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Two Oil Firms Plan Alaska Gas Pipeline

By Jad Mouawad and Clifford Krauss, |The New York Times
Wednesday, 9 Apr 2008 | 8:49 AM ET

Two of the world’s biggest oil companies, BP and ConocoPhillips, joined forces Tuesday to try

Oil Pipeline
Oil Pipeline

to break a longstanding deadlock over Alaska’s vast reserves of natural gas. They said they would spend billions to build a pipeline from the North Slope to feed energy-hungry markets in the United States and Canada.

The proposal won praise from Alaska’s governor, Sarah Palin. “It’s a good day,” she told reporters in Alaska.

The announcement comes at a time when consumption of natural gas in the United States is increasing and conventional production is declining. Natural gas is cleaner than other power sources, like coal, and analysts say it is becoming increasingly critical to the nation’s energy needs.

BP and Conoco will initially spend $600 million in the next three years to drum up support for the project, seek state and federal approval, and secure gas supplies for the pipeline. BP and Conoco said the project would be the largest-ever private sector construction project in North America.

The project, which would include a $5 billion gas-processing facility on the North Slope, would cost about $30 billion and take at least 10 years to complete.

At a time when both energy prices and construction costs are soaring, the endeavor would dwarf the 800 mile trans-Alaska oil pipeline, a momentous project completed in 1977 and that brought jobs and revenue to Alaska. As oil production from the Prudhoe Bay field declines, Alaskans are hoping that natural gas will take over from oil.

An Alaska gas pipeline has long been sought as a critical component of the nation’s energy security. The planned pipeline would have a daily capacity of 4 billion cubic feet of natural gas, or almost 7 percent of current United States consumption.

But the companies will have to overcome some huge hurdles, said Christopher Ruppel, an energy analyst at Execution, a brokerage and research firm.

“We’ve had a long record of Alaska pipeline projects coming out of Alaska and Canada, and they have consistently been delayed because of political opposition and rising costs,” he said. “The United States and Canada desperately need the gas. But the question is, is it doable?”

The companies will need to secure more than 1,000 permits from local, state and federal authorities in both the United States and Canada, a process that will most likely take years. They need to negotiate with native tribes along the pipeline’s route to secure the right of way. If the oil pipeline is any guide, the gas line will also require vast engineering feats.

But with higher prices, and a growing appetite for natural gas, the economics of such a large project are starting to make sense for oil companies. The companies said the initial plan is to build a 2,000-mile pipeline from Alaska’s North Slope to the Canadian province of Alberta; that would add to the total North American gas supply, freeing some Canadian gas for export to the United States. Eventually, the pipeline might be extended 1,500 miles, to Chicago.

“This will be a massive undertaking,” said Doug Suttles, president of BP Alaska. “It is going to take the big team to get this going.”

The plan to build a natural gas pipeline to export the state’s vast gas resources has been tangled in Alaskan politics for years. Today, Alaska’s estimated 35 trillion feet of gas reserves are either re-injected into oil fields or left dormant because of a lack of export facilities to bring them to consumers.

When Governor Palin took office in late 2006, she interrupted pipeline negotiations that her predecessor, Frank H. Murkowski, had been pursuing with the North Slope oil operators, BP, Conoco and Exxon Mobil.

She started from scratch after criticizing the previous talks as not being competitive enough, and sought to bring in new operators in order to secure better terms for Alaska. Her administration is evaluating a proposal made by a Canadian pipeline operator, TransCanada.

But the oil companies complained about the delays and said the governor’s procedure was unrealistic. Eschewing $500 million in potential subsidies from the state, BP and ConocoPhillips declared on Tuesday that the economics of natural gas have reached the point that they can finance the pipeline on their own.

James L. Bowles, the president of Conoco Alaska, said that while the companies would seek no state subsidies, they will try to meet requirements outlined by Alaskan authorities, like offering local delivery points on the pipeline to meet the state’s natural gas requirements.

“This project is moving forward on its own,” he said.

Ms. Palin welcomed BP’s and Conoco’s proposal, while stopping short of formally endorsing it. She told reporters that she would meet with executives from the companies to find out more about the joint project. Still, she added, “it sounds great for the state of Alaska.”

The plan came as a surprise to Exxon , which said it had been invited to participate only a few days ago. The company will now “evaluate all options,” according to Margaret Ross, an Exxon spokeswoman.

BP and Conoco said they would welcome Exxon’s participation.

Many analysts have voiced concerns that natural gas prices would keep rising as domestic demand grows and Canada’s exports fall because of increased consumption there.

Without a natural gas pipeline, the United States will increasingly depend on imports of natural gas in liquefied form, a source that is costly and potentially vulnerable to political instability in the Middle East, Africa and Latin America. Greater demand is already pushing prices higher, and adding to pressure to open deeper waters off the country’s coast for exploration.

Amy Myers Jaffe, an energy analyst at Rice University, said a gas pipeline was badly needed, in addition to the liquefied natural gas projects under consideration. “In the long term it’s not going to mean we are not going to need L.N.G., but we would need a lot more L.N.G. if Alaska does not happen,” she said.

Natural gas consumption rose by 6.2 percent in 2007, to 23 trillion cubic feet, from 21.7 trillion cubic feet in 2006, according to the Energy Information Administration.

Natural gas prices, which averaged $2 a thousand cubic feet in the 1990s, have soared in the last decade. It recently traded at $9.74 a thousand cubic feet on the New York Mercantile Exchange.


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