Alaska to hold critical role in US energy politics

Alaska's oil and gas resources-and the ability to explore for, develop, produce, and transport them-will play a key role in US energy politics in the coming years, particularly under a new administration in the US White House.

The exploitation of Alaska's extensive hydrocarbon reserves hinges largely on two main issues: the development of a scheme to transport natural gas from the Alaskan North Slope to markets in the US Lower 48 and the opening of the Arctic National Wildlife Refuge (ANWR) Coastal Plain to exploration and development (see related story, p. 66).

Topping the list of priorities of newly elected US Pres. George W. Bush is a revamp of the country's energy policy. As part of this policy, Bush has stressed the need to include an aggressive approach to exploration within the US, in hopes of easing the country's dependence on foreign oil.

During one of the presidential debates in early October 2000, Bush stated, "The only way to become less dependent on foreign sources of crude oil is to explore at home. And you bet I want to open up a small part of Alaska, because when that field is on line, it will produce [1] million b/d. Today, we import [1 million b/d] from [Iraq.] I would rather that a million come from our own hemisphere, our own country, as opposed from Saddam Hussein."

Pipeline routes

Currently, there are four proposed schemes for monetizing ANS gas, two of which involve the construction of a pipeline through Canada to the Lower 48.

The first proposal, known as the Alaska Highway route, was first offered by Foothills Pipe Lines Ltd., Calgary, in the 1970s as the Alaska Natural Gas Transportation System (ANGTS) and has already received approvals from the US Federal Energy Regulation Commission and the Canadian National Energy Board. Many in the industry, including the state of Alaska and several Canadian provinces, including the Yukon Territory, strongly back the proposal.

"They are a lot further along with FERC than anybody else," explained Arlon R. Tussing, an oil and gas consultant based in Mercer Island, Wash., and a close industry observer of the various proposed routes.

The second pipeline proposal, offered by a Houston-based group of promoters, is being led by Arctic Resources Co. (ARC). The group, which has not received any government approvals yet, "are claiming to promote what looks to be the technically best proposal," Tussing commented.

The pipeline's route will run along the arctic coasts of the US and Canada, most likely from Prudhoe Bay to the Canadian Beaufort Sea and into the Mackenzie Delta, then via the Mackenzie Valley into northern Alberta.

The other two ANS gas monetization proposals involve the construction of a pipeline from the Prudhoe Bay area to tidewater in south-central Alaska for delivery into an LNG export scheme and the construction of gas-to-liquids facilities at Prudhoe Bay to create a GTL stream that could be injected into the existing Trans-Alaska Pipeline System oil pipeline.

Pipeline feasibility

The US government put its hand on the pulse of the oil and gas industry regarding an Alaskan gas pipeline most recently last September, when pipeline companies gathered to report to the US Senate energy committee that a pipeline from the North Slope to the Lower 48 would be a feasible project.

Sen. Frank Murkowski (R-Alas.), who chaired the committee, said proven ANS gas reserves are more than 35 tcf, with potential reserves of more than 10 times that.

"With prices [currently] hovering around $5/Mcf, the economics have never looked better for Alaskan gas to be delivered to an eager market in the Lower 48," he said.

Foothills Chairman Robert L. Pierce said, "We believe that the Alaska Natural Gas Transportation System can be in service and transporting Alaskan North Slope gas in the 2006-07 time frame." He said the ANGTS overland pipeline route would move the gas from Alaska to northern Alberta, from which it would be shipped to the Lower 48.

The US and Canadian governments approved the route 21 years ago, Pierce noted, and it would be less environmentally disruptive than other overland routes because it would parallel existing highways.

Forrest Hoglund, ARC chairman and CEO, said that the development and delivery of the ANS region's abundant natural gas supplies will require a "unique approach."

"Our country's track record so far on trying to tap Alaskan and other arctic natural gas reserves and bringing the gas to market has not been successful," Hoglund said. "Over the past 25 years, technological limitations and conflicting industry and governmental interests stalled attempts to tap these reserves.

"As a result, no project has been built, and proposed solutions have proven to be uneconomical," he added.

Jerry Halvorsen, president of the Interstate Natural Gas Association of America, called the construction of a gas line "...a matter of no small importance to America in terms of our economy and our future energy security."

The top ANS producers-BP, ExxonMobil Corp., and Phillips Petroleum Co.-were also present to state their opinions. The three ANS gas producers have agreed to a joint work program focused on ways to monetize ANS gas. The initial program, which is expected to cost about $75 million, will involve the conceptual design, project cost estimating, permitting considerations, commercial structure, and overall viability of their Alaskan Gas Pipeline Project. The work program is expected to take 18 months, the companies said.

Robert Malone, BP's western region president, said BP is studying various options for moving the gas to market, including gas, natural gas liquids, and gas-to-liquids proposals. He said it would take 1 year to order materials for a gas pipeline and 3 years to build it.

"Our focus for Alaska gas is not to simply build a pipeline," Malone said. "Rather, our goal is to create a new gas exploration, development, and production industry...that sits side-by-side with the existing oil industry in Alaska."

Terry Koonce, president of ExxonMobil Production Co., told the committee, "At this time, we do not know whether the Lower 48 gas market will support the major capital expenditures required for a [gas] pipeline and when such a pipeline could be built and be in operation.

"It is worth noting that there is sufficient gas on the North Slope for multiple projects if market conditions are supportive. The prospect of building a gas-to-liquids project would not be precluded by building another project, such as a pipeline to the Lower 48."

Phillips Alaska Inc. Pres. and CEO Kevin Meyers said, "We are currently evaluating routing alternatives and plan to select a primary [pipeline] route and begin permit application by midyear 2001. During 2001, we would expect a significant effort to build external stakeholder consensus around the primary route."

