Gas producers say Alaska pipeline makes little sense

Posted: Wednesday, October 03, 2001

WASHINGTON - Although lawmakers and the Bush administration say a proposed Alaska natural gas pipeline is critical to the country's energy security, major producers Tuesday told Congress the $17 billion project makes little sense considering the highly volatile, and currently low, gas prices.

At the same time, there remains wide disagreement over what route a pipeline should take. Alaska officials argue it should shadow the existing trans-Alaska oil pipeline rather than take a northern route mostly through Canada as proposed by one consortium.

With natural gas plummeting to $2 a thousand cubic feet in recent weeks from a high of $10 last winter, even some leading proponents questioned the economics of a pipeline at a Senate hearing Tuesday. Senators expressed little interest in committing to significant government subsidies.

"This project is not economic regardless of the route selected," declared Joseph Marushack, a vice president at Phillips Petroluem Co. His company along with Exxon Mobil and BP America own rights to around 35 trillion cubic feet of natural gas in the Prudhoe Bay area of Alaska's North Slope.

A recent report from the three producers concluded that a gas pipeline would produce no more than a 10 percent to 11 percent return on equity, lower than what would be considered economical considering the risk.

The producers said they continue to examine the possibility of a pipeline but have no immediate plans to apply for federal permission to build one. Still, they urged Congress to ease the regulatory process for a pipeline's approval, saying that might "improve the prospects of an economically viable" project.

K. Terry Koonce, president of Exxon Mobil Production Co., said, however: "Our current analysis has not identified a project that is presently economic."

Alaska Gov. Tony Knowles, a Democrat, urged Congress to sweeten the deal to attract investors in a pipeline that he said would benefit the country and make available as much as 4 billion cubic feet of natural gas a day for the next 50 years. A pipeline could take at least seven years to build and would be one of the largest and most expensive energy projects ever undertaken.

Knowles urged Congress to protect pipeline investors and producers from future wide price fluctuations by enacting a tax credit on North Slope gas that would kick in whenever the price drops to a certain level. He also urged other tax breaks for pipeline construction.

Some senators questioned why the Alaska line should be given preferential treatment not provided other natural gas producers.

"I don't see how you can single out one production area as opposed to another" for tax benefits, Sen. Craig Thomas, R-Wyo., told Knowles. Such a move could put gas producers in Wyoming and other places in the West at a disadvantage, he suggested.

Still senators said it was important to develop the vast natural gas resources now isolated on Alaska's North Slope or face growing U.S. dependence on foreign sources. Demand for natural gas is expected to grow 40 percent over the next 20 years.

The country is "at a critical energy security juncture" when it comes to gas supplies, said Sen. Jeff Bingaman, D-N.M., chairman of the Energy and Natural Resources Committee, as he opened Tuesday's hearing.

"By inaction (on a pipeline), we start down a path of increased importation of natural gas," he said. Before long, he predicted, foreign producers will form "a natural gas OPEC" similar to the Arab-led oil cartel.

The idea of an Alaska natural gas pipeline has been around for almost a quarter-century. Congress approved construction of a pipeline in 1976, but companies have not found the venture economically enticing.

And disagreement remains even over what route to take. Alaska officials, including the state's congressional delegation, are adamant that the route be kept in the state as much as possible.

This so-called "southern route" would take the line along the path of the existing oil pipeline, then along the Alaska Highway and into Canada. Another proposal, the "northern route", would go east under the Beaufort Sea for 240 miles, then south across Canada through the Mackenzie Delta.

Forrest Hoglund, chairman of Arctic Resources Co., the consortium seeking to build along the northern route, said his pipeline would cost $2 billion less than the other route and is economically viable at today's gas prices without government subsidies.

Knowles disagreed. He said the northern route faces more environmental challenges, and some technologies of underwater pipeline construction have yet to be proven.

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