LNG consortium ponders Phase II feasibility study

Pipeline options still open

Posted: Monday, March 20, 2000

An industry consortium will consider continuing its study of the feasibility of a pipeline to bring North Slope natural gas to market during meetings this week in Tokyo.

However, the group likely won't choose between pipeline routes ending in Nikiski vs. Valdez for some time, said Arne Holhjem, who represents Phillips Petroleum Co. on the group.

"So far, there hasn't really been a need to decide," Holhjem said.

As long as there is nothing to lose by delaying the decision, he said, members of the Alaska North Slope LNG Project plan to keep their options open.

A pipeline along either route would carry North Slope gas to tidewater, where it could be converted to liquefied natural gas for export to Asia. Valdez, the North Slope Borough and the Fairbanks North Star Borough have formed a port authority to build and operate a gas line to Valdez.

Meanwhile, the Alaska North Slope LNG Project, which includes Arco Alaska Inc., Foothills Pipe Lines Ltd., BP Exploration (Alaska) Inc., Marubeni Corp. and Phillips Petroleum Co., is exploring the feasibility of a pipeline project. It has narrowed choices for the pipeline terminus to Nikiski and Anderson Bay near Valdez.

A pipeline to Nikiski also could supply gas to Cook Inlet homes, businesses and industrial plants, and the Kenai Peninsula Borough has appropriated $100,000 to promote that route.

The Valdez port authority would buy the gas and sell the LNG. The Internal Revenue Service recently ruled that its operations would be exempt from federal income taxes. The Valdez group estimates that will cut as much as $3 billion from the $12 billion project they propose.

If the port authority works for Valdez, it should work for Nikiski, Kenai borough organizers say. The Kenai borough recently appropriated $50,000 to explore forming a port authority for that route.

The industry consortium has invested $20 million in the first phase of its feasibility study, which is scheduled to end this summer. It has a design, said Arco's David Lawrence, who chairs the consortium board.

"Now, we need to catch up with the commercial work," he said.

Lawrence said the board will discuss the shape and scope of Phase II during its meeting Tuesday in Tokyo. The member companies will mull over the details, he said. The consortium will likely decide whether to proceed with Phase II when the board meets this June in Calgary, Alberta.

"There is a general desire to proceed -- there's no doubt about that," Holhjem said. "But the final decision will have to come from the individual companies."

If Phase II goes forward, it will likely include discussions with the owners of North Slope natural gas reserves, work to pin down Asian markets and work on financing for the pipeline and LNG plant, Lawrence said. Phase II likely also would include work on the consortium's legislative priorities and tax discussions with the state and federal governments.

He and Holhjem said the consortium has two prime interests in the Alaska Legislature. First are House Bill 290 and its companion, Senate Bill 226. Those bills would guarantee that the natural gas required to meet the consortium's export obligations could not be diverted for other uses or displaced from the pipeline by other shipments of gas.

That does not mean the pipeline could not be used to supply Alaska consumers and industry, Lawrence said. The consortium would build a pipeline large enough to handle gas for those purposes, as well as gas to export as LNG.

The consortium's second interest is to negotiate tax breaks under the Stranded Gas Act, which the Legislature passed in 1998, Lawrence said. The act allows developers of North Slope gas to negotiate tax breaks with the commissioner of the Department of Revenue. The Legislature must ratify any agreement reached.

Lawrence said he believes the consortium could complete Phase II fairly quickly. Then, it would decide whether to move to Phase III, which would include detailed engineering.

"At the finish of Phase III, we'd be almost ready to let contracts to build," he said.

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