According to the BP-Exxon-Phillips team studying the proposals for transportation and marketing of Prudhoe Bay natural gas, neither the northern route through the Beaufort Sea nor the southern route via Fairbanks are economically feasible at this time. That finding raises an interesting question. What does it mean for a project to be economically feasible?

The first possible meaning is that given a forecast of natural gas prices, estimates of construction costs and associated judgmental probabilities, the expected rate of return is negative. (The excess of operating revenue over operating cost, when discounted to a present value fails to cover the investment at any positive discount rate.) If this is what BP et. al. meant by "not economically feasible" then the book should be closed for now and everyone should go back to what they were doing before gas prices spiked and hopes were raised. There is no reasonable chance that conditions will change by enough, soon enough to justify our close attention for at least a few more years.

The second possibility is that given the same forecast of prices and costs, the expected rate of return is positive but not as large as the expected rate of return on alternative projects that compete for the same limited investable funds. Given this interpretation of what is meant by "not economically feasible" the book should be left open -- or at least a marker should be placed in it -- because the project may be close enough to doable to warrant additional creative thinking.

The third possible meaning is that (again, given the same forecast of prices and costs) the expected rate of return on the project is positive, larger than on all (or at least most) alternative projects but still not large enough to offset the very high political and economic risk and uncertainty associated with it. Given this interpretation of "not economically feasible" there is reason for optimism. What is needed in this case is some way to spread the diversifiable risk among a larger number of players or, if possible, to even reduce that risk.

My own somewhat limited research on this subject tells me that when the BP-Exxon-Phillips team finally decides to release its results in full we will find that it is the first -- or maybe the second -- interpretation that they had in mind when they told us that neither project was economically feasible. In other words I interpret their findings to date to mean that at today's forecast prices for natural gas, the expected rate of return is either negative (or only slightly positive). It is clearly not high enough to justify building either proposed line given the risks and the availability of other investments.

I recall what the go-ahead price for ANGTS -- essentially the route through Fairbanks -- was estimated to be, in the early 1980s, about $4 per thousand cubic feet (mcf). By extrapolating costs and productivity changes to the present, I come up with a price of about $3.75 per mcf that, if maintained in inflation-adjusted dollars for the life of the field, would yield a go-ahead on that same route today. Given a $2 billion cost advantage for the Beaufort Sea route the comparable go-ahead price for that route today would be about $3.50 per mcf. At the present time natural gas is going for about $2 per mcf!

My go-ahead numbers are almost certainly not the same as those that the BP-Exxon-Phillips study team is coming up with, but I doubt that they are far enough off to justify the belief that large-scale public participation will change things dramatically at this time. More important, given the marginal economics that accompany either project, continued insistence by the public on the Alaska Highway route is decidedly counter-productive.