Alaska's Untapped Energy Resource: Natural Gas

As Americans feel the pinch at the gas pump amid $128 a barrel oil, there's at least one place in the United States where high energy prices aren't all bad news. Alaska, home to America's prolific oil fields, is reaping billions of dollars in record oil-tax revenue. That, along with a populist governor determined to deliver a megapipeline project to the state, is fueling optimism among Alaskans that an energy boom may be just around the corner.

The next boom might not come from oil, however. In fact, residents aren't putting much stock in the renewed effort under way to allow oil exploration in the Arctic National Wildlife Refuge (ANWR) in northeast Alaska, often cited as America's best chance for a major onshore oil discovery but deemed sacred ground by environmentalists.

Rather, Alaskans are pinning their hopes on a 30-year-old dream to tap the state's massive natural-gas fields, the largest in the nation, and ship the gas down a multi-billion-dollar pipeline to produce heat and electricity in the lower 48 states. Supporters say it would be the largest private-energy project in U.S. history, one that would draw thousands of welders, pipe fitters and other workers northward, much like when the trans-Alaska oil pipeline was constructed in the 1970s.

The pipedream has been around since the late 1970s. Grand announcements have come and gone, sometimes at the expense of political careers. But just as with crude, natural-gas prices have soared in recent years, evident in higher utility bills in many parts of the country, making the project more feasible. Climate change has also given the project a boost. Natural gas is cleaner to burn than coal.

Beginning this week, the Alaska State Legislature will debate how to usher in a natural-gas boom. Two pipeline proposals are on the table. One hails from a Canadian pipeline builder and is endorsed by Alaska Gov. Sarah Palin, a Republican who has drawn surprising comparisons with Venezuelan President Hugo Chávez for her tough stance against Big Oil. The other proposal comes from BP and ConocoPhillips, two oil behemoths that hold leases on much of the state's natural gas.

But only one giant pipeline is needed, and Palin has set the stage so that only the Canadian proposal will be considered. State lawmakers must decide whether or not to give a $500 million state subsidy to TransCanada Corp. to lay a $26 billion, 1,700-mile-long pipeline from the Alaskan Arctic to Alberta, Canada, where other lines would transport the natural gas to American markets.

At the same time, BP and ConocoPhillips recently announced that they are embarking on their own $30 billion project to pump Alaska's gas reserves through a 2,000-mile-long pipeline. They say they don't need the state's $500 million and will proceed regardless if the state throws its support behind TransCanada.

The TransCanada proposal is born out of an attempt by Palin to force the hand of the big oil companies—BP, ConocoPhillips and ExxonMobil Corp.—to execute their gas leases, from which the state hopes to raise tens of billions in tax revenue. Uncertainties over natural-gas prices and state taxes have long left the companies skittish about committing to a project.

Palin's strategy is complex and fraught with all sorts of potential pitfalls, including the fact that any project depends on these same companies pledging their gas holdings to fill the pipeline. (TransCanada builds and operates pipelines but doesn't own any Alaska gas.) "The wrinkle in the pavement here is who tells who what to do when?" says Bill Gwozd, vice president of gas services for Ziff Energy Group, a Calgary-based consulting firm. "Oil producers don't appreciate somebody trying to force them to do something."

Alaska owns the natural gas; BP and Conoco, along with Exxon, hold most of the leases to develop it. The companies have long talked of tapping the reserves, but have consistently deemed the pipeline too financially risky without the state first agreeing to favorable terms on gas production taxes. Unlike Palin's predecessor, Gov. Frank Murkowski, who wanted to give the companies generous tax breaks, she has refused to budge.

Any multi-billion-dollar play in the energy business is a gamble, and Palin's adversaries are among the best at the game. Skeptics wonder if BP and Conoco are grandstanding to kill the TransCanada proposal, with no intention of developing their natural-gas holdings until the state gives them favorable terms on gas production taxes. To those wary of decades of dashed dreams and false promises, Doug Suttles, president of BP's Alaska operation, recently told reporters, "Watch, just watch."

