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ConocoPhillips, BP Plan Pipeline for Alaska Gas

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THE WALL STREET JOURNAL: ConocoPhillips, BP Plan Pipeline for Alaska Gas

By RUSSELL GOLD
April 9, 2008; Page B1

ConocoPhillips and BP PLC are joining forces to pursue construction of a long-awaited natural-gas pipeline that would bring the rich energy deposits of northern Alaska to the lower 48 states, the companies said Tuesday.

The two oil giants said they will spend $600 million over the next three years on a design for a project that industry experts say could cost more than $30 billion, potentially making it the largest private construction project ever in North America.

“This is not an announcement to start the plan. This is an announcement to start the project,” says Doug Suttles, president of BP’s Alaska unit. “We will begin work immediately. Gas could be flowing in 10 years’ time.”

Big oil producers have talked about building a second pipeline for Prudhoe Bay’s vast natural gas stores since the Alaska oil pipeline was completed in 1977. While the project still faces a number of hurdles, the talk has never before led to such a concrete step toward making the gas pipeline a reality.

On Tuesday, excitement gripped Anchorage and the rest of a state that still fondly remembers the boom times brought on by construction of the oil pipeline. “My phone has been ringing off the hook,” said Bill Popp, president and chief executive of the Anchorage Economic Development Corp. “We have a greater sense of optimism than we’ve had in several years.”

The perception that there may be a natural-gas pipeline by 2018 could send exploration into overdrive in the North Slope. “It enhances the probabilities and possibilities that any explorers or drillers would want to go to work right away to find new gas,” says Scott Heyworth, chairman of the Alaska Natural Gas Development Authority. The scale of the proposed gas pipeline, which ConocoPhillips and BP are calling Denali, is enormous. It would stretch 2,000 miles to reach Alberta and an additional 1,500 to its final destination near Chicago and require five million to six million tons of steel. It would also require more than 1,000 permits.

When it arrives in the lower 48, the Alaskan gas could also help tame prices for the relatively clean-burning fuel, which closed just shy of $10 per million British thermal units Monday on the futures markets, up 30% from a year ago. The proposed pipe would carry 4 billion cubic feet of gas a day from the Alaska North Slope. Some of the gas would be used to light and heat Anchorage. More of it could be used to develop Canada’s oil sands deposits, and the rest would be routed through North Dakota into Chicago.

In recent years, discussions of a gas pipeline project have been mired in disagreements and controversy. The big oil companies that control North Slope production — ConocoPhillips, BP and Exxon Mobil Corp. — had insisted on a long-term agreement on taxes and other fiscal terms before they committed to build the pipeline. Those talks, championed by former Gov. Frank Murkowski, collapsed in 2006 as lawmakers rebelled against terms they saw as favoring the oil companies. Then, when the state was swept up in a political corruption probe involving a major oilfield contractor, the pipeline project was shelved again.

Last year, in an attempt to jump-start the project, Gov. Sarah Palin and the legislature agreed to put up $500 million in matching funds for a company that would begin work on the pipeline. ConocoPhillips submitted a proposal, but it was rejected in January because it fell short of the state’s requirements. Alberta-based pipeline operator TransCanada Corp. submitted the only proposal meeting the guidelines, but it was criticized for not involving the big producers. Gov. Palin hasn’t yet said whether she will send this proposal to the legislature for approval.

One matter in debate: Trans-Canada said it must be involved in any international project. “We believe we hold the permits to transport Alaskans’ gas through Canada to the lower 48,” said Tony Palmer, TransCanada vice president of Alaska development.

Although it will be buried underground and run parallel to the existing oil conduit, the pipeline will likely raise objections from environmental groups. Given the strong state support, this opposition seems unlikely to derail the project.

Also looming large is the absence of Exxon Mobil Corp., which has the rights to develop about one third of the estimated 35 trillion cubic feet of gas in Alaska’s remote North Slope, but isn’t participating in the project. Exxon spokeswoman Margaret Ross said in a prepared statement that a gas pipeline would “be among the largest, costliest and most complex projects ever undertaken” and that the company hadn’t had enough time to study the proposal.

Still, many observers see the announcement as a major step forward. ConocoPhillips has dropped its earlier requirement to lock in an agreement on fiscal terms such as taxes and royalties before proceeding on the project. BP also is relaxing some earlier conditions.

Drue Pearce, head of the Office of Federal Coordinator for Alaska Natural Gas Transportation Projects, credits Ms. Palin with forcing BP and ConocoPhillips to move ahead.

As Western oil companies are being blocked from exploring for oil in many energy-rich nations, such as Russia and many parts of the Middle East, they are instead turning more often to this type of big, technically challenging project, often involving natural gas with a long payout. Indeed, the companies said the new pipeline could extend the producing life of the Prudhoe Bay oil and gas fields by 50 years.

Under the state guidelines, Alaska would provide $500 million in matching funds. But the new ConocoPhillips-BP plan doesn’t require any money from the state.

Write to Russell Gold at [email protected]

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