with oil companies makes pipeline possible

Posted: Thursday, February 23, 2006

WASHINGTON - A $25 billion pipeline carrying natural gas from Alaska to the Lower 48 states would play an important role in satisfying the nation's long-term supply needs, but experts say it will not reverse America's rising dependence on imports or cause fuel prices to plunge.

Alaska moved the project to the front burner Tuesday when it reached a tentative pact with three oil companies to build a pipeline to transport up to 4.5 billion cubic feet of natural gas a day - an amount equal to 7 percent of present U.S. demand.

Still, the project could be a decade or more away from completion. Even after an anticipated multiyear design phase, some knotty economic and political issues will need to be hashed out, starting with getting the necessary environmental, right-of-way and construction permits from U.S. and Canadian authorities.

The oil companies - Exxon Mobil Corp., BP PLC and ConocoPhillips - and their contractors also would need to recruit some 4,000 workers to build the pipeline and get steelmakers to roll out enough high-strength, 52-inch diameter pipe for the 3,600 mile-long project.

The pipeline's cost was estimated in 2001 at $20 billion. But BP spokesman Daren Beaudo said Wednesday the cost has escalated to between $25 billion and $30 billion because of "the cost of raw materials, particularly steel."

Until recently, natural gas prices were too low to justify the massive investment needed to deliver the fuel from Alaska's North Slope to the Lower 48. But natural gas futures jumped to $9 per 1,000 cubic feet in 2005 - more than five times the price in 1995 - and now trade around $7.28. They are not expected to fall below $4.50 for the forseeable future.

Currently, the industry reinjects into the ground the large amount of natural gas that comes to the surface when oil is being pumped from Alaska's large but dwindling oil fields. Analysts said there is about 35 trillion cubic feet of proved natural-gas reserves in Alaska, but they expect that figure to rise in the future.

Rising demand and high prices already have spurred plans for a separate natural gas pipeline that will carry 1.2 billion cubic feet a day within five years from Canada's Mackenzie Valley in the province of Alberta. And with consumption exploding globally for a fuel used to produce electricity, heat homes and power manufacturing plants, producers and energy companies are racing to raise billions of dollars to build the infrastructure needed to transport liquefied natural gas, or LNG, via ships to the United States and other consuming nations around the world.

The United States, for example, is expected to import some 16.4 billion cubic feet a day of LNG by 2010, by which time overall U.S. demand could rise to 68 billion cubic feet a day. Current LNG import capacity is about 3.3 billion cubic feet a day.

Assuming the Alaska and Canadian pipelines are built, analysts say the U.S. will still face long-term supply challenges because of dwindling natural-gas production in the Lower 48 states and rising demand.

"It is part of the solution, it is not the solution," said Gavin Law, head of the global LNG practice at consultant Wood Mackenzie in Houston.

After years of negotiations, the Alaska pipeline project cleared an important hurdle Tuesday when Gov. Frank Murkowski announced that Alaska had reached an accord with Exxon Mobil, BP and ConocoPhillips on a tax and royalties structure.

Murkowski proposed a 20 percent tax of oil companies' net profits in Alaska, to be offset by a 20 percent tax credit for reinvestment in the state.

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