By Tom Moran -- In the end, there can be only one pipeline delivering natural gas from Alaska’s North Slope to the continental United States. But for Tom Irwin, two gas-line competitors are better than none.

“You’ve got to look at the facts,” said Irwin, Alaska’s Commissioner of Natural Resources, to reporters in March. “Two-and-a-half years ago we were wondering what we would do as a state. Now, we’ve got competition.”

Irwin’s brand of optimism prevails in the administration of Alaska Governor Sarah Palin, which within the last year has seen both Calgary-based pipeline company TransCanada and Denali – a firm created by oil giants ConocoPhillips and BP – begin preliminary work on competing pipeline projects. Palin’s excitement spills across the border into the Yukon, which would make millions in property taxes off the line, and potentially use it to launch its own resource-extraction industry. But in the face of a global economic meltdown, plunging gas prices, and growing competition from other gas sources – not to mention the regulatory hurdles standing in the way – some aren’t convinced that either group’s efforts will produce the pipeline people have talked about for three decades.

“I wrote a very long report on [a proposed pipeline] in October of 1977,” says Bob Hastings, a Canaccord Capital analyst who has long studied the Alaska gas line process. “You can imagine that I’m understandably skeptical of when this would actually happen.”

The Showdown

Alaska’s oil pipeline has been raking in cash since the 1970s, but poor economics have kept Alaska’s 35 trillion cubic feet (tcf) of known gas reserves sitting under the North Slope. Palin kick-started the gasline process in 2007 via the Alaska Gasline Inducement Act (AG IA), which guarantees regulatory preference and up to $500-million (U.S.) in state subsidies for a company which initiates a pipeline project under specific conditions set by the state. In 2008, state lawmakers granted TransCanada an exclusive licence under the act.

Conspicuously absent from the AG IA process, however, were ConocoPhillips, BP and ExxonMobil, the “Big Three” companies that hold the vast majority of Alaska’s North Slope oil-and-gas leases. Declaring the AG IA too restrictive, ConocoPhillips and BP instead announced their own competing project, Denali, in April 2008.

“TransCanada is moving forward under a process that we decided could not result in a successful project, and what we want is a successful project,” says BP Alaska spokesman Steve Rinehart. “So we got together with Conoco and launched the Denali project for that very reason.”

Both firms have proposals to build a mostly buried, 2,760-kilometre, 48-inch-diameter, 4.5-billion-cubic-feet-per-day pipeline from Prudhoe Bay on the Beaufort Sea down the Dalton and Alaska highways to existing pipelines in Alberta. TransCanada says its project would cost $26-billion (U.S.); Denali’s, which may continue to the American Midwest, was pegged at $30-billion (U.S.) in its most recent estimate in 2002.

There are pluses and minuses for each. TransCanada holds an exclusive pipeline right-of-way for most of the route through Canada, and has Alaska’s financial and regulatory support. Denali has the advantage of being backed by two enormous oil companies, who – unlike TransCanada – could finance the project themselves. And Denali holds something even more important: the gas. ConocoPhillips and BP together hold leases for around half of the gas reserves on the North Slope.

Both companies have opened offices and started extensive work, ranging from meeting with state and federal regulators to studying stream crossings and filming the proposed route. Denali focused its 2008 work on a stretch from Delta Junction to the Canadian border, but this year’s work will focus on the Canadian side. TransCanada has already gathered substantial data from the Canadian end and will focus more on Alaska this year. TransCanada, which is adopting a low-cost approach, plans to spend $84-million (U.S.) through 2010; Denali will burn through $600-million (U.S.). Following approval by federal regulators and construction, the companies predict gas could flow by decade’s end – 2017 by TransCanada’s estimate, 2018 by Denali’s. But first they have to get through their “open seasons,” in which they ask oil companies to commit to shipping gas via the pipeline.

The outcome of the open seasons, both set for 2010, is unpredictable. While it seems logical that BP and ConocoPhillips would only agree to ship on their own pipeline, everyone insists they will consider all options. “How we engage that open season will really depend on the information and the conditions and what that opportunity looks like,” Rinehart says. “We are willing to look at any commercially viable opportunity.”

