ConocoPhillips, BP Unveil Plans for Denali Gas Pipeline from Alaska to Canada

Same Vision, New Proposal

For years, energy companies, Alaskan state officials, and U.S. policymakers have dreamed of building a pipeline that would connect the rich gas reserves of Alaska's North Slope to population centres in the Lower 48 states. Construction of the 800-mile, trans-Alaskan oil pipeline in the 1970s and the delivery of North Slope oil volumes to the continental United States gave rise to visions of a similar pipeline that would deliver gas to the Lower 48. Yet, despite rising U.S. gas demand that has seen consumption grow by an average of 1.5% per year for the past 20 years, the Alaska-to-continental U.S. gas-pipeline project has remained solely a dream, hampered by huge costs, environmental opposition, and a host of bureaucratic regulations and complications involving several jurisdictions: the state of Alaska, the U.S. federal government, and Canadian provincial governments, through the territory of which the pipeline would run.

The increase in average U.S. natural gas prices over the past few years, combined with the growing need for gas imports to meet rising U.S. consumption needs, has raised the stakes for the Alaska gas-pipeline project, improving the economics of what would no doubt be a multi-billion-dollar investment, but also increasing the pressure on North Slope gas producers and state, local, and federal officials to reach a deal. Two years ago, then-Alaskan governor Frank Murkowski reached a deal in principle with the North Slope's main gas producers—ConocoPhillips, BP, and ExxonMobil—on fiscal terms that would have underpinned the potential construction of a pipeline, but the deal fell through when the Alaskan legislature refused to vote on it, saying that the agreement—which would have frozen oil taxes for 30 years on the companies and up to 45 years for gas taxes—was too much of a give-away to the energy industry. Murkowski subsequently lost his re-election campaign in November 2006, and current Governor Sarah Palin took a different direction, refusing to negotiate with the oil companies.

Governor Palin introduced the Alaska Gasline Inducement Act (AGIA) last year in an effort to stimulate competition among oil companies as well as the independent pipeline companies to turn the vision of the Alaska gas pipeline into reality. Calgary-based pipeline operator TransCanada has already proposed a pipeline that would connect Alaska to the U.S. Midwest, but yesterday ConocoPhillips and BP joined the fray, unveiling plans to work together to pursue construction of a pipeline from the North Slope to Alberta, from whether the pipeline could be connected to the Lower 48 states. The project, dubbed "Denali—the Alaska Gas Pipeline”, would deliver 4 bcf/d of gas via a 700-mile pipeline. BP and ConocoPhillips said that they are planning to commit US$600 million to do preliminary design work on the project, which would also include a gas-treatment plant on the North Slope and would constitute the largest private-sector construction project ever built in North America.

Same Problems to Overcome

Governor Palin said that the Conoco-BP announcement illustrates how AGIA has triggered competition to build the Alaskan gas pipeline. Indeed, the announcement is a victory for Palin, even if it does not guarantee construction of the pipeline, as it marks a success in her strategy, having rejected last November a ConocoPhillips proposal on the pipeline that was outside the bid requirements of AGIA, which the legislature passed into law last May. Palin said that the Houston-based energy company's proposal on a long-term fiscal package covering taxes and royalties on North Slope gas production was rejected since it would deprive the state of regulatory powers. Alaskan state officials then said that TransCanada's proposal in January was the only one that met state guidelines.

Nevertheless, as the Slope's largest oil producer, ConocoPhillips appears undeterred, and its decision to move forwards and join forces with BP in pursuing the Denali project sets the stage for yet another battle with Alaska officials. However, for yesterday at least, the companies and Palin said that a new round of talks on taxes and other terms can wait. Instead, the focus was on the Conoco-BP announcement and what it could mean for U.S. gas consumers. Tony Hayward, chief executive officer (CEO) of BP, said: "This project is vital for North American energy consumers and for the future of the Alaska oil and gas industry. It will allow us to keep our North Slope fields in production for another 50 years." ConocoPhillips’s CEO reiterated the importance of the gas pipeline, saying: "Our goal of bringing Alaska's North Slope gas to market is becoming a reality. Denali—The Alaska Gas Pipeline project will deliver natural gas to meet North America's growing energy needs. The time is right to start moving this project forward." U.S. Senator Lisa Murkowski (Republican, Alaska), the daughter of the former governor, added: "It is great news for Alaska that companies that control well more than 60% of the North Slope's natural gas are now committing themselves to move ahead to build a gas pipeline."

Outlook and Implications

The Conoco-BP announcement bolsters the prospects that the Alaska-Lower 48 gas pipeline will finally be built, but the same obstacles that killed previous proposals still need to be overcome in order to turn this vision into reality. Indeed, ConocoPhillips and BP themselves were careful to note that this means that they are pursuing the project, but there is no guarantee it will come to fruition. ExxonMobil, the other major North Slope producer, is not part of the project, which could hamper the Denali proposal, while BP and ConocoPhillips still must reach an agreement with Alaska state officials in order to move the project from the drawing table and into the actual construction phase. The companies said yesterday that they will seek approval from the U.S. Federal Energy Regulatory Commission (FERC) and the Canadian National Energy Board (NEB) in order to construct the pipeline, but, even with approval, the pipeline still faces the questions over financing and siting, two issues that could yet derail the Denali pipeline proposal.

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