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Alaska gas plans advance

Competition to construct a pipeline to deliver gas from the Arctic to US markets is intensifying

After decades of controversy and delay, a pipeline that would transport natural gas from the North Slope of Alaska to Midwestern US markets has taken a step closer to being built.

The last day of November was the deadline for proposals to build the pipeline, in accordance with the Alaska Gasline Inducement Act (AGIA). This legislation offers about $0.5bn in financial backing, tax relief and other incentives to the winning bidder, if the company agrees to what Alaska Governor Sarah Palin calls "must have" components, such as jobs and gas for Alaskans.

Hours before the deadline for the competition for the right to build what will be the costliest pipeline in US history, ConocoPhillips submitted an alternative proposal. While it failed to meet all the specific requirements outlined in the AGIA, it offered some powerful incentives of its own, including a willingness to forego the state's $0.5bn contribution to the project.

Un-stranding the gas

The largest oil and gas producer in Alaska, ConocoPhillips has played a central role in the development of the state's hydrocarbons reserves. Phillips Petroleum, which merged with Conoco in 2002, became one of the first US companies authorised by the Department of the Interior to drill in Alaska.

ConocoPhillips has a majority stake in two of North America's largest oilfields, Prudhoe Bay and Kuparuk River, on the North Slope, and shares in many other fields. It also owns 28% of the Trans-Alaska Pipeline System, and operates the Kenai liquefied natural gas plant in southern Alaska and the Beluga gasfield in the Cook Inlet. Alaska accounts for about 17% of the company's total production.

To date, ConocoPhillips and other firms have focused on extracting the North Slope's oil, because no pipeline exists to deliver produced gas to market. But there is a large amount of gas to develop – there are over 30 trillion cubic feet (cf) of proved reserves on the North Slope, but most geologists believe the figure could be much higher.

"It's in Alaska's and the US' interest to get that gas to market," Palin says. And since the 1970s, the state and energy firms have been looking at ways to enable this to happen. Recent attempts include, in 1998, the passing of the state's Stranded Gas Development Act (SGDA), which was intended to make the pipeline more financially viable by reducing or delaying taxes and other fees until the project began generating revenues.

Based on this law, the North Slope's biggest producers – ConocoPhillips, BP and ExxonMobil – negotiated a gas-pipeline deal with Frank Murkowski, Palin's predecessor. However, when Murkowski lost his re-election bid, the deal fell through. In place of the SGDA, legislators overwhelmingly passed Palin's proposed AGIA.

In addition to financial incentives, the act included provisions for an open bidding process for choosing a company to build the pipeline. However, the largest investors on the North Slope indicated that they would not participate in the AGIA bidding process, claiming its criteria were too risky and rigid. At the 11th hour, however, ConocoPhillips submitted its alternative proposal.

"ConocoPhillips is prepared to make significant investments, without state-matching funds, to advance the gas-pipeline project towards our shared objective of seeing the conclusion of a successful open season within 36 months," it said. "We already have efforts under way to begin new field data acquisition in Alaska this coming summer in anticipation of your favourable consideration of our proposal."

The firm also agreed to spend $10m to train Alaskans to work on pipeline projects and provide jobs with competitive pay.

The proposal calls for a 1,700-mile, 48-inch pipeline that would carry up to 4bn cf/d of gas from the North Slope to Canada's southern border, with at least six delivery points to supply Alaskan markets. From the Canadian border, the gas would be transported through a new link to Chicago.

An alternative plan calls for the use of existing or expanded capacity on the Nova Gas Transmission system in Alberta, the West Coast pipeline and Alliance pipeline, which delivers gas from Canada to the US Midwest. In addition, ConocoPhillips would build a gas-treatment plant at the beginning of the pipeline to remove impurities, compress and chill the gas for transport. Cost estimates for the project range from $20bn to $40bn.

Acknowledging Alaska's interest in securing third-party companies' involvement as owners of the pipeline, the proposal said: "ConocoPhillips is prepared to work with the state to consider which of the interested pipeline companies would bring the greatest benefit to the project through their participation."

Sense of urgency

The proposal also expresses a sense of urgency in moving forwards with the project: "Since 2002, the project costs have seen significant increases for both steel and labour. The high-cost environment we are in will also increase the costs to explore, appraise and develop the upstream gasfields that will be needed to fill the pipeline over time. Further, natural gas prices continue to show volatility, which creates uncertainty and risk around a long payout project like the ANS gas pipeline. Therefore, we must jointly find a way to create a mutually beneficial path forward rather than one that distracts us, delays us or leads to lost opportunities."

Hours after ConocoPhillips presented its proposal, the state said bids had been received to join the project from China's state-owned Sinopec, TransCanada, AEnergia, the Alaska Natural Gasline Development Authority and the Alaska Gasline Port Authority – the contents of the bids will be kept confidential for several weeks. Early next year, the Palin administration is expected to present the top applicant to state legislators, who have the final say.

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