And then there’s the largest leaseholder of discovered North Slope gas, ExxonMobil, which isn’t endorsing either project. “Exxon is the wild card,” says Ken Boyd, an industry consultant and former head of Alaska’s oil and gas division. “What will they do? The answer is, I think, they’ll wait until the last minute [to make a decision.]”

Boyd believes the real deciding factor in the open season will be whether the state can, in the interim, work out a long-term fixed structure for taxing natural gas, so producers know what to expect over the life of the line. Fiscal certainty is something the Big Three have been harping on for years, and both Boyd and Doug Reynolds, an associate Professor of Economics at the University of Alaska Fairbanks, think the open season will fizzle without it. “It’ll be a big nothing,” Reynolds says. “Over and over I have heard [the producers], they need a contract, and it’s called fiscal stability.”

The Palin administration has kept mum about the possibility of direct tariff negotiations with the producers. But that may be changing: In March, the governor surprised reporters by indicating a willingness to discuss the subject, and says she was waiting to be approached by the producers.

Reynolds is critical of the current state of affairs: He calls AGIA an ill-advised political maneuver that has hamstrung the state. Hastings, on the other hand, says it has at least helped to spur a competitive environment. “If you’re a believer in a competitive, free market system, clearly you believe that a competitive effort comes to a better conclusion,” he says.

Ultimately, some see this competition as prelude to a logical conclusion: a joint Denali- TransCanada effort. Palin herself stated this in March. “We will obviously get to a point of asking (Denali) if they’re interested in hooking up with TransCanada,” she said. “That is what we predict will happen.”

TransCanada and Denali executives say they are amenable to working together, though both companies remain resolutely noncommittal. Hastings says a combined project is “certainly a possibility,” noting that producers and pipeliners have teamed up on projects before. “Make no mistake about it,” he says, “there’s only going to be one line.”

The second-guessing

This speculation all becomes academic if the pipeline can’t be proven a moneymaker. It’s an issue that has been raised in recent months as the global economy has gone into free-fall and natural gas prices have tumbled from a high of well over $10 per million British Thermal Units last summer to less than $4 in April. At the same time, America’s capacity for imported liquefied natural gas is increasing markedly, and gas from American domestic oil shale deposits has become more affordable, raising the question of whether Alaskan gas can find a market. The combination of events has made some wonder if the pipeline is dead in the water.

But representatives of Alaska, TransCanada and Denali all have the same response: Short-term economic trends shouldn’t be used to second guess a project that wouldn’t be completed for a decade.

“Major projects like this succeed or fail based on long-term project economics – 25 to 50 years commencing in 10 years’ time, not short-term trends in natural gas prices,” Tony Palmer, TransCanada’s vice-president of Alaska development, told state legislators in March.

Irwin, commissioner for the Alaskan department of natural resources, along with other state officials, has emphasized that gas price changes and LNG and shale oil developments were all figured into the $13-million (U.S.) worth of analysis which led the state to endorse AGIA and TransCanada. “The model incorporated all of the various risk factors,” he says. “Broadly speaking, the economic conditions that we find ourselves in today were included within the sensitivities that we’ve run.”

As for the downturn, Alaska revenue commissioner Pat Galvin told lawmakers in March that analysts expect the economy to right itself within two or three years, long before a pipeline builder would need secure financing. In fact, Galvin argued, other recent developments could increase the project’s viability. Steel prices have fallen sharply. The U.S. government supports it as a “green” project.

And President Barack Obama may also elect to regulate and tax carbon, giving natural gas a boost. “The economic impact of that is going to end up driving the demand for natural gas up, perhaps significantly,” Galvin says.

Hastings still believes gas prices could easily sink the pipeline this time around. But neither Boyd nor Reynolds thinks recent developments have ruined the pipeline’s chances. “At the end of the day, I think it’s a project that can be done,” Boyd says.

The Yukon

Alaskans would reap obvious benefits from the project, chief among them billions in tax revenues over the life of the line. In the Yukon, which would be home to 832 kilometres of the line, the principal economic benefit would come through property taxes. Brian Love, the director of oil and gas resources for the Yukon government, estimates these at between $70-million and $80- million a year. “There’s revenue for landowners, whether they be government or first nations,” he says. “For a small population like the Yukon, that’s a fair bit of money.”

