Denali details its pitch for $35B Alaska gas line

Everyone seems to agree there's room for only one major pipeline to move natural gas from Alaska's prodigious North Slope to North American markets. Now a high-stakes showdown is taking shape over who will be in charge and what it will take to make the long-hoped-for project economical and a reality.

Denali, a joint effort of ConocoPhillips and BP PLC, formally proposed a $35 billion project Wednesday, with a pipeline stretching more than 1,700 miles and having delivery points to help meet gas needs in Alaska and Canada.

Denali billed the project, which includes a gas treatment plant on the harsh North Slope, as "one of the largest private investments in the history of North America." Houston-based ConocoPhillips and Britain's BP claim lease rights for about half of Alaska's known North Slope gas.

The Slope's other major player, Irving, Texas-based Exxon Mobil Corp., is helping TransCanada Corp. of Calgary, Alberta, with a competing project that has been promised up to $500 million from the state. Its two options include a line to Canada with a comparable $32 billion to $41 billion price tag.

Both ventures aim to be in service by around 2020, with plans to deliver about 4.5 billion cubic feet of gas per day to North American markets via larger lines to Canada. TransCanada's other option is smaller in size and cost - between $20 billion and $26 billion - for a liquefied natural gas facility that would export the fuel by ship.

Attention now turns to the next few months, when the competing projects plan to court gas producers and seek shipping commitments as part of what's called "open season."

"No one is going to build two pipelines," said Larry Persily, the federal coordinator for Alaska Natural Gas Transportation Projects.

TransCanada and Denali officials agree and say the best option for moving forward is having all three North Slope majors, and the state, behind a single project.

The question then becomes who supports which project, and what will be needed to make it more economical.

TransCanada successfully bid for a state pipeline license and the promise of a $500 million reimbursement under the Alaska Gasline Inducement Act pushed by then-Gov. Sarah Palin.

Denali is pushing ahead without state help. President Bud Fackrell said Wednesday that, while there's only enough room for one line, BP and ConocoPhillips do not agree with all the state's terms under the act, making it problematic to coalesce now. He said Denali and its owners are open to anyone who can add value joining their project, defending it as highly competitive.

Gov. Sean Parnell chalked Fackrell's comments up to "posturing." "They're negotiating," he told reporters, adding that he sees back-to-back open seasons as a positive for Alaska. TransCanada and Exxon Mobil plan to begin seeking shipping commitments as early as May 1, with Denali hoping to hold its own as early as July.

Doug Reynolds, a professor of energy economics at the University of Alaska Fairbanks, sees the companies as having the upper hand. There will be a pipeline, he said, but it's a matter of what can be worked out with the state on long-range tax and royalty terms.

"This is all a game," Reynolds said. "The state is a little bit over the barrel," with companies holding leases to the vast resource that state officials have long seen as a way to help Alaska shore up royalty revenues as North Slope oil production declines.

While oil's still king, estimates have put the North Slope's proven natural gas reserves at 35 trillion cubic feet. But that's worthless to the state unless the gas flows to consumers.

Parnell has said the state would do what it sees as being in its best interests. The companies want greater control, he said, but the state should "stay the course."

There are other obstacles.

Denali noted the risks involved in its filing Wednesday with the Federal Energy Regulatory Commission. It's seeking leeway to consider other options - a scaled-down project, an entirely different project, such as a line to a liquefied natural gas facility, or allowances to drum up additional support for the original - if it doesn't get commitments for at least 85 percent of the line's capacity at open season.

Fackrell also pointed out questions of financing and an ongoing legal dispute over some Alaska lease holdings.

He noted that prospective shippers will have to decide, given the energy market's volatility, tax questions and other issues, whether they want to commit to the Denali project, TransCanada's project, or neither.

Some lawmakers have become skeptical of the idea of a mainline to North America because of other gas plays ahead of Alaska's and improved methods to tap natural gas stored in shale formations elsewhere. There's also the question of whether there will be sufficient demand beyond the next decade to make a major project succeed for all involved.

Reynolds said environmental concerns associated with developing shale gas, and infrastructure and other costs, should allow for Alaska gas to be competitive and make money on the market.

The volume of gas envisioned by the Alaska pipeline proposals is a small slice of demand, he said. U.S. consumers used about 60 billion cubic feet of natural gas per day in 2009.

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On the Net:

Denali: http://www.denalipipeline.com

TransCanada and Exxon Mobil's plan: http://www.thealaskapipelineproject.com

Alaska Gasline Inducement Act: http://gasline.alaska.gov