BP calls on policymakers to endorse Alaska pipeline

By OGJ editors

WASHINGTON, DC, Nov. 7 -- The fate of a sweeping US energy reform bill remains uncertain, but BP PLC officials said Wednesday that Congress sooner than later needs to consider legislation that encourages construction of an Alaska natural gas pipeline from the North Slope to the Lower 48 states.

"Energy legislation is essential now to enable the gas to flow in 10 years," BP official David Welch said at a Washington briefing. Welch is overseeing BP's potential investment in the massive project, with an estimated construction cost of $20 billion.

He said Alaska gas is needed since traditional supplies cannot keep pace with US demand.

"We expect existing production areas will struggle just to maintain current supply," Welch said. "All North American sources of gas plus new LNG imports are needed to meet demand."

Without a new gas supply, a gap of 15 bcfd (6 tcf/year) or more is likely within 10 years, the company said.

"Alaskan gas can close a third of this gap, but project size, risk, and fiscal terms have discouraged investment so far," officials said.

Pipeline issues
Before the November elections, lawmakers were considering a Senate plan that offered both loan guarantees and a floor price to spur construction of an Alaskan gas pipeline. Senate language includes a $10 billion loan guarantee, along with a tax credit that is triggered when the Alberta natural gas hub price falls below $3.25/MMbtu. The White House endorsed the idea of a pipeline but had serious reservations about the incentives connected with the project.

Congressional leaders have signaled that chances are remote for energy reform legislation to be considered before yearend. White House officials meanwhile say they consider energy legislation to be a high near-term priority, although no timeframe has been given on when they want Capitol Hill to send legislation.

Producers recently completed a $125 million study to assess cost, technology, regulatory and environmental issues connected with the 4.5 bcfd line (expandable to 5.6 bcfd).

Producers estimated that the toll to US markets would be $2.39/Mcf under either a "southern" or "northern" route.

The House bill does not offer any kind of tax incentive for the pipeline but calls for the same southern route as the Senate bill, which parallels the oil pipeline from the North Slope to Fairbanks and then the Alaska Highway to British Columbia. Producers also are considering a northern route across the Beaufort Sea into Canada's Mackenzie Valley.

Canadian government and industry officials registered serious concerns over the Senate fiscal package, especially the price floor, saying the proposal violated existing free-trade agreements.

Meanwhile, Canadian producers are eyeing their own pipeline for the Mackenzie Valley, which is slated to be complete within 8 years.

BP officials say they do not expect that line to compete with the Alaska line because demand will be robust enough for both projects.

They are hopeful a pending "hybrid" fiscal option before US lawmakers enjoys enough bipartisan support to survive in the new Congress next year or even possibly in a lame duck session this year. Under that proposal, BP says, the federal government can inexpensively improve the financial risk of the project to attract capital. The company maintains each portion of the proposal is similar to past government policies endorsed by both political parties.

Hybrid plan
Instead of a controversial floor price, BP supports a production tax credit that provides as much as 52¢/MMbtu credit for Alaska gas transported to market. The credit phases out to zero when prices are $1.35/MMbtu.

In this latest plan, the US government would guarantee up to 80% of the total capital cost of the project. BP argues the risk of default is extremely low, and there is precedent for policymakers. Loan guarantees previously have been used to support troubled industries and in Canada. BP also wants the government to allow pipeline owners to accelerate depreciation of the asset from 15 to 7 years. Finally, they would like to see a 35% tax credit for a gas treatment plant connected with the project.

Fellow North Slope producer ConocoPhillips also supports the idea of a production tax credit, federal loan guarantee, and accelerated depreciation, industry officials connected with the project said. ExxonMobil Corp. has not officially endorsed any of the new fiscal terms, although sources said company officials "certainly aren't discouraging it either."

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