Bill seeks to force gas pipeline along highway

Posted: Tuesday, January 23, 2001

JUNEAU -- The developers of a natural gas pipeline might be forced to build it along the Alaska Highway, under a bill introduced Friday by the House Special Committee on Oil and Gas.

The bill invokes a clause in the state constitution calling for development of natural resources for the "maximum benefit" of Alaskans. It would rule out the so-called northern pipeline route off-shore from the North Slope to the Northwest Territories, said committee Chair Scott Ogan, a Palmer Republican, in a news conference.

Asked whether the bill was in sync with Republicans' traditional free-market approach, Ogan said the state has "a constitutional obligation to develop our resources."

"I think it's very constitutional," he said.

The bill also calls for the pipeline to be built with a carrying capacity that might exceed the developer's interstate needs, in order to accommodate in-state spur lines that could go to Southcentral Alaska, the Kenai Peninsula or even Southeast.

Rep. Fred Dyson, an Eagle River Republican, said the state might have to pick up the tab "for whatever is excess to the private sector's needs."

But with an appropriately sized pipeline, there would be the option of a spur to Valdez or Nikiski, and from there exports of liquefied natural gas to Asian markets, a concept being touted by a port authority of Alaska municipal governments, an industry consortium and Yukon Pacific Corp.

Ogan conceded that another section of the bill calling for the pipeline developer's "best efforts to contract with qualified contractors and firms in this state for work to be performed" might be pushing the limits of the interstate commerce clause of the U.S. Constitution. He called it "voluntary."

Gov. Tony Knowles and Yukon Premier Pat Duncan have endorsed a southern pipeline route along the Alaska Highway.

Knowles has suggested that negotiations on deferred tax and royalty payments in connection with a pipeline would be offered only for the southern route.

"The northern route, as far as I'm concerned, is not on the table at this time," he said recently. "I have to be shown, and I think all Alaskans have to be shown, that the project is not doable under any circumstances along that southern route before I'd be willing to take a look at any other direction."

But while Knowles is fond of saying his way is the highway, the issue isn't necessarily settled.

Some are pushing for the northern route because it could pick up ample gas reserves in the Mackenzie Delta in the Northwest Territories. NWT government and civic leaders are lobbying hard for the northern route, which was deemed most economical by an international consulting firm that did a study for the industry last year.

The southern route would be about 1,700 miles to connect with the existing North American gas grid near the British Columbia-Alberta border. The northern route would shave about 300 miles off that distance. To access both the North Slope and Mackenzie Delta gas, the difference would be 1,400 miles in pipe, according to would-be pipeline developer Arctic Resources Co. of Calgary and Houston.

Rob Shoaf, chairman of the Alaska Chamber of Commerce, noted this week that the chamber, in setting legislative priorities for the 2001 session, decided not to take a position on a route for the pipeline, even though the Fairbanks membership pushed hard for endorsing the southern route.

The northern route is shorter, flatter and consequently estimated to be $2 billion cheaper, Shoaf noted. If there is a decision to go with the southern route, "Who's going to pay for that $2 billion extra cost?" he asked.

Critics, though, say that running the pipeline under the Beaufort Sea would be an environmental controversy and regulatory hurdle that could delay the project for years. Meanwhile, there is already an existing U.S.-Canada treaty regarding the Alaska Highway route from 1977.

Ogan said his bill is intended to compel the commissioner of the state Department of Natural Resources to deny right of way to a project that doesn't meet state goals. Those goals include that state residents and businesses will have access to enough gas to satisfy "reasonably foreseeable in-state demands" and that Alaska residents will get the greatest possible number of construction, operation and maintenance jobs.

In December, the three North Slope producers -- ExxonMobil, BP Exploration (Alaska) Inc. and Phillips Alaska -- announced a joint work program on the pipeline project.

BP spokesperson Ronnie Chappell declined to comment on the prospect of the state dictating a route.

"We don't know whether or not we have an economically viable project yet," Chappell said. "We don't know if a southern route is viable. We don't know if a northern route is viable. ... I think that the state is going to have tremendous influence on this decision, no matter how this plays out."

The gas line promises to be one of the biggest issues of the legislative session.

Knowles has asked lawmakers for $4 million for action on permits and right of way. He also wants to amend the 1998 "stranded gas" act to include all natural gas technologies, giving him the flexibility to work out a deal with developers that will ensure financial viability of the pipeline project. The act currently refers to liquefied natural gas projects only.

A contract in lieu of taxes would guarantee revenue for the state once the pipeline is operating but would "backload" the costs to developers. Under existing law, the state would collect royalties, corporate taxes and property taxes. Commercialization of the gas is expected to yield about $200 million to $400 million in state revenues annually.

There are about 35 trillion cubic feet of proven reserves on the North Slope and, with an additional 70 trillion cubic feet suspected, Alaska is "the great untapped gas resource of the North American continent," Knowles said.

"All we need to take this to the energy-thirsty Lower 48 is a transportation system."

Although natural gas prices have skyrocketed recently, Knowles said that a tax break is still needed for the natural gas pipeline, which is considered "marginal." North Slope producers haven't yet requested a negotiated deal on state revenues, but the governor said there is need to lower upfront costs due to the length of time for construction and the likelihood of lower prices over the long term. Estimates are that the Alaska Highway pipeline would cost more than $10 billion.

Legislators so far have been cool to the idea of offering deferred taxes and royalties.

Ogan said he doesn't want to rule anything out yet. He even left open the possibility of partial state ownership of the pipeline, although he added that such a public investment "goes against my grain."

"It might give me a migraine as well," he said.

If producers insist that the northern route is the only one feasible, "Then we have a serious bit of negotiating to do," Ogan said.

Bill McAllister is a reporter at the Juneau Empire.



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