Palin's Pipeline at Risk as Economy Slows

By RUSSELL GOLD
Wall Street Journal
November 19, 2008

The troubled economy that helped sink Alaska Gov. Sarah Palin's hopes of becoming U.S. vice president now is undermining prospects for building the $30 billion natural-gas pipeline she touts as her administration's signal achievement.

The state faces an increasingly gloomy future if construction is delayed, since the majority of the state's unrestricted revenue comes from energy-production taxes and royalties -- a situation unlike any other state. Without a gas pipeline, the annual dividend checks Alaskans get would eventually dwindle and residents could face their first income tax.

As Gov. Palin returns from the campaign trail, she is finding a very different landscape than when she left Juneau in August. Shortly before she was selected as Sen. John McCain's running mate, the Alaska legislature passed a bill to jump-start preliminary work on the pipeline. Not long afterward, the state began handing out record-high annual checks to every Alaskan, sharing the state's windfall from high oil prices.

Today, the global economic slowdown is making it harder to maintain momentum behind the project. At the same time, the combination of falling oil production and falling oil prices has left state officials wondering if they can balance their budgets in the current or coming fiscal years.

There is growing pessimism in Alaska that the pipeline will be built anytime soon. Mike Chenault, the incoming Republican speaker of the state House of Representatives, said he believes the odds of it moving forward in the next couple of years are less than 50-50. "In the end, it is going to be economics that drive this process and not how much we want it to happen," he said.

The economics of building a pipeline are deteriorating as demand for cleaner-burning natural gas slows and prices fall. "Current economic conditions are not good for the Alaska gas line, and I expect considerable delays in the initiation of its construction," predicts Pedro van Meurs, an energy consultant who worked on the project under previous Alaska governors.

Still, for the time being, preliminary work on two rival pipeline projects is moving ahead. ConocoPhillips and BP PLC have committed $600 million for a detailed assessment of building a pipeline. And in August, the state gave $500 million of incentives to TransCanada Corp. to do similar work on a competing plan. The projects have begun hiring employees and signing engineering contracts. But this work could end abruptly in 2010 if energy producers decide there isn't enough demand for gas to justify the investment.

One big hurdle is the growing success of gas producers in the continental U.S. Either pipeline would bring more than four billion cubic feet of the fuel from northern Alaska down to Chicago to feed an under-supplied market. But booming natural-gas production in the U.S. is outpacing demand. In August, wells produced 5.4 billion cubic feet a day more than a year earlier, according to federal data.

For Alaskans, a pipeline would bring a financial bonanza -- and help replenish dwindling revenue from oil production.

Gov. Palin focused on passing the $500 million incentive package and selecting Calgary-based TransCanada to develop the 1,700-mile pipeline. But TransCanada needs commitments from the three big producers controlling the gas on Alaska's North Slope before it can secure financing for the project. And those companies are balking. Exxon Mobil Corp. has so far refused to participate. BP and ConocoPhillips are backing their own pipeline and have expressed reservations about joining the state-backed pipeline.

If West Coast oil prices average about $60 a barrel from today through the end of the fiscal year in June -- which would require Alaskan North Slope oil to rise above the current $49.89 -- the state would end its budget cycle with a small surplus. But another year of $60 prices would mean a $1 billion deficit, says David Teal, head of Alaska's legislative finance division.

Write to Russell Gold at russell.gold@wsj.com