Processing Magazine

Alaska Gov. Rejects ConocoPhillips Plan

January 14, 2008
According to the Associated Press, Gov. Sarah Palin recently rejected a multibillion proposal by ConocoPhillips to build a natural gas pipeline linking the state''s energy rich North Slope to Midwestern states, opting to stick with a plan by pipeline company TransCanada.

ConocoPhillip''s offering was billed as an alternative to the state''s Alaska Gasline Inducement Act, or AGIA, a law which called for bidders to guarantee progress toward construction of a pipeline and is friendly toward new energy exploration.

Instead, ConocoPhillips, the North Slope''s largest producer of oil, wanted to negotiate a long-term fiscal package covering taxes and royalties on natural gas production; this option failed under the previous state administration and prompted Palin to chart a new course.

This week, she turned down the proposal, saying such a deal could deprive the state of its regulatory powers.

ConocoPhillips could not immediately be reached for comment.

TransCanada''s plan, which falls under the law''s guidelines, emerged as the favorite last week.

Palin sent a letter to ConocoPhillips'' Chief Executive Officer James J. Mulva, her office said Thursday. Palin wrote the CEO, "Your alternative does not give the state a reason to deviate from the AGIA process."

ConocoPhillips was one of six companies to submit a bid to the state by Nov. 30 last year. Other bidders included: TransCanada, the Alaska Gasline Port Authority, the Alaska Natural Gas Development Authority, China''s Sinopec ZPEB, and AEnergia LLC.

Their interest comes at a time when natural gas has become an increasingly valuable source of energy with U.S. natural gas demand growing about 1.5 percent a year for two decades since 1986.

And with so many regions in the continental U.S. off limits to oil and gas development, Alaska''s gas line could help met American demandby shipping trillions of cubic feet of gas to market.

A gas line, discussed since Alaska began shipping oil in an 800-mile, trans-Alaskan pipeline 31 years ago, has major long-term implications toward powering North American homes and business.

As of 2006, about 19 percent of electricity generated domestically comes from burning natural gas, a 10 percent increase from 1986, according to a recent Rice University report. Additionally, more than 50 percent of Americans heat homes with natural gas.

The North Slope remains a declining oil producing field, about 731,000 barrels a day. Meanwhile, a large amount of natural gas comes to the surface when oil is being pumped from the state''s large-but-dwindling oil fields. The industry reinjects this natural gas into the ground without shipping to markets.

The long-awaited prospects of an Alaska gas line only gained momentum in recent years with natural gas futures trading in the mid-$7 range and the prospects of prices falling below $4.50 increasingly remote.

Two years ago, former Gov. Frank Murkowski settled in principle with BP PLC, Exxon Mobil Corp. and ConocoPhillips on fiscal terms -- taxes and royalties -- for producing the North Slope gas.

The deal, under the Stranded Gas Development Act, would have frozen oil taxes for 30 years and gas taxes for up to 45 years for the three major oil companies, but it did not guarantee a pipeline would get built. The hope was it would enable producers to move forward with a pipeline.

This prompted Palin to chart a different course, one she remained steadfast in her letter to Mulva.

Palin''s administration will turn its attention to the proposal from TransCanada, which says it can move the North Slope''s natural gas to North American markets.

The company is proposing to root the gas line in Arctic oil fields on Alaska''s North Slope, the bedrock for the state''s robust oil industry since the 1970s.

The line would travel 1,715 miles southeast to a pipeline hub in Calgary, Alberta, that connects to all the major markets on the continent.

About 35 trillion cubic feet of proved natural gas reserves are believed to lie beneath the North Slope permafrost, and energy analysts believe that figure will rise in the future.

At a projected cost of $26 billion, the proposal could become the largest, most expensive energy facility ever constructed, or simply the largest private-sector project ever undertaken, in North America.

TransCanada owns one of the largest natural gas pipeline networks in the world, tallying 36,500 miles of pipe that ferries nearly 30 billion cubic feet of gas each day. The company has long had an interest constructing an Alaska gas line.