Construction of a pipeline that brings Arctic natural gas production into the lower 48 states has tantalized-and frustrated-many companies for decades. Unhappy aboriginal groups, uneconomic technologies and unstable gas prices have all contributed to past project failures. A smattering of "prebuild" pipeline sections in southern Alberta and Saskatchewan is all there is to show from the one plan that received government approvals more than 20 years ago. Yet, the climate is changing. Long-term natural gas demand is widely expected to skyrocket as the electrical generation sector soaks up supply. Technological advances have driven down the cost estimates for such a project. And aboriginal groups, which have historically opposed any projects on their sacred grounds, are recognizing that money and employment opportunities also can flow from a pipeline. "This is the most critical energy project in the United States, and really, in Canada," said Forrest Hoglund, chairman and chief executive of Arctic Resources Co. Ltd. (ARC), when announcing ARC's pipeline plans in June. Hoglund is the recently retired chairman and chief executive of Enron Oil & Gas, now EOG Resources. "The first gas pipeline to the North Slope is almost the same concept as the first railroad to California," he says, in terms of stimulation of economic growth. Of the many pipeline plans that have been studied over the years, one has earned regulatory approval. In the late 1970s, Northwest Energy Corp. received permission from Canadian and U.S. authorities to build a land pipeline along the Alaska Highway, dubbed the Alaska Natural Gas Transportation System (ANGTS). However, after low gas prices plagued the project, the consortium dissolved, leaving some "prebuild" sections standing in southern Alberta and Saskatchewan. Despite the troubles of the past, the vast natural gas resources in the Arctic remain too tempting to ignore. North Slope proved reserves have been estimated at 35 trillion cubic feet of gas, and the Mackenzie Delta and Beaufort Sea areas contain trillions more. With annual U.S. natural gas demand widely expected to hit 30 trillion cubic feet by 2010, several companies are thawing out old plans or drawing up new ones. ARC executives recently announced their ambitions to the press. TransCanada PipeLines Ltd. and Westcoast Energy Inc. are studying various development plans, either to build a pipeline individually or through their co-owned entity, Foothills Pipe Lines Ltd., which inherited the ANGTS permits from Northwest Energy. Producing companies also are researching options for transporting their gas reserves. Earlier this year, Imperial Oil Resources, Gulf Canada Resources Ltd., Shell Canada Ltd. and Mobil Canada, now part of Exxon Mobil, began studying the feasibility of developing their onshore Mackenzie Delta gas resources. Plus, BP Amoco intends to play a leadership role in an Arctic gas pipeline. The company produces about 8 billion cubic feet of associated gas a day from Prudhoe Bay that is reinjected into the reservoir. Officials have investigated liquefied natural gas, gas-to-liquids and pipelines as options to monetize that production. It won't be an easy choice. "We have to look at the regulatory and stakeholder environment," says Annie Smith, a BP Amoco spokeswoman in Canada. "What kinds of lands are crossed, whether there are aboriginal issues, government issues on those lands, or if there are environmental issues for each of the routes. As well as costs." The route for ARC's Northern Gas Pipeline Project would cross both the Prudhoe Bay and Mackenzie Delta regions, and officials believe the line could begin carrying gas into the Lower 48 as early as 2006. (See map.) It would carry about 2.5 billion cubic feet of gas a day from Alaska and 1.5 billion cubic feet a day from Canada. ARC executives estimate it would cost $5 billion, with construction requiring about $4 billion and financing, reserves and other costs adding another $1 billion. The two key ingredients to this equation-ones that ARC believes would allow it to succeed where others have floundered-would be a bond-backed financial approach that would permit aboriginal ownership of the pipeline, subject to contractual rights of shippers, and a consortium that would be better able to obtain necessary approvals than a producer-led project. That consortium would include the largest producers, pipeline companies and marketers in Alaska and Canada, as well as the region's aboriginal groups. ARC would oversee the pipeline design, obtain the necessary permits and approvals, oversee construction and operations, and hire a subcontractor to operate the pipeline. Having a group consensus between the region's major players would give the pipeline a much better chance of being approved, Hoglund says. ARC has begun discussions with potential consortium members, but as of press time had not yet signed on any official partners. ARC indicates it would like to have things rolling around the beginning of next year. The group's financing strategy would use 100% debt capital rather than the equity-and-debt combination traditionally used for pipeline projects. About $5.3 billion in tariff-backed, investment-grade bonds would be issued by two special-purpose entities that would be owned by aboriginal and governmental groups. ARC hopes this measure would ease some of the tensions historically encountered between these groups and pipeline companies. Plus, ARC executives say, this approach would help keep the tariffs low, a vital factor in a project such as this. Early estimates placed the tariff from Alaska to Chicago at less than $1.50 per thousand cubic feet. Bill Gwozd, manager of gas services for Ziff Energy Group in Calgary, says that aboriginal involvement in any Arctic pipeline project would be vital. No matter who ends up developing the first such pipeline, Gwozd would expect aboriginal groups to negotiate at least a 10% ownership in the infrastructure. "With that hurdle overcome, the cold-weather engineering and technology exist to make this happen," he says. Another