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Gas line pipe dream a risky one for Alaska


June 01, 2006

ANCHORAGE, Alaska -- A pipeline to carry North Slope natural gas to the Midwest would be one of the largest construction projects ever attempted, experts agree.

Gov. Frank Murkowski wants the state to buy a 20 percent stake in the project. At a cost of more than $4 billion, it would be the largest purchase in state history.

And surely one of the most risky.




Cost overruns, plunging gas prices, earthquakes - all kinds of demons could turn the pipe dream into a nightmare.

The potential perils - and profits - of state ownership are among a universe of pipeline details Revenue Commissioner Bill Corbus plans to lay out for Anchorage residents this weekend at the Egan Center.

According to Al Rogers of Independent Project Analysis Inc. in Virginia, anything over $1 billion is a megaproject - an elephant. The Alaska gas pipeline, by comparison, is a woolly mammoth, he says.

The state estimates it would take $21.6 billion to run a buried steel tube from Prudhoe across Canada to Chicago, about 3,640 miles away.

That's a colossal sum. The state in 1985 paid the federal government less than $43 million, in today's dollars, to buy the 600-mile Alaska Railroad. The federal government in 1867 picked up Alaska from Russia for under $100 million.

The last time oil prices boomed, in the early 1980s, lots of big oil and gas projects were hatched, Rogers told Alaska lawmakers this month.

"The track record on those projects was something like this: They ended up costing twice as much as predicted. They took twice as long. And they only worked half as well as predicted," he said.

Despite the risks, Murkowski and his consultants believe that if the pipeline ever is built - and that's a big if, despite the tax contract the governor hopes to ink with oil companies Exxon Mobil, Conoco Phillips and BP - the state must plunge in as a partial owner.


In short, because it would sweeten profits for the oil companies. Under the contract, the companies, which found and hold development rights to the Slope's prodigious reserves, are entitled to 80 percent of the gas. To produce that 80 percent, they'd rather not pay 100 percent of the cost of the pipeline, according to a state Department of Revenue analysis.

So, a good deal for the oil companies, right?

Well, the cost of an Alaska pipeline is so great and the competition from foreign gas developments is so strong that the project needs a helping hand from the state, says Pedro van Meurs, a globetrotting oil and gas deal-maker and top consultant to Murkowski.

Building the pipeline would be an epic, three-year undertaking.

According to oil company estimates, the job would take up to 6 million tons of steel; 236 large bulldozers plus dozens of trenchers, tractors and backhoes; and a motor pool of 1,300 pickups and 230 buses.

To own a piece of the project, the state would set up a new office called the Alaska Natural Gas Pipeline Corp.

The state would be buying more than a pipe. And its property wouldn't be just in Alaska.

According to the Revenue Department analysis, Alaska first would take a 20 percent stake in a $2.6 billion Prudhoe Bay plant to remove impurities from the gas. Then it would own a share of pipeline segments from Prudhoe to Alberta and on to Chicago, if that segment were needed.

Where the state would get the $4 billion to buy its share remains an open question.

The Revenue Department expects the state would spend at least $800 million in cash upfront - possibly as an Alaska Permanent Fund investment - and then borrow the rest from banks. The state intends to take advantage of federal loan guarantees Congress passed in 2004.

Not only is the Murkowski administration proposing to buy a piece of the pipeline, it wants to collect its taxes and royalties in the form of gas, not cash.

That means it would be up to the state, not the oil companies, to find buyers for the gas on the open market. The state's gas would amount to almost 20 percent of the 4 billion cubic feet flowing daily through the pipeline.

Aside from improving the chance that the oil companies will actually go ahead with the project, owning a share of the pipeline could give the state extra profits from the gas project, administration members say.

The Federal Energy Regulatory Commission would set rates for companies to ship their gas through the pipeline, and all owners - including the state - would enjoy a steady revenue stream with a built-in profit margin. State officials estimate such profit could amount to as much as $1 billion over 20 years.

But the project also carries major risks.

- Cost overruns. This plagues many megaprojects, said Rogers, the Virginia analyst. "Cost overruns of 50 percent are not improbable," acknowledges the Revenue Department. If gas prices dive, that could make for "dismal results" for pipeline investors, it says.

But even if the pipeline investment itself turned out to be a dog, the state still stands to make billions of dollars, said Dan Dickinson, a former state tax director now working as a Murkowski consultant. Why? Because gas sold even at relatively weak prices is much better than the status quo - no gas sales at all.

- Low gas prices. They're robust now, but low prices have slaughtered several Alaska gas pipeline proposals since the early 1970s.

Prices could crash in the years it would take to plan and build the line, or after it was built. Low prices could make it harder for the state to find buyers for its gas. And the state and other shippers would be obliged to pay higher tolls to move gas through the pipeline. Under the worst scenario, rising tolls could gobble up much or all of the gas value, Dickinson said.

- Striking out on new gas. Right now, the North Slope has 35 trillion cubic feet of known, recoverable reserves. That's a blissful amount, but planners believe the project needs 53 trillion cubic feet to succeed. That means pipeline owners would need to keep their fingers crossed on drillers making new discoveries.


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