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Alaska - Canada Natural Gas Pipeline Competition

Dec 2005 - - The two pipeline projects are in competition for workers and capital: 1) the Alaska Gas Pipeline (AGP) and 2) the Mackenzie Valley Pipeline (MVP).  Only one will probably be built.  AGP is the behemoth and its most likely route would stretch 1,700 miles from Alaska's Prudhoe Bay to Canada's Alberta province. The line would cost $20 billion and take a decade to build.  It has $18 billion in loan guarantees approved last year by Congress in 2004.  The Alaska Pipeline project alone would be more than double the size of the 800-mile-long trans-Alaska oil pipeline finished in 1977, which took 21,000 construction workers three years to build.

MVP would start 250 miles east of the Alaska line, on Canada's portion of the Beaufort Sea and would run 800 miles through forests of spruce and pine along the Mackenzie River. This all-Canada route would cost $6 billion and would take three years to complete.

The Alaska Gas Pipeline could move more quickly. The oil pipeline and highway along the proposed route already have cleared the way with access rights, aboriginal land claims and environmental reviews. Since the 1970s, the TransCanada pipeline company has held rights to one route in Canada, and has laid groundwork on the Alaskan side as well.  There are also negotiations with the Prudhoe Bay producers Exxon-Mobil, BP, and ConocoPhillips.

Alaska Natural Gas Pipeline Legislation Approved

Congress passed legislation for the Alaska natural gas pipeline on Monday, October 11, 2004 that includes expedited approval of permits and loan guarantees worth up to $18 billion. The line is expected to cost about $20 billion.

The bill was part of a 2005 military construction funding bill.  The U.S. Senate passed a corporate tax bill with two gas line-related tax credits on a 69-17 vote. A separate military construction bill, which offers a federal construction loan guarantee and streamlines several regulatory processes, also passed by unanimous consent. The House passed the corporate tax bill Thursday, October 7, 2004 by a vote of 280-141 and the construction bill unanimously Saturday, October 9, 2004.  Alaska's three members of Congress advocated or voted for passage of all the measures.

Proponents have been working for two decades to get subsidies for an Alaskan natural gas pipeline.  Companies interested in building the pipeline include British Petroleum, ExxonMobil and ConocoPhillips. 

Gas pipeline owners can now amortize the cost of all Alaska portions of a pipeline over seven instead of 15 years.  There is also a tax credit for a gas conditioning plant on the North Slope of Alaska.   It should take about 10 years to complete the pipeline.  In summary, the measures:

• Provide a federal loan guarantee provision of $18 billion, or up to 80 percent of capital costs, to make the project more attractive to the eventual pipeline builder.
• Direct the Federal Energy Regulatory Commission to quickly permit the project once certain requirements are met, and provide for expedited judicial review.
• Designate FERC as the lead agency for the National Environmental Policy Act process and requires a single environmental impact study.
• Allow pipeline owners "accelerated depreciation" to claim construction costs on their taxes over seven years instead of 15 years. They also makes a proposed North Slope gas conditioning plant eligible for a tax credit worth $295 million over the same period.
• Create a federal coordinator within the executive branch to provide a single point of contact between federal agencies and pipeline officials.

The three major North Slope gas owners already are negotiating as a group with Gov. Frank Murkowski's administration. The Alaska Legislature passed a law a few years ago allowing the executive branch to tinker with existing state tax rules to make a project more attractive for developers. Two Canada-based pipeline companies, TransCanada Corp. and Enbridge Inc., are also negotiating under that law. The gas owner companies and the pipeline companies all can negotiate with the state over sales, corporate income and property tax rates,  The three major North Slope operators, because they own the gas, can negotiate the share that the state collects as a royalty. The Alaska Legislature must approve any agreement before it takes effect.

