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Gas Supply:Too little, Too late?

GAS SUPPLY
Fortnightly Magazine - September 2004

Trans-Canada pipeline at the Yukon/Alaska border.)

Competing projects have been proposed by the aforementioned consortium of oil and gas majors, as well as Canadian pipeline operator Enbridge Inc. of Calgary. The latter proposed a pipeline along the so-called "Northern route," going under the Beaufort Sea to connect Prudhoe Bay with the planned Mackenzie Valley pipeline project.

But although Enbridge has been developing the Northern route concept for at least three years, the company terms its efforts "preliminary." Indeed the pipeline faces an uphill battle, no matter which plan prevails.

"Ultimately, this project will be developed by the parties that can bring together a wide array of public, private, and commercial interests," says Patrick D. Daniel, Enbridge president and CEO.

The most crucial interests are probably the state of Alaska and the U.S. federal government. Alaska's buy-in is vital to ensure the project gains the necessary rights-of-way and state regulatory treatment. And the U.S. federal government could bring expedited permitting, loan guarantees, and favorable tax provisions.

Specifically, in May 2004, the U.S. Senate passed a budget package that included seven-year depreciation treatment for the Alaska gas pipeline, and a conditional tax credit that would limit the pipeline owners' exposure to gas-price risk. Such incentives could be the catalyst that finally makes the Alaska pipeline viable, but they raise controversies of their own.

"It becomes an inflammatory issue in Congress, because people use numbers and words in different ways," says Hal Chappelle, a petroleum industry consultant based in Atlanta, and a member of the National Petroleum Council (NPC) gas committee. "Some people would call this a subsidy, but the producers wouldn't consider it a subsidy. Their view is that they are taking an unprecedented risk on a large civil-engineering project. They are going into uncharted economic territory to bring energy resources to American customers, and therefore it is reasonable to treat their investment in a unique way."

Not everyone agrees, however, that rate support is necessary for the project, given the shortages coming to the U.S. gas market. Even the NPC and the Interstate Natural Gas Association of America have remained carefully neutral on the issue.

"Anybody who can figure out how to get a pipeline into the North American market won't have any problem getting contracts to sell gas," says Ross Tokmakian, a partner with Accenture's North American utility practice. Nevertheless, he says, pipeline builders are largely tied to an investment model that requires long-term contracts to be in place at both ends of the pipeline before a single pipe can be laid ().

The question of price supports notwithstanding, other aspects of the project's development are getting attention at the federal level. Specifically, the resurrected Omnibus Energy Bill includes a section that expedites and streamlines federal permitting processes for the pipeline, which would travel through numerous jurisdictions and face potentially conflicting authorities. "Many jurisdictions, from native interests to any particular local taxing entity along the way, could tie up the project in various proceedings," Chappelle says. "The Energy Bill addresses that in an appropriate way, allowing the permitting to be conducted all