 Alaskan Gas may be in the Pipeline – by Ken Silverstein Daily IssueAlert 10/12/2004 Free More Alaskan natural gas appears to be in the pipeline. The U.S. House and Senate passed loan guarantee provisions that would provide producers with new incentives to build the Alaskan pipeline. The aim is to reduce investor concerns about the non-completion of the line and to provide a series of important regulatory and administrative provisions to speed line construction, all of which was placed in a military construction appropriations bill that cleared both chambers over the weekend. British Petroleum, ExxonMobil and ConocoPhillips would all like to build a pipeline—under the right economic conditions. They have said that the estimated 10-11 percent projected returns are too little to take on the risks. In addition to loan guarantees, at least BP and ConocoPhillips support federal tax incentives if the price of natural gas were to fall below $3.25 per million BTUs. All, however, have said that the regulatory environment remains too uncertain, which raises the cost of doing business. The loan guarantee would require the government to pick up 80 percent of the cost of the first $18 billion of the project should it not be completed. Meantime, Congress passed tax provisions to allow gas owners to amortize the cost of all Alaska-built segments of a pipeline from their taxes over seven instead of 15 years. That change would save line owners an estimated $441 million over the life of the line, according to final estimates from the Senate Joint Tax Committee. And the bill would permit an enhanced oil recovery tax credit for the cost of a needed gas conditioning plant on the North Slope of Alaska to process gas before it goes into a line. That provision should save the companies $295 million more in taxes in the first decade of the project, say bill sponsors. Those provisions, along with an expedited permitting and streamlined court review process, were structured to encourage producers to invest in the $20 billion project. The pipeline could run from either the Trans-Alaska highway pipeline route to the Lower 48 or it could be an all-Alaska pipeline that will move gas to tidewater in Southcentral Alaska where the gas would be liquefied for shipment to West Coast markets. “These tax incentives represent a key piece that will allow companies to proceed with a project to get Alaska’s huge reserves of natural gas to market,” says Alaska Sen. Lisa Murkowski. “The puzzle isn’t finished, but the federal outline is now done and we’re closer than ever before to adding the finishing touches,” adds Murkowski, who says it now awaits the president’s signature. “With these incentives and the high prices for natural gas there is no reason Alaska won’t be seeing the tens of thousands of jobs that a gas project will bring and the hundreds of millions of dollars of revenues from royalties from the state’s one-eighth share of the gas and in severance and property taxes on the gas and pipeline facilities.” Interest Piqued The pipeline was originally authorized by the Federal Energy Regulatory Commission under the Alaska Natural Gas Transportation Act that went into effect July 1, 1979. Construction began soon after but stopped in the early 1980s, largely because of the availability of low-cost Canadian gas. Developers, who have spent more than $125 million studying the project, say that it would take seven years to complete the pipeline, although the 10-year time frame is designed to accommodate stakeholder interests. The Energy Information Administration estimates that natural gas demand in America will rise by more than 50 percent by 2025, leaving the nation dependent on imported liquefied natural gas, unless the Alaska project is built; Alaska is capable of suppling the nation with 4.5 billion cubic feet of gas a day from the state’s reserves of at least 36 trillion cubic feet of natural gas located at Prudhoe Bay. The gas project will fuel thousands of direct and indirect jobs in Alaska and supply the state with between $450 million and nearly $1 billion a year in revenues in the future, says Murkowski. The loan guarantee is considered by many the most important financing provision because it assures investors they will not lose money should gas prices drop so dramatically as to prevent completion of any line once construction starts. The guarantee could reduce the interest rate needed to attract financing for the line. If so, that would cut its cost, while also protecting investors who would be financing the largest private construction project in the nation’s history. Oil and gas reserves are not neatly separated. The gas and the oil have been parted during processing and the gas has subsequently been re-injected into the ground in the Alaskan fields. Now, that gas is used to put pressure on oil fields to keep the crude flowing. It's just waiting to be tapped and used by electric generators but the transportation costs to get it the Lower 48 are high. Beyond the financial exposure, logistical, environmental and political risks are present. Alaska wants the gas line to follow the oil pipeline down to Fairbanks, and then go eastward to Canada. This would assure that only Alaska gas gets transported through the line. But the Canadians want the route to go due east from Prudhoe Bay to the Mackenzie Delta, where huge natural gas deposits are thought to exist. The Canadians fear that a pipeline from the north that does not include their Mackenzie region would leave them with “stranded” gas. They furthermore worry that American subsidies—as opposed to loan guarantees—would make their gas less competitive. The pipeline has bi-partisan American support, although if subsidies are given to Alaskan gas but not to Canada and the Lower 48, it's a non-starter. That’s why a price guarantee didn’t make it in the final bill. Oil companies with stakes in the Prudhoe Bay generally would like to see price floors. But, they also want to begin producing cash from the gas they own in Alaska’s North Slope. The answer as to whether they will begin building a pipeline is still unknown, although they have acknowledged that their interests have definitely been piqued. UtiliPoint's IssueAlerts are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2004. UtiliPoint International, Inc. All rights reserved. |
