Industry: Gasline won't pay

Oil companies say pipeline returns too low

Posted: Thursday, September 27, 2001

ANCHORAGE - Oil companies looking into the feasibility of building a natural gas pipeline from Alaska's North Slope to the Lower 48 say the project is too pricey.

A preliminary analysis of the proposed project by Exxon Mobil, BP and Phillips Petroleum shows the pipeline project would not provide them with what they want - a 15 percent return on their money.

The project works out to a 10 to 11 percent rate of return.

"We see this as a very high-risk project," Robbie Schilhab of ExxonMobil told Gov. Tony Knowles' natural gas development team meeting this week in Anchorage.

Schilhab and Phillips Petroleum's Joe Marushack presented their preliminary conclusions at a task force meeting.

Whether the pipeline runs north through the Arctic Ocean to Canada's Mackenzie River delta or south along the Alaska Highway through Canada to the Lower 48, the answer is the same. For now, the project looks too expensive for Alaska's oil companies to undertake.

For both routes, the costs would be huge: $15.1 billion for the offshore route and $17.2 billion for the highway route.

"I think this could be made attractive to a number of investors," said Ken Thompson, a former oil company executive who sits on the governors' natural gas team. Thompson said tax incentives, a lower return on investment and a higher value for liquid natural gas from the pipe would make the project a worthwhile investment.

If the oil companies are not interested, natural gas transportation companies such as Williams, El Paso or Enron might be, Thompson said.

Exxon, Phillips and BP are still refining their analysis of the project. But executives made clear they consider the project a long shot for its high costs and high risks.

Schilhab said the project could be made attractive by cutting construction costs. The companies also want to streamline the permitting process to avoid delays.

The presentation dented but did not destroy the optimism of the governor's gas council.

"I don't like seeing the number. But it's a lot different from saying no way, no how, we're shutting our doors and going home," said Pat Pourchot, state commissioner of natural resources. Pourchot said the producers' position underlined the need for incentives such as federal tax breaks similar to those proposed by the Knowles administration.

Exxon, BP and Phillips are split on the incentives. To address the risk of low prices, Phillips wants a tax credit if prices fall below a certain level. BP and Exxon say they want a project that is viable without tax breaks.

Federal legislation is slated for consideration next week in Washington, D.C.

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