Race for Arctic pipeline heats up for Canada, U.S.

By BARRIE MCKENNA
Globe & Mail
Saturday, October 8, 2005

WASHINGTON -- The race is officially on to deliver the Arctic's vast reserves of natural gas to energy-hungry markets in Canada and the United States.

Alaska Governor Frank Murkowski says he's just days away from striking a royalty deal with Exxon Mobil Corp., British Petroleum and ConocoPhillips Co. that would pave the way for the $20-billion (U.S.) pipeline megaproject.

"I anticipate receiving an affirmative response from the producers within the next few days," Mr. Murkowski said, adding that today's lofty natural gas prices have finally made the long-planned project economic.

The pending deal comes as Exxon subsidiary Imperial Oil Ltd. and other producers are at loggerheads with Ottawa over the fiscal terms of a second shorter and cheaper northern pipeline -- a $7-billion (Canadian) line to tap into natural gas in Canada's Mackenzie Valley.

A deal on the Alaska pipeline could put pressure on Ottawa to come to terms with Imperial Oil on the all-Canadian line. Imperial chief executive officer Tim Hearn warned this week that the Mackenzie pipeline might never get built if it can't reach a deal soon with Ottawa and native groups.

"If this thing drags out and drags out, I believe Alaska will get built and we might as well just take a back seat for a long period of time," he told reporters in Calgary.

And some analysts agree.

"If the Alaskans are going, the bigger line will be the one that gets all the attention," said Calgary-based energy analyst Ian Doig. "I don't think Ottawa can move that quickly."

The two projects are so ambitious that there may not be enough capital, manpower, expertise and pipe steel in North America to build both routes at once, Mr. Doig said.

At least two companies are involved in both projects -- Exxon and ConocoPhillips. Shell Canada Ltd. is also involved in the Mackenzie Valley project. Alaska officials insist they aren't in competition with the Mackenzie Valley project. Indeed, Mr. Murkowski has said both projects should go ahead.

Exxon and the other producers on Alaska's North Slope were tight-lipped about the state's offer on royalties, jobs and access to the gas -- the culmination of 18 months of intense negotiations between the state and the companies.

"We will evaluate the State of Alaska's fiscal contract and will respond when our assessment is complete," said Exxon spokeswoman Susan Reeves from Houston.

Even with a royalties deal, Alaskan officials conceded it will be four or five years before construction can begin. "If we get an agreement this would be an important step in getting North Slope gas to market," said Chuck Logsdon, gas line adviser to Mr. Murkowski.

Mr. Logsdon said the state hasn't given producers a deadline to respond, but it anticipates a deal "pretty soon."

Buoyed by the recent price surge, which has pushed the cost of natural gas to about $14 (U.S) per thousand cubic feet, Alaska insists its project is now clearly economic.

Meanwhile, Imperial Oil, eager for guarantees from Ottawa to help it recoup the massive investments needed, said the pipeline remains uneconomic.

But analysts and industry insiders said Imperial is using an artificially low $2.50 per thousand cubic feet estimate of the future natural gas price in its modelling to extract a better deal from Ottawa.

"No one is using that number," said Wilf Gobert, vice-chairman and head of research at Peters & Co. Ltd. in Calgary. "Imperial Oil is trying to protect their downside."

"Nobody has a $2.50 gas price," echoed an oil and gas industry executive, who asked not be named.

Mr. Gobert said most producers are using a long-term forecast of $4 per thousand cubic feet, still well below the current price. Most investors, on the other hand, are betting that gas prices will retreat from their current peak, but remain above $5 for several years.

The 5,500-kilometre Alaska pipeline, running south through British Columbia and Alberta, would take at least a decade to build and would rank as one of the largest construction projects ever. The proposed pipeline would deliver 4.5 billion cubic feet of gas a day, or about 7 per cent of average U.S. consumption.

The U.S. Congress has already approved $18-billion in loan guarantees. But the producers are apparently seeking additional concessions to help with project financing.