Alaska Lawmakers Question State Backing Of $30B Gas Pipeline

SAN FRANCISCO (Dow Jones Newswires), Mar. 20, 2009

Alaska lawmakers are considering a proposal to rethink the state's support for a $30 billion natural gas pipeline amid sharply lower gas prices and concerns about availability of financing for the massive project.

A resolution by Alaska Rep. Jay Ramras would require a re-evaluation of the state's award of a natural gas pipeline license and up to $500 million in incentives to Canadian pipeline operator TransCanada Corp.

Under current conditions, the pipeline would be "uneconomic," Ramras said, speaking at a hearing before a legislative panel. "If the prevailing (gas) price is what we would have when this project would be built, it would be underwater."

Natural gas futures in New York closed Thursday at $4.42 a million British thermal units, about 70% below their highs reached in July.

Ramras also argued that abundant gas supplies in the lower 48 states, including shale gas in Texas and Louisiana, could keep U.S. gas prices low, keeping the Alaska gas pipeline from being economically viable in the long term.

Gov. Sarah Palin has defended the state's agreement with TransCanada, of Calgary, which agreed to terms requested by the state, such as rolled-in shipping rates, as part of the Alaska Gasline Inducement Act, or AGIA.

Palin, in a statement, said "I agree with the premise, but I don't believe this resolution is necessary, and I certainly don't agree that there should be an AGIA 're-do."'

Palin's administration has argued that the gas pipeline is a long-term proposition and that by 2019 gas prices are likely rise substantially and that demand is likely to rise when climate change legislation drives power generators toward natural gas, which produces fewer greenhouse-gas emissions than coal.

TransCanada's contract includes $500 million in state assistance and a state guarantee for a 10-year production tax freeze for gas shippers.

Oil majors ConocoPhillips and BP PLC are developing a competing $30 billion pipeline project, called Denali Gas Pipeline, which is working with federal regulators ahead of submitting a formal application. The companies didn't participate in the AGIA process and aren't eligible, under state rules, for the 10-year production tax freeze for gas shippers that TransCanada has.

Both TransCanada and the oil companies plan to hold "open seasons" or solicitations for shippers' interest in their pipelines next year, and both pipelines are scheduled to be operational by 2019.

The developers of both pipelines are hoping to win the support of Exxon Mobil Corp., which controls the largest chunk of the 35 trillion cubic feet of known gas reserves on the North Slope.

TransCanada's proposed 1,715-mile pipeline would ship 4.5 billion cubic feet of gas per day from Prudhoe Bay on Alaska's North Slope, to the Alberta gas hub in Canada.

The 2,000-mile Denali pipeline would bring 2 billion cubic feet of gas a day, or 6% to 8% of total U.S. daily consumption, from Alaska's North Slope to Alberta, Canada. The companies may also build a 1,500-mile pipeline extension from Alberta to Chicago.

In August, when gas prices were about $8 a million Btu, the Federal Energy Regulatory Commission volunteered to help merge the two competing pipeline projects into one, citing the widely held view that only one project is expected to be built.  

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