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Latest Risk to Alaska Gas Pipeline: More Gas

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(THE WALL STREET JOURNAL), Feb. 1, 2010

The discovery of huge new natural-gas fields across the contiguous U.S. is threatening Alaska's plans for a pipeline to export gas to the lower 48 states.

Two rival consortiums, each backed by major energy companies, are competing to build the pipeline, designed to carry gas from Alaska's North Slope to continental markets.

But even as the project is poised to get off the ground after decades of discussion, its viability is being called into question as energy companies have found huge new supplies of natural gas locked in dense rocks known as shale in places such as Texas, Louisiana and Pennsylvania.

Those supplies are glutting the market and driving down prices, leading many experts to question whether a pipeline from Alaska is needed or could turn a profit for its backers.

Still, on Friday, one of the two contenders, backed by energy giant Exxon Mobil Corp. and pipeline company TransCanada, formally asked federal regulators for permission to begin accepting bids from gas producers for space on the pipeline, which would carry as much as 4.5 billion cubic feet of gas a day.

"This filing is an important milestone for the project and Alaska," said Tony Palmer, TransCanada's vice president in charge of the project. Mr. Palmer said he believed there is "no lack of demand" for the gas in the contiguous U.S.

The rival project, a joint venture of oil and gas producers BP PLC and ConocoPhillips, plans this spring to announce details of its own plans and begin its own bidding process. The project would stretch as much as 2,000 miles from Alaska and would cost an estimated $30 billion.

Mr. Palmer said TransCanada is considering two versions of the project, one of which would pipe gas through Canada and cost up to $41 billion, and another that would pipe the gas a shorter distance to Alaska's southern coast, where it could be transported by ship. That option would cost up to $26 billion. Either would be complete in 2020.

Supporters argue the pipeline, first proposed in the 1970s, would help stabilize U.S. natural-gas prices, reduce dependence on foreign sources of energy and provide revenue and jobs for Alaska.

Former Gov. Sarah Palin, who in 2008 signed a bill providing state support for the project, touted the pipeline during her vice presidential campaign as a potential solution to the nation's energy needs.

But that was before the success of shale drilling was widely recognized. The industry and many outside experts now believe the U.S. has a century's supply of gas.

"I just don't think that people appreciate even still the magnitude of gas volumes that are possible in the lower 48," said Porter Bennett, CEO of Bentek Energy, a consulting firm.

The bidding process, in which gas producers can make offers to secure space on the pipeline, could help determine whether there is enough demand for the pipeline to move forward. Backers of both projects are playing down expectations. They say they are worried that producers won't make the firm offers necessary to secure financing for the project.

"We are concerned that the bids may be heavily conditioned to address risks that are outside of our control," said David MacDowell, a spokesman for the Conoco-BP project.

The surge in lower-48 production isn't the only factor calling the project into question. Producers also are concerned about cost overruns, possible increases in Alaska's energy tax and other variables.

Most of those challenges have been known for years. The impact of shale drilling, however, became clear only recently. It has been so rapid that a planned natural-gas import terminal in British Columbia last year announced plans to export gas to Asia instead.

Not everyone thinks the U.S. gas glut has put the project in jeopardy. Alaska's vast gas resources are relatively cheap to produce. Ed Kelly, a gas analyst for the energy consulting firm Wood Mackenzie, said the U.S. gas market could shift significantly in the time needed to build the pipeline. "It's not competing with shale gas now. It's competing with shale gas 10 to 15 years from now," he said.

The uncertainty is making many Alaskans nervous. The state depends on revenue from the oil industry to fund nearly 90% of its budget, but oil production has been declining steadily for 20 years as giant fields such as Prudhoe Bay begin to dry up. State officials hope natural gas could help fill that void, but only if a pipeline gives producers a way to get that gas to market.

But Kurt Gibson, deputy director of the Alaska Division of Oil and Gas, said he is still confident the project will happen. "It's an important component to our state's economic future."

Others are less certain. State Rep. Craig Johnson, a Republican who co-chairs the House of Representatives' Resources Committee, said repeated delays had put the whole project in jeopardy.

"I think we've probably cost ourselves a few years, which allowed the shale plays to come in," Rep. Johnson said. "We should've built this pipeline four years ago."

Copyright (c) 2010 Dow Jones & Company, Inc.

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