Exxon is not necessarily seeking lower tax rates from the state of Alaska and it refrained from advocating for any federal tax breaks. Exxon believes the pipeline project should be able to stand on its own. They are concerned about certainty and the risk of going into the project and then three or four years later the administration or the Congressional mood changes.

Another question mark is the traditional regulatory process of the Canada National Energy Board for approving pipeline projects, in which the 1970s Alaska Natural Gas Transportation System failed. While the Alaska delegation stressed that the package they have put in place does not mandate a line through Canada, the major gas owners have said that is the most feasible option. However, two governmental organizations, the Alaska Natural Gas Development Authority and the Alaska Gas Line Port Authority, want to build a line to Valdez rather than through Canada.

Natural Gas: A Primer

Natural gas is a great fuel, cleaner than coal or oil.  That is why proponents recommend it as a fuel for use in electric power plants to replace coal and uranium.  Unfortunately, natural gas is very hard to store, doesn't have pipelines to large sources, has limited availability due to restrictions on exploration and production on pubic lands and cannot be imported easily. Moreover, baseload powerplants use massive amounts of fuel (except uranium) to produce electricity and usage in power plants would significantly reduce availabilility of this precious fuel for residential (heating & cooking) and commercial uses. Although environmentalists and policy makers promote it as a clean fuel for use in electric power plants, they restrict its production by fighting exploration and drilling on public lands.

A cubic foot of natural gas is the volume of methane and related gases (propane, butane and others) occupying one cubic foot when the temperature is 60 degrees Fahrenheit and atmospheric pressure is 14.7 pounds per square inch (pressure at sea level).

Before natural gas enters an interstate pipeline, contaminating components, such as the sulfur, water vapor and solids are processed out to meet standards mandated by the Federal Energy Regulatory Commission (FERC). One of the most important standards is the identification of heating content per cubic foot, usually measured in British thermal units(or African thermal units by AAEA). One Btu or Atu is the energy required to raise the temperature of one pound of water one degree Fahrenheit, at sea level.  If natural gas were pure methane, the Btu or Atu content of a cubic foot would be 1,012 Btu (Atu). A therm is roughly 100 cubic feet of gas or 100,000 Atu.

There is a critical shortage of natural gas in the U.S. The Department of Energy (DOE) reports that natural gas storage levels are at their lowest levels in 30 years and prices have increased by up to 700 percent since 2000.  According to DOE's Energy Information Administration's Annual Energy Outlook 2003:

• Total demand for natural gas is expected to increase at an annual average rate of 1.8%.
• This increase is due to the rapid growth in demand for electricity generation.
• Forty percent of U.S. natural gas resources are inaccessible due to stringent environmental regulations on the federal lands.
• Environmental regulations favor the use of natural gas over other fuel sources, such as coal and gasoline.                                                                          

Federal Reserve Chairman Alan Greenspan testified about the natural gas shortage before the Joint Economic Committee and noted that:

• Importation facilities are limited and domestic sources are the best solution.
• Policy-makers have encouraged the use of natural gas, but have constrained access to it.
• Contradictory federal policies are creating shortages and leading to price increases.

Natural gas is the other reason energy companies want to drill in Alaska. It is estimated that Alaska's reserves could remedy the shortage. According to the U.S. Geological Survey Alaska has at least 35 trillion cubic feet of proven reserves of natural gas, and its federal lands could contain another 59.7 trillion cubic feet in undiscovered reserves. However, there is no natural gas pipeline to transport the fuel to the lower 48.  The Energy Security Act of 2003 proposes an Alaskan natural gas pipeline. However, greens are opposing it.  It is contradictory to promote the use of natural gas for electricity production while limiting its production from public lands and the outer continental shelf (moratoria on offshore drilling on the East and West coasts.

The Department of Energy Energy Information Administration forecasts a 34 percent increase in natural gas consumption over the next 10 years, from about 22 trillion cubic feet a year to 30 trillion cubic feet annually. But the gas can't get to its delivery points unless more pipelines are developed.