NATURAL GAS: Exxon Mobil role in Alaska project called a blow to rival

Jun 12, 2009 (Houston Chronicle - McClatchy-Tribune Information Services via COMTEX) -- COP | Quote | Chart | News | PowerRating -- Exxon Mobil Corp.'s plan to work with TransCanada on a massive natural gas pipeline from the North Slope of Alaska is a significant setback for a competing project by ConocoPhillips and BP, an energy policy analyst said Thursday.

The state of Alaska granted TransCanada a license to build the project in January 2008, but the Calgary-based firm was widely seen as the underdog to the ConocoPhillips-BP project called Denali, which was announced later last year.

Major pipelines generally don't get built without the backing of customers, which in the case of the North Slope would include the largest oil and natural gas producers -- ConocoPhillips, BP and Exxon Mobil.

But Thursday's announcement that Exxon Mobil will side with TransCanada puts the state-backed project in the better position, said Kenneth Medlock, a fellow at the Baker Institute for Public Policy at Rice University.

"At face value it seems this will really disadvantage the BP-Conoco project," Medlock said. "With Exxon on board, it looks to me as if the pipeline that will move forward is the one that has secured the right to do so."

Officials with the Denali project, however, said the Exxon Mobil-TransCanada announcement doesn't change their plans.

"Denali has been the leader in pushing this project forward, and we're not changing our 2009 work program," said Scott Jepsen, vice president of external affairs for Denali.

He noted that the company spent $55 million last year on engineering and survey work and plans to spend as much as $80 million through next summer.

$26 billion project

The 1,700-mile project is priced at $26 billion, but that's based on estimates from the second half of 2007, said Tony Palmer, TransCanada's vice president of Alaska Development. That was before a spike in equipment and material costs in 2008, so a new estimate is planned for early 2010.

The North Slope holds some 35 trillion cubic feet of known gas reserves, with estimates of undiscovered reserves reaching as much as 250 trillion cubic feet. The United States used a little more than 23 trillion cubic feet in 2007.

TransCanada and Exxon Mobil told Alaska officials in early May of their plans to work together, Palmer said. State officials reviewed the agreement over the past month to make sure it didn't compromise the license agreement between Alaska and TransCanada.

Alaska Gov. Sarah Palin met with Exxon Mobil officials in Dallas on Wednesday to get final assurances before the announcement Thursday, said Kurt Gibson, director of the Alaska Department of Natural Resources Oil and Gas Division.

"We're encouraged and we're excited, but we're not surprised," Gibson said, because the state pipeline license "was designed for just this kind of alignment between private sector companies."

Fiscal stability

The state license with TransCanada also provides the kind of fiscal stability Exxon Mobil is expected to ask for in the project, Gibson said, including a freeze on tax rates for the first 10 years of the pipeline's operation, and "a willingness to revisit some of the state's prerogatives on royalty treatment in order to not create obstructions."

Marty Massey, Exxon Mobil's manager for the project, said detailed discussions with the state over those terms will follow at a later date.

Massey wouldn't share specifics on why the company sided with the Trans-Canada project over Denali, but during a news conference Thursday he said he thought it had "the best chance of success and the best opportunity to bring all the parties together."

Bidding a year away

If all goes as planned, Exxon Mobil and TransCanada expect to conduct an open season -- in which customers make bids to indicate their interest in having gas shipped on the line -- by July 2010. Pending federal regulatory approval in the U.S. and Canada construction could start in 2016 and operations begin in September 2018.

The Denali and TransCanada projects are spending millions in advance of their planned open seasons, with TransCanada expecting to spend about $150 million through 2010.

"What we're doing may be duplicative of what the competitor is doing, but that's the nature of the business," Palmer said.

Cooperation or conflict

Resolving the differences between the two projects before an open season would be ideal since the economics won't support two pipelines.

"But it may end up there's a winner and a loser," Palmer said.

tom.fowler@chron.com

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