Alaska Gas Pipeline, USA, USA

As crude oil prices rise (Around $125 a barrel in May 2008) the price of natural gas follows and gas resources start to become more economically viable – in Alaska crude oil production from Prudhoe Bay is now in decline so that gas could take over.

It has long been known that Alaska is a gas-rich state but the problem has always been how to retrieve the gas and deliver it to the customer at an economic price. A project which has long been held in abeyance is the Alaska gas pipeline, which has now been resurrected since its first inception and appears to be heading for construction despite estimated costs of around $30bn.

The project is controlled by the Alaska Governor's office, the Alaska Gasline Port Authority and the Alaska Natural Gasline Development Authority.

THE PIPELINE PROJECT

The basic project involves the construction of a gas pipeline to transport natural gas from the large Alaska North Slope reserves to the lower 48 states. The known natural gas reserves available in the North Slope are estimated to be around 35 trillion cubic feet (currently this is being left dormant or being reinjected into oil fields). There are expected to be many times more as yet undiscovered reserves of gas in Alaska's North Slope – the known reserves would only give 18 months' supply to the US at current rates of consumption.

The provisional plans for the pipeline include a 52in, 3,600-mile pipeline with a capacity of 4.5 billion cubic feet a day. The construction will also include a gas liquefaction plant on the North Slope and the construction of various spur pipelines to Alaskan communities to supply them with an alternative gas supply.

The estimated cost of the project was around $20bn in 2001, but the rising cost of steel, other materials and labour could inflate the final cost as high as $30bn. The State of Alaska has said that it will provide assistance in funding the project although would expect the majority of funding from the oil / gas companies involved (the state has offered $500m but this has been turned down by the project participants as it would introduce delays).

The Alaskan governor Sarah Palin has praised the project after she rebrokered negotiations with BP Conoco Phillips and Exxon Mobil that had been undertaken by the previous governor Frank H Murkowski (replaced in 2006). The gas from Alaska is needed as North American gas consumption rose by 6.2% in 2007 to a record high of 23 trillion cubic feet (the 2006 figure was 21.7 trillion cubic feet).

THE DETAIL

BP and Conoco (who both own North Slope gas reserves) will now spend three years and £600m working on support for the project (this will be called the Denali Project).

The pipeline and associated facilities will require around nine to ten years to construct and the timeline for finishing the project is tentatively placed at 2017-2018, at which point four billion cubic feet of gas would be transported a day. But with gas prices rising all the time, and the demand for gas from Canada and the US rising, the economics of the project are looking more sound by the day.

It has been estimated that the pre-construction work will require the securing of over 1,000 permits from local, state and federal authorities in both the United States and Canada (there will be a need to negotiate with local tribes for rights of way as well).

The engineering and construction will see a 2,000-mile pipeline built stretching from the North Slope in Alaska to the Canadian Province of Alberta and then later a possible 1,500-mile extension to Chicago (the trans-Alaskan pipeline for crude oil is only 800-miles long and there would be at least five Alaskan take off points). The project will now be planned and administered by BP and Conoco Phillips from a base in Anchorage, which will employ up to 150 personnel by the end of 2008.

TRANSCANADA PROPOSAL

As well as the pipeline proposed by BP Conoco Phillips, a rival company, TransCanada Corporation has also put forward a project proposal, which is being considered by the Governor of Alaska. This project would require an investment of $26bn to construct a pipeline from Prudhoe Bay to Alberta.

The planning, which will cost around $625m (this would be state money), is starting in summer 2008 and construction, if all goes well, is expected to be completed by 2017. The project currently only includes the pipeline and no gas processing plant. In addition TransCanada does not actually own any gas reserves on the North Slope as these are under the control of Exxon Mobil, BP and Conoco Phillips (the other interested consortium).

It is possible that TransCanada and the other consortium could merge their projects and build the pipeline together in cooperation. TransCanada do have two pieces of legislation in their favour, the first being the AGIA (Alaska Gasline Inducement Act) of 2007 which could present them with a State licence and hence a subsidy (BP-Conoco have turned this down) and also the 30 year old Canadian Northern Pipeline Act which supposedly confers rights to build such a pipeline across Canadian territory (this remains to be tested).

The AGIA was bid for by Sinopec, AEnergia LLC of California and also TransCanada (TransCanada are favoured currently and the licence may be awarded following a June 2008 special session meeting).

ANOTHER PROPOSAL

In a further twist the Governor of Alaska has now also asked for a study to be carried out (costing $8m) to examine the possibility of bringing a bullet line (smaller pipeline) from the North Slope reserves to supply Fairbanks, Anchorage and south central Alaska with a new gas supply.

The current supply from the Cook Inlet is running out and a new supply has to be found. This would function concurrent to any other larger pipeline constructed later on. Although even for this smaller scale project the costs of construction could approach $3bn.