Alaska Gas Pipeline Gaining Momentum, But Investors Still Worry About Risks

A 3,500-mile pipeline to deliver natural gas from Alaska's North Slope to the fuel-hungry Midwest is suddenly more than a pipe dream.

WASHINGTON-A 3,500-mile pipeline to deliver natural gas from Alaska's North Slope to the fuel-hungry Midwest is suddenly more than a pipe dream.

Congress has promised to cover 80 percent of the cost if the project goes bust _ and Alaska is thinking about owning part of it.

But despite a tripling in natural gas prices in the last few years, the companies that own the gas remain skittish about rushing into a $20 billion investment. And how much government help should be given has become an issue in a highly contested Senate campaign in Alaska.

To ease investors' concerns, Alaska Gov. Frank Murkowski is proposing to make the state part owner of the pipeline. His administration is expected to announce a state proposal this week, prompting charges by Democrats that Murkowski was rushing the issue to help his daughter's Senate campaign.

Murkowski denied politics was involved in the planned announcement.

"I didn't create the timing," he told reporters. The state's chief negotiator said he wanted a state proposal completed by the end of October so a final agreement with the private companies could be completed for legislative action in January.

In a rush of pre-election business, Congress gave the Alaska pipeline fresh momentum by promising loan guarantees for 80 percent of the pipeline's cost, and gave developers other tax breaks as well as promises of less burdensome permitting requirements.

"After working for more than 20 years ... we have finally taken steps to make the Alaska natural gas pipeline happen," Sen. Ted Stevens, R-Alaska, said after Congress agreed to the incentive package.

The incentives were touted as a major breakthrough by Alaska's other senator, Lisa Murkowski, but quickly became fodder in her closely contested election race. Her opponent, Democratic former Gov. Tony Knowles, criticized her for failing to get a better incentive package, including gas price supports, to further ease pipeline developers' concerns.

Tax credits if Alaska gas fell below a certain price had been sought by the Alaska senators and some of the potential pipeline investors, but were strongly opposed by the Bush administration as being unfair to gas producers in the lower 48 states.

The companies that own the Alaska gas _ ExxonMobil Corp., ConocoPhillips and BP PLC _ have praised Congress' action, but remain reluctant to push headlong into a $20 billion investment. They are seeking more advantages and security from the state to mitigate their risk in what has been described as the largest private construction project ever in North America. If given the go-ahead the pipeline would take 10 years to plan and construct.

"This is a very big, very risky project," said David MacDowell, BP Alaska's spokesman. He said Congress' action "brings us one important step closer" but an agreement on state royalty and tax issues _ as well as state equity ownership _ still needs to be resolved.

Some equity ownership by the state would make agreement on other issues easier, the oil companies believe. "When people are in similar positions decisions become easier," said MacDowell.

ExxonMobil spokesman Bob Davis in Houston said that while costs must be reduced and financial issues worked out with the state, "certainly the project seems to be gaining momentum."

"It's been our view the project should be able to stand on its own economically," said Davis, playing down the significance of government subsidies.

Alaska's North Slope is believed to hold as much as 100 trillion cubic feet of natural gas, the largest reserves in North America. That includes more than 30 trillion cubic feet easily accessible in the Prudhoe Bay area, where for years gas has been pumped along with oil and then injected back into the ground to help force up more oil.

Rising demand for the fuel has brought renewed focus on trying to get some of that gas to U.S. markets. A pipeline would provide 4.5 billion cubic feet of gas a day by 2014 at the earliest, or about 7 percent of current consumption.

The pipeline would run from Prudhoe Bay along the route of the trans-Alaska oil pipeline to Fairbanks, then follow the Alaska Highway into Canada, where it eventually would connect with pipelines in Alberta and a system of lines into the Midwest, as far as Chicago, and into the Pacific Northwest.

It has been a dream of Alaskans for decades.

Natural gas-related revenues could be as much as $1 billion a year, according to the state department of revenue, and could reverse a slide in revenue because of the decline of North Slope oil production. The project also would produce tens of thousands of Alaska jobs and dramatically boost U.S. steel production.

"It is the enormous scale of the project that magnifies the risks and inhibits the attraction of investment capital," Ken Konrad, a senior vice president of BP Alaska, told a congressional hearing earlier this year. He cited the potential for cost overruns, regulatory uncertainty and market uncertainties. "Any one of these alone could severely damage an Alaska gas project."