Alaska would have to cover most of US$7.5B cost to build natural gas pipeline designed to meet energy needs for state's most populous region; lawmakers must decide whether to move ahead with smaller in-state project or wait on major line

Rachel Carter

JUNEAU, Alaska , July 6, 2011 (Associated Press) – Report: Smaller, in-state natural gas pipeline in Alaska could cost $7.5 billion

A natural gas pipeline project meant to meet energy needs in Alaska's most populous region could cost $7.5 billion and require that the state cover much, if not all, of the construction costs, a report released Tuesday shows.

It will now be up to lawmakers and Gov. Sean Parnell to decide whether it makes sense for the state to move ahead with the project or if the state should wait to see if a major line, capable of carrying gas to North America and perhaps overseas markets, is doable.

Neither Parnell nor several lawmakers speaking during Tuesday's teleconference from Anchorage suggested this had to be an either-or situation. But given that both projects could require significant state investments to make them viable, that could end up being the case.

The report, released by the Alaska Gasline Development Corp., makes an argument for public ownership of a smaller, in-state pipeline, saying it would provide the lowest tariff. The report noted that state financing of a line through issuance of debt could result in a downgrade of the state's high bond ratings, but the development agency would demonstrate to rating agencies the "credit positives" of this project.

The $7.5 billion price tag was given with an uncertainty range of plus or minus 30 percent.

Larry Persily, federal coordinator for Alaska natural gas transportation projects, said at some point, the state's elected leaders are going to have to decide the best project for Alaska. Currently, the state is putting millions toward pursuing a spate of options, including the pipelines and a massive proposed hydroelectric project -- none of which may ultimately come to fruition.

When it comes to the pipelines, "How long do you wait for the right answer, as opposed to jumping in to the convenient one?" he said. "Before you pour billions into a Plan B, you better be sure there's no way you're going to get Plan A."

Dan Fauske, president of the Alaska Gasline Development Corp., said it would be great if a big line worked out. If the projects were on similar timelines, and the state had the option of spending money on one or the other, he said he'd advocate putting money into the big line.

But it really is an issue of timing, he said, to make sure Alaska residents get the energy they need.

South-central Alaska relies on gas from Cook Inlet for heating and electricity, but reserves from developed fields could begin falling short of demand by 2014, the report said. A recent assessment by the U.S. Geological Survey estimated far more gas in Cook Inlet than previously thought -- a mean of 19 trillion cubic feet. But the pipeline report said a lack of new investment or development could cause projected shortfalls for the so-called Railbelt region to worsen.

House Speaker Mike Chenault, one of the most outspoken supporters of an in-state line, said it makes sense to go forward, the state should do so. He said the worst thing that could happen is the Railbelt goes cold.

Former state Rep. Jay Ramras is running TV ads urging a special session on the issue. Last week, in response to those ads, Parnell's spokeswoman, Sharon Leighow, said the governor had no plans to call lawmakers back right now. On Tuesday, after speaking with the governor, she said the report needs to be fully vetted before a decision on any special session is made.

Fauske said the Legislature's original timetable, for an in-state line to supply gas for south-central, Fairbanks and other communities as practicable by the end of 2015, isn't reasonable. He said delivery of first gas likely wouldn't be until 2018.

TransCanada Corp., which is working with Exxon Mobil Corp. to advance a major line, has not publicly swayed from its goal of being in service by around 2020, though some lawmakers -- and even Persily -- question whether that's doable.

Since the 2007 passage of the Alaska Gasline Inducement Act, under which TransCanada is operating, the nation has undergone an economic slump, natural gas prices haven't been high relative to oil and there's no been shortage of gas on the market. That leaves companies to weigh the competitiveness of Alaska's gas against, say, North American shale.

TransCanada is still in negotiations with possible gas shippers nearly a year after starting those talks. The company said it is working to resolve issues within its control -- which it hasn't specified -- but is also awaiting resolution of a lease dispute critical to the line's fortunes and tax and royalty issues between the state and gas producers.

Parnell has said he won't start talking fiscal terms until there's an actual project.

Terms of the inducement act limits to 500 million standard cubic feet per day the size of any other gas line project the state can pursue. By comparison, TransCanada has proposed delivering about 4.5 billion cubic feet of gas per day from Alaska's North Slope to market. Its project would cost from $20 billion to $41 billion, depending on the route.

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