player in the Arctic pipeline arena-the TransCanada/Westcoast group-also recognizes the need for aboriginal involvement. The duo announced earlier this summer that it is talking to native groups as well as major oil companies and government bodies. The old ANGTS proposal may be the group's best bet, as it already has the required regulatory blessing. What's more, because it would be constructed via the Foothills joint venture, it may be more palatable to TransCanada and Westcoast shareholders than having either company embark on such a huge project alone, Gwozd adds. Starting at Prudhoe Bay, the ANGTS pipeline route would follow the Alaska Highway and could stop at one of two places, depending on the amount of available capacity in the Canadian pipeline grid, says John Ellwood, vice president of engineering and construction for Foothills. It could stop in the area of Gordondale, near the Alberta-British Columbia border, or it could go further south and connect to the prebuild sections in southern Alberta. The cost estimate for ANGTS is US$6 billion, and it would carry about 2 billion cubic feet of gas a day from Alaska to Gordondale, Ellwood says. Once the project has the green light, it would take about three years to build. "As soon as the producers and/or the gas buyers have enough confidence that the market volume and price will hold up, then it's ready to go," he says. Robert L. Pierce, chairman and CEO of Foothills, touted the ANGTS proposal in a statement late last year. "Our reassessments of the project in light of advances in technology, our northern research and our operating experience have resulted in significant reductions in costs from our original estimate," he said. "Because of the ANGTS head start resulting from its regulatory approvals, advancements in project engineering, full-scale testing in northern conditions and the certificates held for construction and operation, I believe the ANGTS not only remains economically viable, but will be earliest to Lower 48 markets. No other project is in that position." The major difference between the ANGTS and ARC proposals is that ARC's pipeline would tap both Alaskan and Canadian resources in the North Slope, the Mackenzie Delta, the Mackenzie Valley and possibly the Northern Yukon. But to do this efficiently and cost-effectively, the route has an offshore component-an extremely contentious idea among some environmentalists. Coming out of Prudhoe Bay, about 326 miles of the pipeline would be offshore, 191 miles of which would be offshore Alaska. Offshore projects in this area have faced tremendous opposition in the past, but ARC officials believe a natural gas offshore pipeline would be much less controversial environmentally than an offshore oil pipeline project. Another plus, ARC executives say, is that the route avoids some of North America's more environmentally sensitive national and territorial parks. Though natural gas may be a less controversial fuel than oil, the Arctic region has no experience with offshore pipelines, which may make people in the region wary of such a proposal, Gwozd points out. Much of this area is laced with roads of ice, meaning that mobilization in the event of a spill could be quite difficult and expensive. Material and equipment would have to be stockpiled nearby in case of an emergency, he says. With the ANGTS proposal, a lateral pipeline would have to be built from the Mackenzie Delta and hooked up to the main Alaska Highway pipeline to tap the reserves in Northern Canada. A lateral pipe could trace the Dempster Highway or wind along the Mackenzie Valley. "That would be a separate project," Ellwood says. "The Alaska Highway project is really there to move Prudhoe Bay gas to the lower 48 states. Anything in respect to the Mackenzie Delta could be done and would most likely be done on a different time frame, to meet the market demand if and when enough gas is found in the Mackenzie Delta." The economics of the Mackenzie Delta region-including high drilling, logistical, supply and shipping costs-necessitate large reservoirs and high-productivity wells, according to David S. Anderson of IHS Energy Group, in a paper presented at the recent World Petroleum Congress in Calgary. To move 2 billion cubic feet of gas a day to Alberta from the northern Mackenzie Valley for a 20-year project life, it would take 15 trillion cubic feet of gas reserves, according to his analysis. Currently, there are 6.96- to 11.44 trillion cubic feet of discovered, marketable gas reserves in the Mackenzie Delta/Beaufort Sea area, according to Canada's National Energy Board, and an estimated 53.3 trillion cubic feet of undiscovered reserves. The issue will unfold during the next few years, as the various players position themselves in this potentially lucrative market. Gwozd predicts it will take five to eight years for the first Arctic natural gas pipeline to be constructed, and it will require a tremendous amount of industry cooperation and agreement to make it happen. "You will see a lot more consortia posturing that theirs is slightly better," Gwozd says. "At the end of the day, you'll see these [groups] join forces and each take a vested interest in the major pipeline." CALL BPA? BP Amoco's announcement at press time that it intends to purchase Boise, Idaho-based IGI Resources Inc. may have more to it than what immediately meets the eye. IGI isn't just any marketer, it is a gateway to the Pacific Northwest. Want to connect Canadian gas to Northwest markets? Call IGI. There was a time when no one would bypass IGI-neither producers nor industrial customers would speak above a whisper to discuss alternate routes or markets. With the acquisition, BP Amoco may be assuring itself a fortress position in the direct path of a natural gas pipeline from Alaska and/or the Mackenzie Delta to the Northwest market. Currently, strong Northwest hydrogeneration activity translates into relatively low power prices. If there is a power shortage in the region in the future, as is presently forecast, BP Amoco could be sitting pretty. -Linda K. Rader