Pipeline

The bidders were: TransCanada Corp., Chinese energy giant Sinopec, Aenergia from California, the Alaska Gasline Port Authority and the Alaska Natural Gas Development Authority.  ConocoPhillips provided a non-conforming proposal.

Governor Palin started the process rolling earlier this year with the Alaska Gasline Inducement Act (AGIA) which lays out the foundation for the agreements and timelines for approval on construction of the line.  Bidders had to agree to the guidelines and processes set forth in AGIA to submit a qualifying bid.  The State will now review the submitted bids and announce a winner some time in February 2008.  From that point it will be up to the State Legislature to approve the winning bidder. That is expected to happen in summer 2008.  The project will be one of the largest in North American history costing up to an estimated $42 billion dollars and taking 10 years to build depending on the route.  The route for the pipeline has yet to be determined, but it will either follow the existing Trans-Alaska Pipeline (TAPS) from Prudhoe Bay to Valdez, or more likely travel from Prudhoe Bay to central Alaska and then head east into Canada and down into Alberta and the central lower 48.  It is roughly estimated that’s its capacity will be around 4 billion cubic feet of gas a day supplying 7% of America’s needs.  Due to the nature of natural gas transport it is probable that the pipeline will be buried.   The project will also involve construction of natural gas processing facilities at Prudhoe Bay and at the line’s termination point.  It may also involve spur lines in central and southcentral Alaska.  If natural gas is shipped to Valdez it will be compressed into liquid and thus require compression facilities and port facilities for highly specialized LNG tankers.  Natural gas is usually produced with oil and water and is either a product from a natural gas well or separated from oil and water from an oil well.  Currently North Slope natural gas is re-injected into the ground to maintain oil reservoir pressure underground. There has been no way to get it to market. 
 
Despite the six offers to the State the bidding process was slightly marred by the lack of a highly anticipated bid from MidAmerican Energy Holdings (part of Berkshire Hathaway) which is one of the main suppliers in the US Midwest.  MidAmerica submitted a letter to the Governor stating it was not bidding due to recent political scandals involving a local oil field service provider and state politicians as well as problems involved with production operations on the North Slope. Another non-bidder was oil giant BP Exploration which produces most of the oil on the North Slope.  The oil company stated early on that it would not bid for the project as it didn’t believe it could propose a project that would fall within the Governor’s AGIA guidelines.  A similar argument to BP’s was put forth by Exxon/Mobil corporation, the third largest producer, and major gas rights holder on the North Slope. 
  
The economics of the gasline is immensely complex involving state and federal governments, as well as pipeline operators (transporters), natural gas suppliers (primarily BP, ConocoPhillips, Exxon), port operators and shippers, all working off of the national natural gas market price.  The price of natural gas is, unlike oil, determined on a national market rather than a world market. The current average price for natural gas in America is roughly $6-7 per cubic foot (cf).  The construction cost is perhaps the projects biggest obstacle.  The state needed to provide enough incentive to potential bidders to allow them to see the benefit of spending and risking their private capital in Alaska versus spending it on other projects around the world with less risk.  The fact that Alaska raised its Petroleum Profits Tax (PPT) just last month to 25% did not help the confidence of bidders.  Alaskan oil producers pay 25% tax on production plus a 25% royalty tax as well as federal taxes before any profit can be taken.  In calculating the potential return bidders would have to weigh expected gas market prices against the lines cost plus expected taxes and royalty payments for decades to come. 
 
The gasline, when it is built, will have a profound affect on Alaska and America.  Currently Alaska supplies the US with 16% of its domestic oil production.  Despite that Prudhoe Bay has produced over 15 billion barrels of oil and will produces billions of barrels more from satellite fields coming online, the steep decline in production shows from the volume of the TAPS which is currently less than half full.  The state has always wanted a gasline to tap the estimated 36 trillion cf of gas reserves, yet has battled with cost and bureaucracy fighting the advance of the issue.  It is hoped the gasline will help fill the ever decreasing tax revenues supplied by the oil industry to the state.  Currently the state earns nearly 90% of its revenue from the oil industry alone.  A gasline will not only allow an outlet for all the natural gas re-injected into the ground yet supply a market to currently unexplored gas fields and provide greater incentive for the opening of the 10-02 area of ANWR which are estimated to hold vast oil and gas reserves.   

Despite being an historic first step for the construction of the long overdue line, many questions still remain as to its operation.  A pricing point needs to be worked out between the operator of the line and the suppliers which will allow profit enough for both to justify the investment made in keeping the line open and the gas wells producing.  The state and federal government will need to work out the actual assistance given in the financing of the line that will allow a company to take the financial risk in construction and operation.  AGIA sets the state inducement at $500 million and a gas producers tax freeze for the first 10 years of operation.  Many potential bidders have said this is simply not enough and not long enough.  Because the supply of gas will act similar to a public utility long term supply contracts will be the norm of operation.  Unless shippers can guarantee a supply at a set price for long periods of time, energy buyers at the end of the line will not sign on. At the beginning of the line problems also exist in that the line operator must agree to transport the gas at a certain price for suppliers.  This transport price must be less than the cost benefit obtained from re-injection, otherwise there is no incentive the gas producers to ship the line to market.  Another aspect of the risk involves the future of US energy and the potential opening up of gas fields off the east, west and south coast of the lower 48.  More economic fields closer to market could make the Alaskan supply uneconomic.  A similar affect could be produced by sudden access to cheaper supplies imported from sources in Canada.
 
America consumes 21.7 trillion cf of natural gas a year, 15% of which is imported mostly from Canada.  It is estimated imports will rise to 25% by the time the pipeline is built.