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Municipal leaders told state needs a big gas pipeline

Posted: Friday, November 19, 2010

Alaska should focus its efforts on a big natural gas pipeline to ship its gas out of the state, rather than an in-state line for local needs, to develop its huge natural gas reserves, said Larry Persily, the federal government's gas pipeline coordinator.

Michael Penn/Juneau Empire
Michael Penn/Juneau Empire

Most of that gas will go elsewhere, he said, with only a few percent being used in Alaska. That means that most of the cost of the multi-billion dollar project will be paid by gas users outside Alaska.

"Ninety-eight percent of the gas is going to go south, which means that 98 percent of the cost is going to be paid by people in Des Moines (Iowa), Chicago, upstate New York and everywhere else," Persily said.

All of the proposals for a big pipeline call for multiple off-take points in Alaska to serve local needs, he said.

"The gas that's siphoned off those spurs will be the cheapest gas you can get, because the cost is going to be paid by somebody else," he said.

Persily spoke before local public officials at the Alaska Municipal League's annual meeting in Juneau Thursday, briefing them on current gasline progress.

The federal government is supporting a pipeline from Alaska's huge North Slope gas reserves to the Midwest with loan guarantees and tax breaks, while two private pipeline efforts are exploring a project.

One is the state-backed Alaska Gasline Inducement Act line being developed by TransCanada and Exxon Mobil corps. A competing plan is being developed by ConocoPhillips Co. and BP PLC.

During the recent election, many candidates talked instead of having the state build its own cheaper, small diameter pipeline. The Alaska Legislature appropriated $15 million to study that option.

The small-diameter option for local needs, likely 8 inches instead of 48 inches, would cost somewhat less to build but would carry dramatically less gas. That means that the gas it does carry would be prohibitively expensive, Persily said.

A state subsidy of $3-5 billion would bring the price of the gas down somewhat, but it still wouldn't be the long-sought "cheap natural gas," of which candidates talk.

The problem is volume, he said. Event the state's population center, the area from Fairbanks to Anchorage, wouldn't consume enough gas to bring economies of scale.

And residents who wouldn't benefit from natural gas, for example those in Southeast, Kodiak and Bush communities may object to seeing their money being used to subsidize natural gas for other Alaskans.

And digging a pipeline trench hundreds of miles through harsh arctic terrain will be almost as expensive for a small line as a large one, he said.

Two recent candidates for governor, Sen. Hollis French, D-Anchorage, and former Rep. Ralph Samuels, R-Anchorage, joined Persily for a panel discussion later and largely agreed with his economic analysis.

"The economics are just horrible when you have to move a small amount of gas a long way," French said.

A small line also has other problems for the state, including it would not provide much revenue to the state from natural gas taxes. Natural gas is already less valuable than oil and even a big line is unlikely to replace the state's oil revenue as Alaska runs out of oil, he said.

"It's not as valuable a resource, you just can't tax it the same, it just doesn't work," Persily said.

In addition, construction of a big line is likely to spur a boom in exploration for natural gas on the North Slope, because the current proven reserves there would be exhausted in about 12 years, he said. That exploration is likely to find additional oil too, he said, helping the trans-Alaska pipeline keep flowing.

Persily said rather than spending billions on a small gasline, the state would be better off using that money to somehow advance a large line.

The pipeline developers have been soliciting customers for their project this year, and expect to discuss those results with the Legislature in the next regular session. A special session is likely to set a new natural gas tax rate, French said.

As a legislator, Samuels was the lone vote against AGIA, but even in his position as the House majority leader was unable to block its passage. Samuels said the state should instead negotiate tax breaks with the three big oil producers, who hold the lease rights to the gas, to encourage them to build a pipeline without state involvement.

Samuels said that he now thinks more of his former colleagues would vote along with him in a similar bill.

• Contact reporter Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com.



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