Meyers added that gas sales from the line would be a possibility by 2007, provided that the company receives stakeholder consensus from both the US and Canada for a primary project as well as cooperation from both countries' governments to expedite permitting.

"Whether the pipeline route is accepted or not, it's the producers that are going to make the decision," Tussing noted. "Of the three pipeline promotion groups, Foothills is the only one that has anything to bring to the table," he said. Tussing added that the White House's new cabinet candidates-especially the Department of Energy, the Department of the Interior, and the Environmental Protection Agency-will certainly have some influence over the pipeline's routing, but that the producers are ultimately going to make the final decision.

Alaska's role

Alaska has actively participated in studying the feasibility of transporting North Slope gas to markets south. Late last year, Alaska Gov. Tony Knowles expressed his state's support for the Alaskan Highway route. He billed the idea with the phrase: 'My way is the highway."(OGJ, Dec. 4, 2000, Newsletter, p. 7).

The 1,800-mile line would be the largest private construction project in US history.

A shorter, competing route from Prudhoe Bay across the Beaufort Sea and down the Mackenzie River Delta to Alberta also has been suggested, but that route poses formidable technical, environmental, and logistical challenges, including "under-ocean (arctic) pipelines at untested pressure over never-achieved length of 400 miles," Knowles said (OGJ, Nov. 27, 2000, p. 31).

Building the massive pipeline would generate billions of dollars for the Alaskan economy, provide access to more gas for use in that state, and create spin-off industries involving the use of gas liquids, say state officials.

Knowles has pledged to spend the rest of his office term pushing to launch construction of a natural gas pipeline. He is on record in support of lowering state tax barriers to encourage such a project.

Further demonstrating his strong commitment to the line's construction, Knowles earlier this year issued an administrative order that, among other things, included:

• The creation of a "pipeline cabinet" and coordination office to centralize permitting and oversight procedures among state agencies for construction of such a pipeline.
• The introduction of an amendment that would include both gas pipeline and gas-to-liquids proposals in the state's 1998 Stranded Gas Development Act, which originally targeted only a possible LNG project.
• The issuance of a notice seeking a $4 million appropriation to jump-start construction of a gas pipeline; the money would help fund initial work on permits and rights-of-way.

The administrative order "establishes a fully integrated state organization that utilizes existing government structure and processes to the maximum extent possible, minimizes impacts to existing agency functions, and promotes internal alignment of state agencies," the governor said.

The objective is a streamlined, one-stop state permitting facility that will be in place if a company decides to build a pipeline to move Alaskan gas to markets in the contiguous US.

"Alaska's natural gas can be the foundation of a 21st century economy of high-tech resource development, high-tech manufacturing, and new business growth and quality of life based on affordable clean energy. With known and estimated [Alaskan] reserves of up to 100 tcf, natural gas can fuel our economy for the next 50-70 years, but to start this mammoth project, we need a single point of contact," Knowles said.

The official pipeline coordinator will submit periodic progress reports to the governor and members of his gas pipeline cabinet, summarizing goals, objectives, and accomplishments in building the proposed pipeline.

In his state of the state address, given earlier this year, Knowles made it clear that a method to get North Slope natural gas to southern markets was a top priority.

"I believe Alaskans can be on the working end of a shovel building a natural gas pipeline within 2 years," he said. "After 2 decades of false starts and broken dreams, the economic and political stars are finally aligned in our favor. Natural gas is the fuel of the 21st century.

"We're working hard to keep this project on track-conferring with Alaska's major oil and gas producers; cosponsoring a natural gas summit in America's heartland; listening to Alaskans.

"And I'll soon appoint the governor's Natural Gas Policy Council to ensure Alaskans realize the maximum benefits from this project. This includes feedstock for new industries, community access to gas, and future gas projects."

Will it get built?

Although there are many who are backing the construction of the gas line from the North Slope, still others can't help but be wary of how long it has taken to get to this point. Tussing noted that with a project with such a large economy of scale, the long-term cost must truly justify its construction.

"Both the politicians and the producing companies are giving the impression that something is going to be built," he said. "It seems to me that this is a real stretch. It wasn't much more than a year ago that the price out of Alberta was less than $1[/Mcf] (US). And, under those circumstances, to be competitive, you've got to bring the gas as far as Alberta with $1-what kind of netback [would that provide]? We now have the highest market prices that we've seen since the evolution of the market price for gas, but we've also got the most volatile situation-nothing has happened to the fundamentals," Tussing observed.

As for when such a project would be completed, Tussing said, "It could be any time and no time."

Holding up the progress, Tussing said, is the fact that "the numbers just don't work out. Unless you're convinced that there has been a major, permanent structural shift-that there has been some change in the fundamentals between 1999 and 2000-the safest thing would be to assume that the fundamentals are going to be the same, roughly on the average that they have been over the previous 15 years. There's no basis for a gas pipeline either to the Lower 48 or to an LNG terminal," he said.

Opening ANWR

As for the likelihood that Bush would attempt to open up part or all of ANWR to exploration, Tussing said, "I can't foresee of the Bush administration-no matter how strongly they felt about it-collecting or being willing to cash in enough chips to do it. There's no popular support in the United States for it."

Tussing added that within Alaska, however, there is strong support for such a proposal. "Drilling is now prohibited without an act of Congress. There are members of Congress, maybe a third of the Senate under major pressure by the administration would vote to open it, but there isn't any national consensus for it," he said.

"The Democrats in Congress would love to have an early fight. It's really the only high-profile wedge issue in the environmental arena. ANWR is overwhelmingly an emotional issue. There's no way that the decision is going to affect the gas line or have any impact on national security."

Alaska Gov. - Tony Knowles