Exxon Makes Alaska Pipeline Deal

Exxon Throws Weight Behind Alaska Pipeline

Exxon (XOM - Analyst Report) has finally decided to throw its weight behind the TransCanada Corp. (TRP - Snapshot Report)-sponsored Alaska Pipeline project that will bring stranded Alaskan natural gas to consuming markets in the U.S. Lower 48. TransCanada’s 1,700 mile, 48-inch diameter pipeline has the support of the Alaskan and Canadian governments. The Alaska government passed legislation last year that would subsidize the initial project costs by up to $500 million.

While details of the deal between the two companies were not released, it is expected that TRP will remain the project’s operator. This pipeline, expected to cost approximately $26 billion to build, would be the largest civil engineering project in North America. The pipeline would stretch from the North Slope of Alaska through Yukon and British Columbia to the Alberta border, where it would be linked to existing infrastructure reaching the U.S. market.

While a number of companies have natural gas reserves in Alaska, three are the most important; Exxon, ConocoPhillips (COP - Analyst Report) and BP (BP - Snapshot Report). The last two have been sponsoring their own rival pipeline project.

Without the inclusion of BP and COP, it would be difficult, if not altogether impossible for the XOM-TRP project to get off the ground. But with Exxon, the largest natural gas resource holder in Alaska, getting behind the project, its prospects have brightened significantly.

At its maximum capacity, the pipeline would transport 5.9 billion cubic feet per day, roughly 10% of total U.S. demand. Proved reserves in Alaska are around 35 trillion cubic feet (Tcf), but the state’s overall resource potential is believed to be much higher. As a comparison, the total U.S. natural gas consumption in 2008 was 23.2 Tcf.

A number of hurdles remain for this long-delayed project. In the next stage, the project needs commitments from companies who would use it to ship their gas before it can get the final go-ahead signal from the Federal Energy Regulatory Commission (FERC). Aside from these procedural/logistical issues has been the question of long-term U.S. natural gas outlook, which has changed materially following the recent discovery of abundant shale natural gas. Exxon’s reputation for conservatism and investment savvy goes some way to answering that question. In the best case scenario, the pipeline would begin operations in 2018.