Pipeline may take one of four routes

Posted: Sunday, April 23, 2000

The question of where to build a natural gas pipeline is looming as large as the questions of whether to and when.

There are four proposed pipeline routes, two of which would be associated with a liquefied natural gas (LNG) plant.

A partnership called the Alaska Natural Gas Transmission System already has permits for a 1,700-mile pipeline from the North Slope. The line would run south to Fairbanks and then parallel the Alaska Highway east to Boundary Lake, near Fort St. John, British Columbia, where it would connect with the existing Canadian pipeline system for natural gas. From there, gas could flow southeast to Chicago and southwest to California.

Foothills Pipe Lines of Calgary, Alberta, is a 50 percent owner of that project, expected to cost $6 billion in U.S. currency.

The pipeline could be operating by 2007 if critical decisions are made within 18 months by North Slope producers and Lower 48 utilities, said John Ellwood, vice president of engineering and operations for Foothills.

For the Lower 48 market, Foothills has competition from Municipal Energy Resources Corp. (MERC) of Houston, Texas, which has formed Arctic Resources Co. (ARC), now opening offices in Calgary and Anchorage.

MERC's concept is also an intertie with the Canadian system, with a radically different route: The $5 billion pipeline would go offshore from Prudhoe Bay and come back on land at the Mackenzie Delta in the Northwest Territories, where ample gas reserves are suspected, as well, said MERC President Bob Murphy.

The 1,200-mile route would be shorter than the corridor to the south and also cheaper per mile because of flatter terrain in the Northwest Territories, Murphy said from Houston.

He said it would be even more economical because of the additional gas that could be accessed in the delta and more attractive to the Canadian government, which would realize greater royalties from domestic gas production.

``It is important to Canada that this pipeline not only serve Alaska. It has political economies of scale, as well.''

ARC is intended to become an umbrella group of various interests who want to develop the pipeline, Murphy said. The pipeline itself ultimately would be owned by governmental entities on both sides of the border. In Canada's case, it would be entirely aboriginal groups; in Alaska, the state could be involved, he said.

State Revenue Commissioner Wilson Condon said the state should explore partial ownership of the line, because of the possible tax benefits.

Meanwhile, two 800-mile, all-Alaska pipeline routes are included in competing LNG projects.

A port authority comprised of municipalities in Valdez, Fairbanks and the North Slope formed to spearhead a pipeline alongside the existing oil pipeline to Valdez, with an LNG plant at Anderson Bay, on Prince William Sound. The gas would be chilled to a liquid and shipped on refrigerated tankers to Asia.

The port authority won an Internal Revenue Service ruling exempting it from taxes, a savings of about $3 billion. New cost estimates for the project are being worked up for release at a news conference in May. Previously, a range of $12 billion to $15 billion has been cited.

An eight-person delegation from the port authority recently spent two weeks touring Japan, China, Hong Kong, Korea and Taiwan, holding 21 meetings in an attempt to establish eventual markets for the natural gas.

Valdez Mayor Dave Cobb, who went on the trip, said the natural gas market in Asia will be opening up by mid-decade, coinciding with construction of a pipeline.

``You have to have buyers on line, committed, before you go to the financial markets to fund the project,'' Cobb said.

Cobb said that the port authority is the best vehicle for commercializing the gas because of the public ownership of the resource.

``We've argued the point repeatedly that the gas belongs to the people of the state of Alaska.''

Under the port authority concept, 60 percent of revenues would go to the state, 30 percent to the communities in the port authority and 10 percent to the port authority itself, Cobb said.

Meanwhile, Yukon Pacific Corp. already owns most of the necessary major permits for building a pipeline in the existing oil pipeline corridor, a fact that the company says gives it a prohibitive edge over other companies considering a southern terminus in Alaska.

So far, Yukon Pacific and the port authority haven't signed any agreements, but talks are underway.

Meanwhile, an industry consortium is studying a different pipeline route for an LNG project. The consortium, known as the Alaska North Slope LNG Project, includes BP Amoco, Phillips, Foothills, and Marubeni Corp. of Asia. Its study includes Valdez, but also is taking into a consideration a pipeline to Nikiski on the Kenai peninsula.

The consortium is demonstrating ``weapons-grade ignorance'' about the regulatory hurdles that would be faced in getting new permits, said Yukon Pacific Vice President Wayne Lewis.

But Steve Alleman, commercial manager for the consortium, said that the Valdez site would require ``blowing up a mountain'' to make room for the LNG plant and shipping facility.

``Our view is that there's still going to be significant permitting at either location,'' Alleman said from Anchorage. ``The market is going to drive this project.''

He said cost estimates for the Nikiski project, tentatively being considered for about 25 percent less capacity than the port authority project, are about $6 billion. The port authority project involves more financial exposure and greater risk in the uncertain Pacific Rim gas market, he said.

BP spokesman Ronnie Chappell suggested that his company is in a better position to market the resource than Yukon Pacific.

BP picked up natural gas expertise with the recent Atlantic Richfield merger, Chappell said. The company is now moving ahead on every technological front, including a pipeline and an LNG plant, and a gas-to-liquids (GTL) project that would allow the product to be sent through the existing oil pipeline, thus eliminating the need for major new construction, Chappell said. ``We are working all three.''

A $70 million GTL pilot project on the North Slope could be green-lighted by BP in coming weeks, said Ken Konrad, Alaska gas manager for the corporation. If the company's technology proves successful, ground could be broken for a commercial-scale plant in late 2000, he said. It would use a chemical process to convert gas to a low-sulfur, diesel-like fuel for sale in West Coast markets. Exxon Mobil also is considering a GTL plant on the North Slope.

Ellwood of Foothills noted that the Calgary company is also working on both the Lower 48 pipeline and the LNG project directed toward Asian exports. He couldn't say which is likely to come to fruition first.

``Our view would be that you could do both,'' he said. There is probably much more natural gas on the North Slope than has been found so far, and having access to markets would spur exploration, which in turn would drive the economics for a second pipeline, he said.

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