Anchorage Daily News

Energy industry giants are winding up their pitches for a North Slope gas pipeline next year, but the state and its critics remain at war over whether any of the hundreds of millions being spent now will result in a successful project.

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Roger Marks

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Citing the flurry of activity, state officials say Alaska is closer than it has ever been to obtaining a gas line. The multibillion-dollar project would pipe North Slope gas to a major hub in Canada, a project that is considered critical to the state's future economy, since most North Slope oil fields -- the state's principal source of revenue -- are long past their peaks.

Two competing gas pipeline projects -- one licensed by the state and the other advanced by North Slope producers BP and Conoco Phillips -- are in early stages but are working to publish cost estimates and find customers to commit their gas next year.

"All of a sudden, we are going from the abstract to the real," said Mark Myers, a state official overseeing the project of TransCanada Corp., the Canadian pipeline company that won the state's license. In June, TransCanada began working with Exxon Mobil, the third major North Slope producer, on its project.

Critics of the state's approach, however, predict that no one will commit their gas next year and that millions of dollars in public money will be wasted over the next few years to reimburse a portion of of TransCanada's spending.

Last year, the Legislature approved covering up to $500 million of TransCanada's costs.

The state's pipeline project works against the interests of the North Slope leaseholders who would need to commit trillions of cubic feet of gas to the project, wrote former state petroleum economist Roger Marks in a recent paper titled "Why America May Not See Alaska Natural Gas Soon" for a peer-reviewed academic journal.

Marks detailed a series of potential flaws that he and other skeptics -- including North Slope producers -- have raised ever since 2007 when former Gov. Sarah Palin kicked off plans to make energy companies compete for a license to build the pipeline. Marks retired from the state last February, having never been involved in the Palin gas-line effort. He was, however, directly involved in former Gov. Frank Murkowski's three-year attempt for a gas line deal, an effort that died in 2006.

State officials discount Marks' analysis. Myers said it is likely the North Slope lease holders will commit their gas next year, but with conditions attached.

One likely condition would be a revised state tax policy on gas production.

Federal law allows North Slope lease holders to bid on both pipeline projects before any final agreements are signed. It's common for bidders on big pipeline projects to offer conditional commitments at the outset, according to federal officials.

CREDIBLE WORK?

In Marks' view, TransCanada isn't spending enough money to obtain a credible cost estimate by next year. Knowing the construction cost is key to deciding how much to charge gas producers for using the pipeline.

He pointed out the state license gives TransCanada an incentive to delay big spending until after it seeks shipping commitments from gas producers in a so-called "open season" next year. The state will reimburse it for 50 percent of its costs up to the open season, and 90 percent after, when TransCanada would seek federal approval for its project.

TransCanada and Exxon executives say they will spend $150 million to get through the May to July open season next year.

"We feel that we will have a highly credible cost estimate," said Tony Palmer, TransCanada's vice president for Alaska development.

By contrast, BP and Conoco executives initially said they'd spend $600 million to get to open season, but they've spent a fraction of that so far on their Denali project -- roughly $100 million -- and last month a Denali official said his group was 90 percent done in preparing its cost estimate.

A spokesman for the Denali project, Dave MacDowell, declined to discuss last week how much will be spent to get to open season.

The state is monitoring "a tremendous amount of new work" on the pipeline by TransCanada and Exxon, said Myers, who is not involved in monitoring the Denali project. That project is being overseen by the state-federal Joint Pipeline Office.

"Are they going to stick their nameplate on sloppy engineering work?" Myers said of TransCanada's project.

One industry expert monitoring the gas line project said he thinks the preparatory work being done by the competing projects is credible.

"I don't think the companies are just posturing," said David Hobbs, head of research for Cambridge Energy Research Associates, a global energy consulting firm based in Massachusetts.

Despite some of the doom-and-gloom pronouncements, "There are grounds for optimism that this project may indeed be realized," he said.

FLAWED ANALYSIS?

Another criticism levied by Marks is that the state has overstated the potential profits of a pipeline and understated the commercial risks that the North Slope lease holders would be taking.

His evidence comes from the 2007 bidding for the exclusive state license that TransCanada won: "Out of all the producers, out of all the pipeline companies, out of all other entities, it received five bids, four of which were deemed non-responsive. In other words, it received just one bid," he wrote in his paper. Why? The other potential bidders decided the risks outweigh the rewards. "The costs are too high relative to the benefits," he wrote.

The state disagrees with that, too.

State Revenue Commisioner Pat Galvin recently said the state's requirements are in line with commercial terms that the North Slope producers have accepted elsewhere in the world.

They've held off support, Galvin said, so they can negotiate valuable tax concessions from the state.

North Slope leaseholders have long claimed that uncertainty over gas taxes makes the project too risky.

Hobbs said he doesn't think there will be any firm commitments to build a pipeline until the state and the North Slope leaseholders come to terms over taxation.

While he is sanguine about the pipeline's prospects, in general, Hobbs said the first round of bidding to get gas commitments will not work because taxation hasn't been resolved.

It won't be resolved any time soon. Gov. Sean Parnell said last week that it is premature to begin talking about revising the state's taxes. That shouldn't happen until actual cost estimates are submitted for the pipeline, he said.

Find Elizabeth Bluemink online at adn.com/contact/ebluemink or call 257-4317. The Associated Press contributed to this article.

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