US Loan Guarantees Make Alaska NatGas Pipeline More Likely

The 250 trillion cubic feet of natural gas stranded on the North Slope of Alaska is suddenly looking more mobile.

In the closing days before the U.S. elections, members of the Alaska delegation to Congress quietly slipped $18 billion in federal loan guarantees and other incentives for construction of a natural gas pipeline into a largely unrelated piece of legislation – the fiscal 2005 military construction spending bill.

Minus the natural gas price supports opposed by President George W. Bush and natural gas producers in the lower 48 states, which had helped to trip up the Energy Bill, the measure sailed through both the U.S. House of Representatives and the Senate.

The pipeline could provide 4.5 billion cubic feet of gas per day, or about 7 percent of current U.S. consumption. Permitting, design and construction are expected to take 10 years, making the first deliveries of gas possible in 2014.

Market forces kept gas stranded

For more than two decades, the North Slope oil producers – BP, ExxonMobil and ConocoPhillips – have sat on the stranded gas. With natural gas prices at historically low levels, the companies said they could not justify the estimated $20 billion investment to build a pipeline to bring the gas from Alaska's North Slope to a point in Illinois. Most of the gas that has been produced in the region has therefore been pumped back into the ground to stimulate greater oil production.

Over the years, with natural gas plentiful and cheap, Congress apparently shared the oil companies' lack of interest in the project. But electric utilities in the United States have steadily switched to natural gas as their generating fuel of choice, raising demand even as domestic production began to fall. Virtually overnight, a supply shortage developed; gas prices began to climb steadily, from $2.50 to $3.50 to $5.50 per thousand cubic feet in consumer markets last winter, to as much as $8 per 1,000 cubic feet currently.

To take advantage of the market and close the gap, developers began proposing dozens of LNG terminals. Officials in Alaska soon realized that, if they didn't make the pipeline happen soon, they might lose their chance forever. With that chance would go billions of dollars of investment and tax revenues, an estimated 400,000 jobs and a giant boost for the U.S. steel industry, which would fabricate the estimated 1,600 miles of steel pipe. The project also is expected to generate $40 billion in revenues for the U.S. Treasury.

All of that led to the push in Congress to approve the loan guarantees, along with other incentives, including allowing the developers to depreciate the investment over 7 years, rather than the normal 15, and $295 million in tax credits for an associated gas conditioning plant.

The legislation also provides for an expedited permit process with the Federal Energy Regulatory Commission – not the Environmental Protection Agency – in the lead. It encourages the pipeline developers to take the longer southern route, paralleling the Alaska Highway and the existing oil pipeline. The extensive southern route is favored over the much shorter northern route by environmentalists eager to keep the pipeline away from the Arctic National Wildlife Refuge, and by labor unions eager to maximize the jobs and wages generated by the project.

Producers remain cautious

The fact that the federal government is willing to guarantee 80% of the $20 billion investment hasn't completely cured the oil producers of their cold feet, however. "This is a very big, very risky project," said David MacDowell, BP Alaska's spokesman.

He told reporters that the Congressional action "brings us one important step closer" but said an agreement on state royalty and tax issues still needs to be involved. Without price guarantees that would ensure their profits even if the price of natural gas should fall, the oil companies are looking for more guarantees, and the State of Alaska appears prepared to give it to them.

Alaska Gov. Frank Murkowski is pushing negotiators to arrive at a package in time for the state's General Assembly to consider the legislation when it returns to session in January. That package is likely to include not just reductions in the taxes and royalties the producers will have to pay but something no other state has ever done – a direct investment, making the State part-owner of the pipeline.

Although such government/industry ownership arrangements are common around the globe, it would be a first for a U.S. state. "It's a scary place to be," Michael Menge, the governor's assistant on natural resources, recently told The Wall Street Journal. "In the U.S., states are not particularly eager to enter into the complexities of the commerciality of an energy project. There is a reason the taxes and royalties are so appealing: they're relatively easy to deal with."

But the producers believe that if the State is part-owner of the pipeline, potentially taking a share of the profits (or losses) rather than relying strictly on taxes and royalties as compensation for its natural resources, the producers' share of the risk will be lowered and agreement on other issues between the producers and the State will be simplified as well.

"When people are in similar positions decisions become easier," MacDowell said.

"It is the enormous scale of the project that magnifies the risks and inhibits the attraction of investment capital," Ken Konrad of BP Alaska told Congress earlier this year. He cited the potential for cost overruns, regulatory uncertainty and market uncertainties. "Any one of these alone could severely damage an Alaska gas project." This article provided courtesy of EyeForEnergy