ConocoPhillips plans natural gas pipeline

Multibillion dollar project would run from Alaska's North Slope to Midwestern states

Posted: Sunday, December 02, 2007

ConocoPhillips wants to build potentially the world's largest, most expensive energy facility - a multibillion dollar gas pipeline running from Alaska's North Slope to Midwestern states.

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The project, with a price tag of up to $42 billion, would be worth it, if it can help supply North American homes and businesses with heating fuel for years to come.

ConocoPhillips, Alaska's leading North Slope oil producer, said Friday it's "prepared to make significant investments, without state matching funds, to advance this project."

It's the first proposal in the state-sponsored competition for a pipeline to tap the rich fields where the industry has identified about 36 trillion cubic feet of proved reserves that could be shipped within the next 10 to 12 years.

And with so many Lower 48 regions off limits to oil and gas development, Alaska's gas line could ultimately help stem America's dependence on foreign resources. Net imports made up about 15 percent of the approximately 22 trillion cubic feet of gas the U.S. consumed last year.

But the geopolitical climate changes frequently as oil prices continue to climb.

"The viability of the Alaska pipeline depends on the access to the Lower 48 fields and the day on which you bring the pipeline on," said Peter Hartley, a Rice University energy economist who studies North American natural gas markets.

"There is a lot of gas that is inaccessible as a result of the politics, areas like the Eastern Gulf of Mexico, the Atlantic Coast and the Pacific Coast," he said. "What all these projects have hanging over them right now is political uncertainty if these regions open up."

Friday was the deadline for oil and independent pipeline companies to submit applications under state guidelines, outlining details such as the pipeline's route, the market it will serve and how it can build a pipeline and avoid cost overruns.

The state announced other proposals late Friday evening.

Others submitting an application include: a joint proposal from Canadian pipeline companies TransCanada and Foothills Pipe Line Ltd; the Alaska Gasline Port Authority; the Alaska Natural Gas Development Authority; Sinopec ZPEB, China's second largest energy company, and a company listed as AEnergia LLC. Not much was immediately known about AEnergia LLC, and the governor's office could provide no further immediate information, having received the application late Friday.

"Bringing Alaska's North Slope gas to market in an environmentally responsible manner may reduce the burden on energy consumers and lessen American dependence on foreign energy sources," Gov. Sarah Palin said late Friday.

But whether ConocoPhillips' application conforms to the recently passed Alaska Gasline Inducement Act - also known as AGIA - remains to be seen. Companies can still build a pipeline without following the guidelines, but it would not receive various incentives or state backing.

Alaska's Revenue Commissioner Pat Galvin said Friday he was not prepared to fully judge the company's proposal.

"We will have to spend more time looking at it," Galvin said. "It appears they are not submitting it as an AGIA application; it appears they are submitting it as a separate proposal. We have said all along companies can pursue a pipeline on their own."

The company called its 115-page proposal "an alternative path forward."

For example, ConocoPhillips is not requesting the state's $500 million matching funds offered in AGIA and is reprising a long-standing position by North Slope producers who are calling for long-term tax freezes; AGIA offers a 10-year freeze, which producers have previously said is not long enough.

"In order to enable shippers to make long-term shipping commitments, prospective shippers need clearly defined natural gas fiscal terms and an understanding of the period during which those terms apply," ConocoPhillips wrote in the proposal.

BP, which is ConocoPhillips' Prudhoe Bay production partner and field operator, said it had no intention of submitting its own bid. The third North Slope partner, Irving Texas-based, Exxon Mobil Corp., had no comment on its plans or ConocoPhillips' proposal.

MidAmerican Energy Holdings Co. has previously stated it would submit a bid as well, but has since declined to comment on the project. The Alaska Gasline Port Authority said it plans to submit a bid as well.

The state will next review the bids and is expected to recommend a winning application for the Legislature by next spring.

With pipeline cost estimates ranging from $25 billion to $42 billion, ConocoPhillips Chairman and Chief Executive Jim Mulva said in a prepared statement and letter to Alaska Gov. Sarah Palin that it could certainly look for partners on this project.

"We also expect to approach other parties to explore ways through which their participation could add value to this effort," Mulva said in the statement. He also told Palin he would consider having an independent pipeline company as a partner.

A North Slope gas line has been discussed since oil first moved down an 800-mile trans Alaskan pipeline in 1977.

But the prospects only gained momentum these last few years with natural gas futures trading in the mid-$7 range and the prospects of prices falling below $4.50 increasingly remote.

Last year, former Gov. Frank Murkowski settled in principle with BP, Exxon Mobil and ConocoPhillips on fiscal terms - taxes and royalties - for producing the North Slope gas.

It would have frozen oil taxes for 30 years and gas taxes for up to 45 years for the three major oil companies.

Still, last year's deal did not guarantee a pipeline would get built; the hope was it would enable producers to move forward with a pipeline.

The line would ultimately have delivered 4.5 billion cubic feet of natural gas a day, which is about 7 percent of the current U.S. demand.

But state lawmakers felt the deal had too many giveaways for big firms, including locking in the tax rates, and stripped the state of its sovereignty and constitutional powers. The Legislature never voted on the deal.

That led Palin, who took office last December, and her administration to chart a different course in January. Rather than negotiate with one group, her plans called for new guidelines designed to stimulate competition among oil and pipeline companies.

ConocoPhillips proposal calls for shipping about 4 billion cubic feet of natural gas per day through Alaska and Canada before reaching Chicago. The company is already gathering data to support the pipeline permit application.

During the initial phase of the project, Bechtel Oil, Gas and Chemicals Inc. will provide construction and design support, ConocoPhillips said.

The U.S. consumed about 21.7 trillion cubic feet of natural gas in 2006, according to the Energy Department.

While energy analysts have estimated there to be about 35 trillion cubic feet of proved natural gas reserves in the North Slope, they believe that figure will rise in the future.

It won't reverse increasing dependency on imports, but a prospective gas line still has implications on the nation's growing dependency on foreign supplies, which stand at about 15 percent.

That figure could grow to about 25 percent by the time any Alaskan gas line gets built within the next 10 to 12 years, according to the Energy Departments long-term outlook which will be updated next week.

Most imported natural gas comes from Canada with a small percentage arriving in tanker carrying liquefied natural gas - also known as LNG - shipped primarily from Trinidad and Tabago.

For now, the industry reinjects North Slope natural gas into the ground. A large amount of natural gas comes to the surface when oil is being pumped from Alaska's large-but-dwindling oil fields.

"Natural gas supplies are tight and the demand is not going to go away," said Addison Armstrong, analyst with Stamford, Conn.-based TFS Energy Futures LLC. "With emphasis on clean fuels only growing. They won't have a problem finding a market."



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