Anchorage Daily News

BP and Conoco Phillips' announcement Tuesday that they will move forward to prepare for an open season for a gas pipeline should send a jolt of new confidence through the state's business community, which we badly need, what with worries of a national recession.

I was amused, however, by all the politicians in Juneau crediting themselves for making this happen. The two companies said that a deciding factor in moving ahead now is their belief that we are in a new environment of high energy prices for good.

Keep in mind that we're in a new environment in costs, too. Steel prices have doubled in recent years, labor costs are soaring and there are worries about skilled worker shortages. Conoco has pointed out that its North Slope costs are rising faster than oil prices, so that some projects don't pencil even at $100 per barrel prices, particularly with the state taking 75 to 80 percent of the profit under the new state oil production tax.

The pipeline is moving forward, but it's still no sure bet. We have to wait for the new cost estimate and that will take a couple of years. Let's also remember that there are some contingencies. One is that an agreement with the state to hold taxes stable for a number of years will still be needed eventually. The companies' plan also depends on a state decision to let Exxon Mobil proceed with developing the Point Thomson gas and condensate field east of Prudhoe Bay. State Resources Commissioner Tom Irwin is now mulling this. BP and Conoco say that certainty over the Point Thomson ownership and having that gas available is critical to any pipeline.

Still, the commitment to spend $600 million to prepare for this $30 billion-plus project is serious business. I also believe the third big gas owner, Exxon, will eventually join BP and Conoco if the numbers look right.

Which brings me back to business confidence. This is very subjective and it turns quickly up or down based on signals in the economy. The pipeline announcement is a big positive signal and it will encourage new business investment even if we still can't say the pipeline is a sure thing.

However, when we combine business confidence with something tangible, a big slug of cash coming on the street through the state capital budget, I believe Alaska will be positioned to ride through a national recession quite nicely.

BILLIONS AND BILLIONS

Lawmakers in Juneau this weekend finished up the capital budget, which at my last count totaled over $2.8 billion. Gov. Sarah Palin will undoubtably veto some of this, but a lot will remain. Much of the capital budget is for small projects like building additions, deferred maintenance on schools and road repairs, and that means a lot of work for engineering firms and small contractors.

Before Tuesday we were in kind of a business confidence funk, I felt. Despite all the oil money, business leaders sensed a worrisome drift in our economy. We know the surge in oil income is temporary. Even if oil prices remain high, our oil production is declining. The state operating budget continues to grow at 10 percent-plus yearly, meanwhile.

Given those trends, in three or four years we could easily be facing revenue deficits and a need to draw down savings accounts. Those are considerable -- in fact we'll add $5 billion to reserves this year -- but at some point they will be spent. Without something out there in the future to give us hope, it wasn't a pretty picture.

Tuesday's announcement signaled something big, that work is starting on a gas pipeline. The effect will be to boost business confidence immediately and if the project actually happens the logistics buildup and construction will be a big economic stimulus beginning in a few years. What is more important is the long term, that gas production will help sustain oil production and keep our North Slope industry intact for decades.

GAS FOR EVERYONE

It will make gas available to Interior Alaska communities hard hit by energy costs, and one way or another, North Slope gas will come to Southcentral Alaska, too. Let's be thankful that we have a group ready to facilitate a spur pipeline to Southcentral, the Alaska Natural Gas Development Authority, a state agency. We have an interested commercial player too, with Enstar Natural Gas Co.

North Slope gas will be a big economic "enabler" for Southcentral. It might extend the life of the liquefied natural gas plant near Kenai and someday make a new, large LNG plant built in Valdez possible. Natural gas liquids brought from the Slope could stimulate new value-added manufacturing, too.

There are still those who doubt that this initiative is real, and I can't blame them. There have been so many announcements over the years followed by disappointment. Is it different this time? I believe it is.

We'll know for sure in two years after the cost estimates come in, a deal with the state is struck on fiscal stability and those all-important gas shipping contracts are signed, which means financing for this $30 billion-plus project can be raised.

Let's hold the champagne for now, and wish these companies luck with the huge enterprise on which they have embarked.

Tim Bradner writes for an Alaska economic reporting service and business publications, and consults for private clients. His opinion column appears every fourth Sunday.

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