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Wednesday, July 12, 2006 - Page updated at 12:00 AM

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Delays may doom plans for Alaska gas pipeline

Bloomberg News

Legislative delays could threaten the viability of an Alaskan natural-gas pipeline proposed by ExxonMobil, BP and ConocoPhillips, as buyers in the lower 48 states turn to liquefied natural gas (LNG) to meet supply needs.

The three companies signed a deal in February with the governor of Alaska to build and operate the 2,140-mile pipeline, bringing gas from the North Slope to the Canadian border. That contract still awaits approval of the Legislature, which adjourned last month after a special session without acting on the contract.

"For Alaska to be a meaningful part of the natural-gas supply mix of the U.S. in the coming years, action needs to be taken now," the Federal Energy Regulatory Commission (FERC) said in a report to Congress issued Monday. "Any further delays may serve to make the Alaska gas pipeline uneconomic in comparison to LNG imports."

Demand for natural gas is expected to increase more than 23 percent between 2005 and 2025, according to the Energy Information Administration, the statistical arm of the U.S. Energy Department.

Gas production in the lower 48 states will decline from supplying 85 percent of U.S. needs to 64 percent in 2025, according to the FERC report.

Alaska's North Slope is estimated to have about 35 trillion cubic feet of proved gas reserves, about 13 percent of North America's total. The proposed pipeline could deliver 4.5 billion cubic feet a day to the lower 48 states.

The group of companies proposing the pipeline, which would cost an estimated $25 billion, is already producing oil on the North Slope.

Alaska legislators today start a 30-day special session called by Republican Gov. Frank Murkowski in a third attempt to ratify a contract to build the pipeline negotiated by Murkowski and the three oil companies.

Under the contract, oil-tax rates would be frozen for 30 years, gas taxes for as much as 45 years, and the state would take a 20 percent stake in the line.

Some politicians say the tax freeze violates the state constitution by removing the ability of future governments to set rates.

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Alaska is expected to supply about 5 percent of U.S. natural gas by 2025, according to the commission. LNG supplies could rise from around 1 percent last year to 24 percent by 2025.

"Gas buyers in the lower 48 are more likely to enter into long-term LNG contracts if there is no substantial progress on building an Alaska pipeline," according to the report, the second in a series of congressional updates required by last year's energy bill. "And, the longer an Alaskan pipeline is delayed, the more strength is gained by the proponents of LNG."

"If I were one of the players on the Alaska pipeline and I was looking at the economics of LNG and the economics of Alaskan gas, I would probably be inclined to go with LNG," said Ron Denhardt, vice president of natural gas with Strategic Energy & Economic Research in Winchester, Mass. "The problem with Alaska is the high capital cost and potential for cost overruns."

An application to build the pipeline could be filed at the end of 2008 if the Legislature acts this summer, the commission report suggested. Gas deliveries could begin flowing to the lower 48 states in 2016.

"Twenty years ago, Alaskan gas would have been in competition only with other North American gas production," the commission report shows. "Now, Alaska natural-gas production will also face competition from low-cost production in LNG exporting countries across the globe."

Bloomberg News reporter Gene Laverty in Calgary, Alberta, contributed to this report.

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