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BP and Conoco move forward on $30 billion plus gas pipeline project

Alaska Journal: Companies move forward on gas pipeline project

By Tim Bradner
Alaska Journal of Commerce
Web posted Sunday, April 20, 2008

BP and ConocoPhillips are moving quickly to assemble a team of employees and contractors for their new $30 billion-plus Denali gas pipeline project. The companies intend to have 150 people assigned to the project by the end of 2008 and 500 in the next three years along with 1,000 to 2,000 contractor employees, senior officials with the two companies said April 16.

The project involves a 2,000-mile large-diameter pipeline from the North Slope to Alberta, Canada, that will move 4.0 billion to 4.5 billion cubic feet of gas daily. The companies will reserve judgment on whether to use existing pipelines to move Alaska gas from Alberta to the U.S. or to build a new pipeline.

Discussions are also underway with another major North Slope producer, ExxonMobil Corp., regarding possible involvement in the project, according to Brian Wenzel, vice president for North Slope gas development for ConocoPhillips, and Angus Walker, who holds a similar position at BP.

Wenzel said the two companies hope to interest other potential partners in the project, and possibly even the state of Alaska. “We’d be very interested in having the state as a partner,” Wenzel said. The two companies announced their decision to move forward with the project April 8.

The three major North Slope producers negotiated a complex and detailed agreement for a pipeline that included the state owning a 20 percent equity share with former Gov. Frank Murkowski in 2005. It was not approved by the state Legislature, however.

Gov. Sarah Palin rebuffed a second initiative last November by ConocoPhillips.

Wenzel said a critical turning point for BP and ConocoPhillips’ new initiative came after Palin’s rejection of ConocoPhillips’ plan earlier this year. The companies decided to not wait until major issues were resolved with the state, or even between themselves, before launching the project.

“This is very different compared with what we had announced last November,” Wenzel said. “This is not a proposal. This is the launching of a company,” to develop the project.

Walker said the previous efforts involved attempts to resolve issues like tax and royalty terms on gas production before the companies agreed to spend substantial sums on development of the project. “Now we will attempt to resolve the issues as we move forward,” Walker said.

Wenzel said Palin told him she was willing to discuss an agreement on state fiscal terms, but only after there were better cost estimates and an understanding of the economics of the project available. “We listened to what the governor said, and went back to rethink our approach,” Wenzel said.

After 36 months an open season will be held. At that time detailed cost estimates, a strategy for procurement of critical materials and environmental permitting information will be made available.

There is still no guarantee the project will move forward. That can’t come until a detailed cost estimate is completed, and shippers have signed contracts for capacity. At that point there will have to be an agreement with the state as well. From that point, in 2010, another $1 billion will have to be spent on detailed engineering and on the application to the U.S. Federal Energy Regulatory Commission for a certificate.

The new Denali project will proceed even if the state continues its efforts to attract an independent pipeline company to the project through its Alaska Gasline Inducement Act, Wenzel and Walker said. TransCanada Corp. has made a proposal to the state under a solicitation held in 2007. Palin will make a decision May 19 on whether to issue a license to TransCanada, which the Legislature will also have to ratify.

“Our project is being done outside the AGIA process,” Walker said. Wenzel said the companies have assured Palin they do not want the Denali initiative to be seen as distracting from the state’s consideration of TransCanada. The AGIA license would grant state incentives, including a $500 million state grant, to a project meeting certain state goals.

Walker said the new effort goes beyond what the three slope producers did in earlier cost estimates in 2001 when they spent $125 million on conceptual engineering, route and environmental studies. Besides the more detailed cost estimate, the companies will begin work now on critical environmental permits so the schedule can be maintained.

“What we did in 2001 was prove the technical feasibility of the project. Our goal now is to advance the project to commercial feasibility,” Walker said.

The companies will spend the $600 million budgeted over the next 36 months to develop estimates in which potential customers can have a high degree of confidence, Walker said.

The 2001 estimate put the cost of a project at $20 billion with a margin of 30 percent on either side. At the April 9 press conference the companies said the pipeline is likely to now cost over $30 billion. There has been seven years of inflation, increases in labor costs and a doubling of steel prices since the 2001 estimate.

Tim Bradner can be reached at [email protected]

http://www.alaskajournal.com/stories/042008/hom_20080420034.shtml

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