Love says the Yukon would also benefit from new jobs, primarily in the construction phase, though he acknowledged there would be more positions available than Yukon residents can fill. The chief benefit of a gas line, he says, could be what it brings with it: a potential boon to local resource development. The pipeline is likely to contain both input and output points, he noted, which would enable the Yukon to access gas for potential industrial applications and, more importantly, to foster the extraction of the Yukon’s own estimated 17 tcf of onshore gas, which could be carried on the line. “There’s nothing like a big pipeline running through the spine of your territory to spur further development,” he says.

Love says the pipeline project has already benefited the Yukon indirectly, as the United States has funded more than $100-million (U.S.) in recent Alaska Highway improvements in the territory, partly in anticipation of a line. He says he believes the Yukon’s infrastructure is ready for a line, but says the government is continuing to meet with the operating parties to see if problem areas exist. “What we’re doing now is the due diligence to find out where there may be issues.”

In general, the pipeline proposal enjoys the support of Yukon residents, Love says. But not everyone is cheering at the prospect. Lewis Rifkind, an energy coordinator with the Yukon Conservation Society, says the group does not officially oppose the pipeline but finds it of dubious merit. “We’ve yet to be shown that this pipeline project will be good for the environment,” he says.

Rifkind says the pipeline’s status as a green energy source is debatable, since it’s unknown whether its gas would supplant dirtier forms of energy, or just be used in addition to them. On a local level, he says the wide swath cut by the combination of the buried pipeline and the highway could affect wildlife populations and migration. The pipe would also have to find its way through or around some ecologically sensitive areas, such as the Ibex Valley and Kluane Lake.

He also cited concern about the pipeline freeing up cheap energy for use by the Alberta oil sands projects, derided by many as environmental disasters, and about pressure to open Alaska’s Arctic National Wildlife Refuge to oil-and-gas exploration. Further, he says Love’s dream of resource extraction in the Yukon could raise another raft of questions. “If the gas pipeline goes through and it jumpstarts the Yukon oil-and-gas community, then you are going to get a lot of environmental issues.”

Do environmental concerns have the potential to hold up an Alaska Highway pipeline project? Rifkind says maybe. He noted that TransCanada’s right-of-ways through the Yukon were last reviewed in 1982, and that it is imperative the environmental assessments from that time either be revised or redone entirely, in line with new regulations and developments. “I don’t think it would be a showstopper, but it would definitely change the time frame,” he says.

First nations

The right-of-way question also brings up another key Yukon issue: first nations. Trans- Canada’s right-of-way passes through the traditional territory of eight first nations, two of which have unresolved land claims. Both Denali and TransCanada have begun visiting first nation communities and holding discussions about the projects, though neither has reached any official agreements. “We’ve had contact with most aboriginal groups along the pipeline corridor and are working to meet with the others,” says Denali spokesman Dave MacDowell.

TransCanada’s rights-of-way predate all first nation final agreements and are thus grandfathered in; however, should the pipeliners seek to make major changes to the route, it may require government approval. If Denali were to go forward with a different route, everyone would presumably have to start from scratch. In addition, the project could be subject to recent legislation, like 2003’s Yukon Environmental and Socio- Economic Assessment Act, which may require new reviews of the project’s effects on all Yukoners.

No matter what, the companies intend to work with first nations, not around them. “It’s probably much more productive to have a very congenial, ongoing relationship with first nations,” noted Shay Smart, liaison with the Alaska Highway Aboriginal Pipeline Coalition, an information clearinghouse on the projects largely funded by the Yukon government.

Reynolds says he thinks first nations negotiations might cause holdups, just as they have for the Mackenzie Valley gas pipeline. Love, on the other hand, thinks pipeline builders can work through first nations issues if they make a concerted effort. “Early engagement is key,” Love says. “I think it’s very doable, but it requires industry to be proactive.”

Whether first nations rights, environmental concerns or regulatory issues will throw a wrench into the pipeline project will only become clear as events play themselves out. Hastings, for one, is not optimistic. “What’s different? We have first nations issues, we have environmental issues, we have economic issues,” he says. “It’s all the same issues that I remember in the ’70s.”

But Reynolds thinks events will eventually resolve themselves. “It’ll be another three or four years of negotiations on this,” he predicts. “There certainly is going to be a pipeline project. The governor will have to negotiate, AG IA will be paid off, we’ll all call each other names and then we’ll build a pipeline.”