"We are all watching carefully," Palin says, "but we won't sit by and wait either."

The 44-year-old governor embodies a growing anti-oil sentiment among Alaskans frustrated by the industry's lack of progress in building a natural-gas pipeline. She's enjoyed some of the highest approval ratings of any governor in the country since taking office in December 2006, with some grass-roots Republicans suggesting her as running mate for presidential candidate John McCain.

Yet, her dealings with Big Oil sometimes seem utterly un-Republican. Palin may not command an army to seize the people's oil fields like Hugo Chávez does, but that hasn't stopped her administration from trying to revoke lucrative leases at one giant oil and gas reservoir, alleging Exxon and its partners have dragged their feet for decades to develop it.

Her rhetoric can be blunt, too. Displaying no love for Exxon (a popular punching bag for Alaskans still irked over the 1989 Exxon Valdez oil tanker spill), Palin recently scolded the company for not showing enough interest in the natural-gas pipe dream. "The sentiment shared by a lot of Alaskans," she told reporters at a news conference, "is that Exxon, 'Don't let the door hit you in the stern on the way out if you choose not to participate in progressing development of Alaska's resources'."

Exxon has invested more than $20 billion in Alaska, including in new oil wells, and the company holds the largest working interest at Prudhoe Bay, the biggest U.S. oil field, says Margaret Ross, an Exxon spokeswoman. "It would be inappropriate to comment on a statement made by the governor," she said.

Getting [Alaska's] resources to market is of increasing concern to the state. High oil prices are enriching Alaska beyond the imagination—if oil averages $120 a barrel over the next fiscal year, the state will collect an astounding $12.6 billion, the Alaska Revenue Department says. But one crude reality remains: the reserves are drying up.

Alaska depends on oil taxes and fees to fund 90 percent of its budget revenue (residents pay no income tax; a $39 billion oil-wealth savings account generates an annual dividend for Alaskans, with last year $1,654 going to every man, woman and child). The oil fields produced about 740,000 barrels last year, down from a peak of 2 million in 1988. It's not that there isn't more oil to be found, it's that the best prospects—ANWR and the Arctic Ocean—face unrelenting opposition from environmentalists. The recent Interior Department decision to list polar bears threatened will almost certainly spawn lawsuits to try to block the search for crude in the bear's Arctic habitat.

All of which is why tapping the natural-gas fields now is imperative to offset declines in oil-tax revenue and keep industry busy in Alaska, state leaders say. Palin's quest to secure Alaska's future began last year when she invited all energy companies, large and small, to compete for an exclusive state license and a $500 million subsidy to build the gas pipeline. But the state received only one qualifying bid, from TransCanada, which doesn't own any Alaska gas and may have to pursue other subsidies to get its project off the ground.

In contrast, BP and Conoco didn't submit a bid under Palin's rules, instead pledging to spend $600 million on preliminary work over the next three years, with the hope of turning on the spigot as early as 2018. "Conoco and BP are saying, 'We'll do this project our way,' and that flies completely in the face of the governor," says Gwozd. "This will undoubtedly test her strength and resolve. Is she as strong as the oil companies?"

For now, though, the battle is out of Palin's hands. The Alaska legislature has 60 days to decide if it should back TransCanada. Already, the proposal is facing opposition. "I'm hearing a number of the legislators are gearing up to throw their support" behind the BP-ConocoPhillips project, says state Rep. Les Gara.

Still, if Palin loses her standoff with Big Oil, she may have one more chance to endear herself to the people. Residents are paying some of the highest gasoline and diesel prices in the country, particularly in rural parts of the state, where the fuel is used for everything from Eskimo hunters straddling four-wheelers to powering salmon fishing boats to keeping prop planes aloft, the latter the main mode of transportation in bush Alaska.

Ever the populist, Palin has asked the legislature to pass a bill that would give every resident $1,200 to help pay for gasoline. This proposal isn't a slam-dunk either, but no doubt Hugo Chávez would be proud.