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By Robert Rapier on Jun 3, 2008 with no responses

The Alaskan Gas Pipeline Controversy

For months now – off and on – I have been trying to wrap my head around the controversy over the proposed gas pipeline for Alaska. As a shareholder and former employee of ConocoPhillips – one of the involved parties – I have a vested interest. However, that’s also one of the reasons I haven’t written about this before, as I wanted to better understand the issue before writing about it.

I saw that the headline story in yesterday’s Drumbeat at The Oil Drum was a story from Newsweek dealing with the controversy, and that prompted me to go ahead and write something:

Pipe Dreams

I am going to post some excerpts from the story in an attempt to summarize the key issues:

Beginning this week, the Alaska State Legislature will debate how to usher in a natural-gas boom. Two pipeline proposals are on the table. One hails from a Canadian pipeline builder and is endorsed by Alaska Gov. Sarah Palin, a Republican who has drawn surprising comparisons with Venezuelan President Hugo Chávez for her tough stance against Big Oil. The other proposal comes from BP and ConocoPhillips, two oil behemoths that hold leases on much of the state’s natural gas.

But only one giant pipeline is needed, and Palin has set the stage so that only the Canadian proposal will be considered. State lawmakers must decide whether or not to give a $500 million state subsidy to TransCanada Corp. to lay a $26 billion, 1,700-mile-long pipeline from the Alaskan Arctic to Alberta, Canada, where other lines would transport the natural gas to American markets.

At the same time, BP and ConocoPhillips recently announced that they are embarking on their own $30 billion project to pump Alaska’s gas reserves through a 2,000-mile-long pipeline. They say they don’t need the state’s $500 million and will proceed regardless if the state throws its support behind TransCanada.

The TransCanada proposal is born out of an attempt by Palin to force the hand of the big oil companies—BP, ConocoPhillips and ExxonMobil Corp.—to execute their gas leases, from which the state hopes to raise tens of billions in tax revenue. Uncertainties over natural-gas prices and state taxes have long left the companies skittish about committing to a project.

Alaska owns the natural gas; BP and Conoco, along with Exxon, hold most of the leases to develop it. The companies have long talked of tapping the reserves, but have consistently deemed the pipeline too financially risky without the state first agreeing to favorable terms on gas production taxes. Unlike Palin’s predecessor, Gov. Frank Murkowski, who wanted to give the companies generous tax breaks, she has refused to budge.

As I understand it – and everything I have read seems to confirm this – the real sticking point seems to be that Governor Palin refuses to make a long-term commitment on the tax rates for the project. For a $30 billion project, it is pretty important to understand the economics of the project pretty far in advance. What I don’t know are specific details of what is being proposed – nor whether the tax rates being asked for are in some way unreasonable. But I do think it should be reasonable to at least agree in advance not to change the rules during the game. That is, after all, what Hugo Chavez has become famous for. And Palin’s threats to tear up existing contracts with XOM do provide a cause for concern.

TransCanada would route the gas pipeline through Canada, while the COP/BP pipeline would be an all-Alaska pipeline. The risk for TransCanada, of course, is that they don’t own any gas. I think you have to presume that if they build the line, COP and BP are going to put their gas in. But they will only do so under favorable terms. The risk for COP and BP is that gas prices come back down and their $30 billion investment suddenly doesn’t look so good. That’s why they need certainty on the tax rates.

A lot of money is at stake. Per this article, there are 30 trillion cubic feet of natural gas reserves that the pipeline would tap into. There is also a blog devoted specifically to discussing this issue. I recently read through a number of articles there in order to gain a better understanding of the issues involved. That blog is called The Alaska Gas Pipeline, and the author generally opposes the approach Palin has taken.

Finally, Happy Anniversary to my wife (and me) today. For the first time in 19 years, I almost forgot. When I changed jobs I lost the security blanket of having the date on my Outlook calendar. Of course it doesn’t help that I am spending it alone in the Netherlands.