Denali projects Alaska gas pipeline cost at $35B

Details of the project released in a filing with the Federal Energy Regulatory Commission

Posted: Thursday, April 08, 2010

JUNEAU - A massive endeavor to move natural gas from Alaska's North Slope to North American markets will cost an estimated $35 billion, according to a plan unveiled Wednesday, potentially setting the stage for a high-stakes showdown with a competing pipeline project and the state.

Details of the Denali project, a joint effort of ConocoPhillips and BP PLC, were released in a filing with the Federal Energy Regulatory Commission.

Denali proposes a pipeline of more than 1,700 miles, with delivery points along the way to help meet gas needs in Alaska and Canada. It bills the project, which includes a gas treatment plant on the harsh North Slope, as "one of the largest private investments in the history of North America." Houston-based ConocoPhillips and Britain's BP claim lease rights for about half of Alaska's known North Slope gas.

Denali is competing with a proposal being advanced by Calgary, Alberta-based TransCanada Corp., and Exxon Mobil Corp., of Irving, Texas. That project, which has been promised up to $500 million from the state, has estimated its cost at $20 billion to $41 billion, depending on the route.

TransCanada plans to court gas producers and begin seeking shipping commitments as early as May 1 as part of what's called an open season. Wednesday's filing by Denali sets up expected back-to-back open seasons, with Denali hoping to hold its own as early as July.

Both projects aim to be in service by around 2020, with plans to deliver about 4.5 billion cubic feet of gas per day to North American markets via larger lines to Canada.

"No one is going to build two pipelines," said Larry Persily, the federal coordinator for Alaska Natural Gas Transportation Projects. The question then becomes who gets on board with which project, and what will be needed to make a project more economical.

It's already widely anticipated that bids made in the open season process will be conditioned, with companies wanting to negotiate with the state on long-range tax and royalty terms.

Earlier this year, Tony Palmer, TransCanada's vice president of Alaska Development, said he believed the most effective way to move his project ahead was by forming an alliance with the state, Exxon Mobil, BP and ConocoPhillips, the North Slope's other current major players.

Denali President Bud Fackrell agreed that all the stakeholders would need to get behind one project, because there's only room for one this size. He said Denali and its owners are open to anyone who can add value joining their project. But he said BP and ConocoPhillips do not agree with all of the state's terms, making it problematic to coalesce now.

Gov. Sean Parnell tacked the comments up to "posturing." "They're negotiating," he told reporters, adding that he sees back-to-back open seasons as a positive for Alaska.

Denali, which is moving ahead without the state support TransCanada's plan is getting, notes the risks involved. It's seeking leeway to consider other options - a scaled-down project, an entirely different project, such as a line to a liquefied natural gas facility, or allowances to drum up additional support for the original - if it doesn't get commitments for at least 85 percent of the line's capacity at open season.

TransCanada successfully bid for a state pipeline license and the promise of a $500 million reimbursement under the Alaska Gasline Inducement Act pushed by then-Gov. Sarah Palin. Its proposal also has an option for a liquefied natural gas facility that would export the fuel by ship.

Fackrell noted other challenges, too, including financing and a legal dispute over some Alaska lease holdings. He noted the market's volatility and said prospective shippers will have to decide - given the volatility, tax questions and other issues - whether they want to commit to the Denali project, TransCanada's project, or neither. He said people are not "sitting there waiting" for gas out of Alaska now, and that any project will have to prove itself economically viable.

But pipeline officials Wednesday also defended what they see as a highly competitive project, with numerous options for shippers.

For years, a natural gas pipeline has been billed as a way for Alaska to shore up royalty revenues, since projections call for a continued decline in North Slope oil production. While oil's still king, estimates have put proven reserves of gas on the North Slope at 35 trillion cubic feet.

Debate has focused on how best to capitalize on that resource, but in recent months that debate's also been colored by skepticism among some lawmakers, who wonder if the idea of a mainline to North America is past its prime because of other gas plays ahead of Alaska's and improved methods to tap natural gas stored in shale formations. There's also the question of whether there will be sufficient demand beyond the next decade to make a major project succeed for all involved.

A recent report by IHS Cambridge Energy Research Associates referred to a "shale gale" that is changing supply and price outlooks for gas and competition among energy choice. By 2035, the report found, shale gas could account for 50 percent of the United States' natural gas supply, up from 20 percent currently.

The report also credited shale with helping to bring the level of North America's discovered gas resources to an amount sufficient to meet current energy needs for more than 100 years.

But Doug Reynolds, a professor of energy economics at the University of Alaska Fairbanks, said that shouldn't be seen as a death knell to an Alaska pipeline project.

While acknowledging the potential of shale gas, Reynolds also noted environmental concerns associated with developing it as well as infrastructure and other costs that he believes would allow room for Alaska gas to be competitive and make money on the market.

He said the volume of gas envisioned by the Alaska pipeline proposals is a "small part" of the demand. U.S. consumers used about 60 billion cubic feet of natural gas per day in 2009.

"It'll happen," Reynolds said of a pipeline project. "It'll happen. ... This is all a game," with the major players waiting to negotiate terms with the state.

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