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Bringing Alaska's Natural Gas to Market

Image by Bud Curtis

Construction of a natural gas pipeline to take North Slope gas to the Lower 48 was a hot topic as the 22nd Alaska Legislature began. This session the Legislature took a deliberate and pragmatic approach to the issue, passing legislation that will facilitate the construction of a pipeline and protect Alaska's interests, and avoiding hasty decisions or unnecessary concessions to the oil industry.

A brief history

Alaska's proven gas reserves total more than 30 trillion cubic feet and another 100 trillion feet yet to be discovered. The state and oil producers have waited for more than 20 years for improved technology and increased market demand to open the door for developing North Slope natural gas.

For the last several years it was thought that gas development would take place in the context of liquefied natural gas (LNG). But this is an expensive process that would not be commercially viable without major changes to the state's oil and gas fiscal system. In 1998 Alaska's natural gas statutes were amended, and the Stranded Gas Act allowed the state to make financial concessions to oil and natural gas producers to make an LNG project viable.

Last year the oil producers began to look seriously at Arctic gas development following a fundamental change in the U.S. market. Domestic demand for natural gas skyrocketed. Technological advances in the pipeline industry, including the invention of stronger steels, high-compression pipelines and welding techniques made a natural gas pipeline a much easier proposition than in the past.

One of the most important issues on the table during the BP/Arco merger negotiations last spring was the question of who would control the gas rights on the North Slope. At the same time developers were already considering possible routes for a gas pipeline. The two that received the most attention were the Alaska Highway Route and the "Over-the-Top" route. The highway route would follow the highway system south from the North Slope through Fairbanks and then head southeast through the Yukon Territory. The "Over-the-Top" route includes a submerged pipeline extending east offshore of the Arctic Coast to Canada's Mackenzie Delta and then south through the Northwest Territories to link up with the continental gas pipeline network.

In November 2000, Gov. Tony Knowles said, "My way is the highway," announcing his support for the route that would bring more construction and operations jobs to Alaskans. The governor said that he planned to ask the Legislature to amend the Stranded Gas Act to allow concessions or subsidies to oil and gas producers for any gas commercialization project, including a pipeline.

In his efforts to break ground on a pipeline before he left office, the governor created the Alaska Highway Natural Gas Policy Council in January. Thirty business and civic leaders were charged with addressing public policy issues during the development of the Alaska Highway natural gas pipeline.

The Legislature responds to the issue

The Legislature does not share the governor's enthusiasm for financial concessions or immediate support for the highway route. Many think that natural gas lines to the Lower 48 are probably economically viable without subsidies to the oil industry.

Several House and Senate committees, including the House Special Committee on Oil and Gas and the Senate Resources Committee, heard testimony from oil producers, industry experts and organizations interested in promoting specific pipeline routes or projects. BP, Exxon Mobil, Phillips Petroleum Co., Yukon Pacific Corp. and Foothills Pipe Lines Ltd. were among the groups that made presentations to the Legislature.

Legislators carefully considered a wide range of scenarios for bringing Alaska's natural gas to market, including pipelines that provide natural gas for in-state needs and open the door to industries that create value-added products from natural gas. They discussed the natural gas markets in Asia and different options for Alaska's North Slope natural gas including overland pipelines to the lower 48, pipelines to South Central Alaska to liquefy gas and transport it to Asia, and conversion of natural gas to liquids.

Legislation to pave the way for a gas pipeline

The Legislature passed a number of bills and a resolution that set the stage for construction of a natural gas pipeline, streamlining the permitting process while protecting Alaska's interests.

Senate Bill 164: No Gas Pipeline Over Beaufort Sea, sponsored by Sen. John Torgerson (R-Kasilof) and co-sponsored by the entire Senate and eight representatives, prohibits leases under the state's Right-of-Way Leasing Act on the State of Alaska's submerged lands in the Beaufort Sea. This effectively prohibits pipeline construction along the "Over-the-Top" route, and maximizes the direct benefits to Alaskans of an in-state natural gas pipeline route. The "Over-the-Top" route faced significant engineering and permitting challenges, including the Alaska Natural Gas Transportation Act of 1977, which specifically states that a pipeline would follow the Alaska Highway.

Keeping a natural gas pipeline in-state will provide construction, operation and maintenance jobs for Alaskans, as well as significant long-term property value to the tax base of state and local governments. An in-state line will also allow for the possibility of in-state distribution of natural gas for residential and commercial use. Providing gas for commercial use would open the door to the manufacture of value-added natural gas products, and create thousands more jobs and additional revenues for the state over the next 50 years.

Senate Bill 143: Right-Of-Way Leasing Act: Application Cost, sponsored by the Senate Resources Committee, limits the state's financial risk in permitting proposed pipeline routes. The bill allows the state to collect fees for pre-application work performed when a pipeline right-of-way application is filed. This includes work performed by the State Pipeline Coordinator's Office, and clarifies that an applicant must reimburse the state for application processing costs whether the application is granted or not. By eliminating the need for most of the budget money the governor requested for pre-application work, SB 143 saved the state almost $8 million.

Senate Bill 156: Best Interest Finding Under Alaska Land Act, sponsored by the Senate Resources Committee, was drafted in response to several court decisions that have discouraged development. SB 156 streamlines the oil and gas leasing process, making it faster and less costly, by clarifying that the Department of Natural Resources is only required to write a single, best-interest finding for multi-phased oil and gas development projects, such as pipelines. Subsequent phases, including the exploration, development, and transportation phases of a project, are subject to the department's approval and to separate reviews by extensive federal and state permitting processes that include public input and scrutiny by other agencies.

Senate Bill 158: Report: State Participate In Natural Gas Pipeline, sponsored by the Senate Resources Committee, will help determine whether the state should invest wholly or partially in a natural gas pipeline. The bill requires the commissioner of revenue to present a comprehensive report, with recommendations, addressing ownership and financing options for the proposed gas pipeline to the Legislature and the governor no later than Jan. 31, 2002. The report must also include how participation in the gas pipeline might affect the state's cash flow, its credit worthiness, and its ability to continue to pay for essential public services.

Senate Bill 121: Right-Of-Way Leasing Act, sponsored by Sen. Loren Leman (R-Anchorage), makes a necessary clarification to the right-of-way application requirements. Under the current law, any amendment to a right-of-way application constituting a "substantial change" requires the applicant to conform with all of the provisions of an original application, essentially repeating the entire application process. Because "substantial change" is not clearly defined in statute, literally all changes to a right-of-way lease application could be argued as being substantial. Requiring the Department of Natural Resources and interested parties to go through the process of determining whether each change to an application is substantial without clear guidance creates unnecessary costs and delays on both sides. SB 121 defines the conditions that must be met for a change to be considered substantial.

Senate Concurrent Resolution 14: Joint Committee On Natural Gas Pipelines, sponsored by the Senate Rules Committee, creates the Joint Committee on Natural Gas Pipelines to study issues relating to a proposed gas pipeline and to consider what legislation should be proposed during the next session. The committee will meet during the interim between legislative sessions, and will have the authority to take appropriate action to ensure the best interests of the state are protected in any gas pipeline development.

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