BP official: Regulatory, fiscal movement needed to maintain interest

Action urged on pipeline

Posted: Friday, July 26, 2002

WHITEHORSE, Yukon Territory (AP) -- The three major companies pursuing an Alaska Highway pipeline could lose interest in the project if they do not see movement toward their goal in the next year or two, according to a top-ranking BP official.

David Welch, president of BP Alaska-Canada Gas Pipelines, told Whitehorse reporters the desire to build a pipeline through Alaska, the Yukon and British Columbia to central Alberta is still very much alive in the hearts of BP, Exxon-Mobil and Phillips Petroleum.

But without movement in regulatory and fiscal areas by the United States, Canada and the state of Alaska, there could come a day when the interest wanes and the three oil and gas producers walk away, Welch said.

''As a matter of fact, that is one of the concerns I have about the project, is that if nothing happens this year and maybe the year after, then all of a sudden, the companies do start losing momentum,'' Welch said. ''You know, we spent $125 million last year and we are probably spending another $30 million or so this year.

''You can't go on year after year spending $100 million without progressing the project, at least in the regulatory arena.''

Welch said he is ''guardedly optimistic'' the U.S. federal government will come up with a package in its energy bill that will satisfy the companies' desire to reduce project costs and risks, and that will be acceptable to opponents of direct subsidies.

He reiterated BP's favor for the Alaska Highway route, and not the over-the-top route across the Beaufort Sea to the Mackenzie Valley.

With both routes costing roughly the same at $19 billion, with the strong environmental resistance to the Beaufort Sea link, and with the state of Alaska having passed legislation prohibiting the over-the-top route, the logical and most likely choice is the highway route, he said.

The U.S. Senate's version of the proposed federal energy bill would guarantee tax credits for BP, ExxonMobil and Phillips if the price of natural gas fell below $3.25 per thousand cubic feet for the first 15 years of the Alaska Highway project.

Repayment of the credits would begin when the price went above $4.85 per thousand cubic feet.

The Senate incentive has been widely criticized, particularly by Canadian proponents of the Mackenzie Valley pipeline project and Ottawa, as a direct subsidy that unfairly influences matters that should be left to the open market.

Also, U.S. Energy Secretary Spencer Abraham recently informed members of the Senate and the House of Representatives that he does not like the idea of the guaranteed floor price.

Abraham has asked senators and U.S. representatives to look at other means of providing assistance to the companies.

Welch said other means have been employed in the past, such as a federal loan guarantee that would reduce the cost of borrowing money to finance the project.

''I think those are more in line, fit with what Canada would be expecting, and they would also be things what would be in sync with what Secretary Abraham asked the conferees to do,'' he said.

It is almost standard practice for governments to provide incentives when developing virgin pipeline infrastructure that will open up new areas for development, he said.

''And that is what this is because it opens up the basin of the North Slope, it opens up the foothills basin in Alaska, it opens up the Yukon, British Columbia. Once that piece of infrastructure is there, it's possible for gas that is discovered along the route to tie into the line for export to markets in Alberta and the U.S.''

Also essential before the companies proceed is certainty from Canada that there will be a regulatory and permitting process that is fixed, from one end to the other, he said.

Welch said with such a large investment at stake, the companies don't want to find themselves embroiled in legal proceedings half way through the regulatory process.

''That is why we are up here today actually, to try to start getting that dialogue going to understand what exactly it is going to take for everybody that has a stake in the pipeline to get their needs met.''

Welch said if the consortium can somehow reduce its risk from $19 billion to $17 billion through government incentive and cost reductions, it would move ahead.

Currently, he said, the $19 billion estimate had a plus or minus factor of 20 percent. In order to get the plus-minus factor to 5 percent, which is needed for a project of this magnitude, the three companies need to spend $400 million, he said.

Welch said before they spend that kind of money, they'll want to have the fiscal and regulatory certainties in place.

If those certainties come through in the next year or so, gas could flow in 2011, he said.

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