The Ongoing LNG Gas Pipeline Project.

Some day, natural gas may be piped from the North Slope to an ice-free shipping port for export, but first planners have to make the project economically feasible.

Alaska's gas pipeline advocates believed more than a year ago that the pending merger of the state's two largest oil producers might help efforts to commercialize the mammoth-sized untapped natural gas reserves on the North Slope.

Unexpected and unknown back then were the final results of that business deal concluded this spring--which, in a sweeping turn of events, redistributes ownership of North Slope oil and gas as well as places a 30-year veteran of LNG production in Alaska into a major ownership role on the North Slope.

"I think the realignment works to Alaska's best interest-it's a real benefit to Alaska," said Hank Hove, Fairbanks North Star Borough mayor and a board member of a government-backed gas pipeline advocacy group. "It certainly does advance the interest of gas commercialization in Alaska."

And now, oil and gas industry observers say the long-awaited and much-discussed natural gas pipeline project has as good of a chance of becoming reality as it ever has before.

"We think that is a significant step to a major gas sale," said Ronnie Chappell, spokesman for BP Exploration (Alaska) Inc., one of the state's three largest oil producers. "It aligns for the first time all the owners in a way that should make achieving a gas sale easier. Everyone has the same commercial interest."

Granted, all three producers, as well as other interested parties hoping to some day build a gas pipeline to transport natural gas from the North Slope to an ice-free shipping port, say the concept is still uneconomical in today's market.

Substantial problems of placing a large volume of natural gas in a still-sluggish Asian market and coming up with affordable construction costs remain major obstacles to the coming of Alaska's second pipeline boom.

"All of these problems that existed prior to the realignment continue," explained Roger Marks, a petroleum economist in the state Department of Revenue. "But there are several groups spending a lot of money, time and effort to see if they can get these things to work and that's a positive thing."

Merger and Realignment

Due to federal antitrust regulations, BP Amoco agreed this spring to sell off the Alaskan assets of its pending acquisition, Atlantic Richfield Co. And who should step up to the buying plate but Phillips Petroleum Co., a 30-year veteran of natural gas production in Alaska's Cook Inlet region.

By negotiating with BP Amoco to buy the Arco Alaska assets for about $7 billion, Phillips brings its experience of liquefied natural gas shipping and sales to Alaska's North Slope.

"You have to look real long and hard to find a negative on that event," said Hove. "Phillips has a lot of experience in LNG in Alaska and given their experience and interest here, I think that is great."

But Alaska's third-largest oil producer, Exxon Mobil Corp., cried foul at the announcement of the Phillips purchase of Arco Alaska. Citing a 36-year-old agreement concerning Arco assets in Alaska, Exxon filed a lawsuit in March to block the Arco-Phillips deal.

"Our position was that we had preferred fights agreements from back in the 1960s that gave Exxon the right of first refusal," said Bob Davis, spokesman for Exxon Mobil in the company's Houston headquarters.

That lawsuit was quickly settled among the producers by a new allocation of untapped oil and gas reserves remaining on the North Slope. Instead of differing ownership that had placed more gas reserves and less oil reserves in Exxon's hands, now the allocation of the two different underground resources are equal.

For example, Exxon now has approximately 36.8 percent ownership of the oil and the gas reserves in the Prudhoe Bay field. Phillips has a 36.5 percent interest in both oil and gas, and BP Amoco now has 26.7 percent of both the oil and the gas.

"It's a leveling of the playing field and the inequities created in the early days of the unit," said Jeff Lowenfels, president of Yukon Pacific Corp., a company formed to compile the necessary permits to build a gas pipeline along the existing 800-mile crude oil transportation route. "I know that the day after the (realignment) announcement, everyone started talking about commercializing natural gas."

The realignment has removed some of the factors that had previously discouraged BP, which remains as the operator of Prudhoe Bay, from moving to commercialize the gas. That's because natural gas has been reinjected into the underground reservoir to maintain pressure for crude oil extraction.

"When the ownership of the oil and gas was different, it was going to require a commercial negotiation between oil owners and gas owners to compensate for the oil production lost, but that has been resolved," said Chappell. "It's a pretty momentous thing and a very important step ...; in our view, the prospects for moving gas to market have never been better."

But how best to move the vast amount of North Slope gas to market remains a divisive issue among producers and groups interested in a natural gas project.

For years, many have advocated a pipeline system that would compress North Slope gas before sending it across the state to an ice-free port. Yukon Pacific acquired the necessary permits to build such a pipeline project in the same corridor as the existing trans-Alaska oil pipeline that carries crude oil south to Valdez.

But construction costs of that 800-mile pipeline have always been touted as the economic holdup.

"In order to get the per-unit cost of the pipeline down, they have to market just big volumes of gas, in a market that's highly competitive with other resources," said Marks, at the Department of Revenue. "To bring in smaller amounts, it's a big marketing challenge."

Lowenfels, at Yukon Pacific, thinks his company has put together more accurate and current construction cost estimates for a gas pipeline project. "For years, people were using the 1986 study and just escalating the numbers. But the technology has changed--it's a whole new world out there today.

Yukon Pacific believes a gas pipeline project can be built for $8.16 billion. That number includes a North Slope conditioning plant, the 800-mile pipeline with compression stations, a liquefaction plant at Anderson Bay and nine LNG tanker ships that would deliver nine million metric tons of gas to Asian markets each year.

The projected annual sales is nearly half of what previous studies called for as a minimum amount that would make such a gas project in Alaska feasible.

Should market demand call for more North Slope gas from Alaska, Yukon Pacific's scenario allows for two stages of expansion, each adding additional tanker ships and construction of bigger facilities along the route. Of course, each larger production scenario comes with a bigger price tag.

"We've got a project that we think is economically viable and we want to move forward on it," Lowenfels said.

Two groups looking at Yukon Pacific's pipeline route are the local government-created port authority and the industry-backed sponsor group.

Membership of the industry group has changed in recent months. Yukon Pacific dropped out about a year ago, citing conflicts with the sponsor groups' decision to further explore a pipeline route to the Kenai Peninsula.

And in December, BP Exploration joined the sponsor group, picking up Yukon Pacific's share.

"We said all along that we would change the mix of this group as it makes sense," said Steve Alleman, commercial manager for the Alaska North Slope LNG project, and a Phillips Petroleum employee. "We're trying to see if we have a viable project at either location, or if neither works at the end of the day."

The sponsor group is nearing the end of its first stage exploration work, when the four companies will eventually have to decide whether to continue work on the gas pipeline proposal or abandon the concept.

"A project like this is extremely difficult and complex at the end of the day," Alleman said. "We're not trying to determine if it's viable, but if it has the potential to be viable and able to enter the marketplace to compete with other projects in a fiercely competitive marketplace."

Hove, who worked with mayors in Valdez and on the North Slope to create the port authority a year ago, believes the tax-free status the government entity enjoys will greatly enhance the economics of building and operating a gas pipeline.

His group is also working to reduce construction cost estimates. Hove declined to release preliminary numbers prepared and discussed during a port authority board of directors meeting held in early May, saying that refined numbers would be available later.

The port authority group is not only looking at the route to Valdez, but is also looking at proposals that would carry North Slope gas south to Delta Junction, then east across Alaska and into Canada, to eventually hook into existing gas pipeline networks that feed the Lower 48.

"It's not only possible but desirable," Hove said, adding that sending some gas to North American markets in addition to shipping LNG to Asia would help ease the marketing bind for the project.

"There's only going to be one gas pipeline project in Alaska," Hove said. "Probably the only way to make it happen is on a cooperative and collaborative basis."