Energy Conference Update #11 (The Real Deal)

October 6, 2003
12:00 AM
Here is a “dear colleague” letter from Sens. Daschle, Bingaman and Reid on the Alaska natural gas pipeline. It urges Senators to support the provisions that are necessary to make this project -- which will provide a reliable source of natural gas for the Lower 48 states -- a reality. (Background: This current project is a Democratic initiative first proposed in March 2001 by Sen. Jeff Bingaman, D-NM. We’re grateful for the bipartisan support that it has since received in Congress.) October 3, 2003 Dear Colleague: One issue under discussion in the energy conference is how to transport natural gas from Alaska's North Slope to the continental United States. Two central questions in this debate are whether Congress should stipulate a route for a pipeline to the lower 48 and whether Congress should provide financial incentives to encourage this project. Both the Senate and the House energy bills direct that the project follow the "Southern" route through Alaska. The Senate bill also includes a "commodity risk" provision that would provide a maximum tax credit of 52 cents per million Btu of natural gas if prices drop to a level that falls within specified price parameters. Last Sunday, 60 Minutes aired a segment that suggested that the so-called "over-the-top" or "Northern" route through the Beaufort Sea to Canada is a viable alternative to the " Southern" route, and that Congress should not designate a particular route or provide any "subsidy" to an Alaska gasline project. As you consider those suggestions, we urge you to also consider the following facts: First, it is widely agreed that the United States is on the brink of a major natural gas shortage that has serious price implications for businesses, households and the US economy. It is estimated that, by 2010, the supply deficit may be as much as 4.5 billion cubic feet of gas per day and that by the year 2020 our nation will need more than 33 trillion cubic feet of natural gas annually to keep up with demand. Second, Alaska's North Slope contains 35 trillion cubic feet of proven natural gas reserves, with the potential of at least 65 trillion cubic feet. And, the Alaska producers plan to ship 4.5 billion cubic feet of gas per day to ship to the continental United States once a pipeline is built. Third, the proposed Northern route, to be built for hundreds of miles under the ice-choked Beaufort Sea and off-shore of ANWR, would utilize untested technology and require digging the ocean floor to protect the pipeline from damage by ice pack scouring. In explaining the State of Alaska's advocacy of the Alaska Highway routh in 2001, then-Gov. Tony Knowles noted the adamant opposition of the Inupiat Eskimos of the Alaska North Slope to the Northern route. Tribal, civic and corporate leaders had all concurred that they would fight this routing "with everything in their power." It represents to the Eskimo people of the North Slope a clear and present danger to their cultural and subsistence needs of whales and other marine mammals. Also, the national environmental community, which has not objected to the Southern route, would oppose the off-shore route with great vigor. These concerns alone would likely stop the project permanently and at the very least would delay it for many years. Fourth, the only feasible route for the natural gas pipeline follows the existing oil pipeline from the Alaskan North Slope to Fairbanks and then parallels the Alaskan Highway into Canada to existing distribution facilities in Alberta. Already approved by Congress in 1977 and the subject of an international agreement with Canada, this route would quickly receive regulatory approval. No alternative is close to the implementation phase. Fifth, recent studies demonstrate that the cost differential between the Southern and Northern routes is small, particularly when the discounted present value of money resulting from permitting delays related to the Northern route is considered. Sixth, oil industry analysts, Wall Street investment bankers and two of the three producers have testified that it is highly unlikely that the Alaska gas pipeline will be built without the Senate commodity risk provision, or something comparable to it. The major proponent of the "Northern" route, the owner of Arctic Resources Corporation, argued on 60 Minutes that his company's project requires no subsidy. What he didn't highlight is that ARC has a concept, but no financing, no current access to gas supplies and no permits to build a pipeline across submerged lands in the Beaufort Sea offshore of ANWR. In our judgment, if we want to get Alaska natural gas to the continental United States in a timely manner, our only viable option is the Southern route. Further, we believe that, given economic reality, some modest fiscal incentives are necessary and warranted. This pipeline project would be the largest private construction project ever undertaken in North America. The magnitude and duration of the operation underscores the need to bring some certainty to the price of the commodity. In a recent letter to Sen. Domenici, Secretary Abraham explained the Administration's opposition to the commodity risk provision contained in the Senate energy bill as follows: "The Administration strongly opposes the price-floor tax credit provision in the Senate bill and any similar provision because it would distort markets, could undermine fiscal responsibility and would likely undermine Canada's support for the pipeline and set back broader bilateral energy integration." We strongly disagree with the Administration's analysis of this "commodity risk" provision. First, it will not undermine fiscal responsibility. In fact, given future price projections, it is unlikely that the commodity risk provision will ever become operative, which the Congressional Budget Office acknowledged by giving this provision a zero score. Second, it is certainly not unprecedented. To promote energy production, existing federal laws, as well as the pending legislation, provide numerous fiscal incentives for various energy resources, including ethanol, nuclear and shallow gas. Third, it will not "distort markets." The commodity risk provision does not interfere in the natural gas markets because it does not artificially establish a price floor for natural gas. Under the Senate provision, the market is allowed to operate independently with no government intervention. Instead, the federal government would provide a 52 cent tax credit to make up for low natural gas prices should they fall within a specified range. And finally, countries around the world, including Canada, provide similar incentives for energy projects considered to be of national importance. We believe the question before the conferees is, how can the Congress encourage the construction of a pipeline to transport gas to the continental United States in the most cost-effective and timely manner? We further believe the answer to that question is the construction of a pipeline along the Southern route through Alaska and adoption of the modest financial incentives contained in the Senate-passed bill. Sincerely, Tom Daschle Harry Reid Jeff Bingaman