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'NOT VIABLE': CEO weighs inflation impact on projects in Canada, Alaska.

Exxon frets over Arctic gas pipeline cost
'NOT VIABLE': CEO weighs inflation impact on projects in Canada, Alaska.

Anchorage Daily News

Published: May 31, 2007
Last Modified: May 31, 2007 at 06:16 AM

Exxon Mobil Corp.'s chief executive told stockholders Wednesday that rising costs to build pipelines to exploit Arctic natural gas from Alaska and Canada possibly could red-light the projects as uneconomic.

Rex Tillerson, speaking with reporters after Exxon's annual shareholders meeting in Dallas, was quoted by the Reuters and Bloomberg news services as saying the cost estimate to build a gas line from Canada's Mackenzie Delta gas fields had more than doubled to about $15 billion.

"At those costs, it's not viable to build that pipeline," Tillerson said.

Exxon is a lead player in the proposed Mackenzie pipeline.

While Exxon hasn't updated its estimate for the much larger Alaska gas pipeline, Tillerson said he expects soaring costs might have made that project too expensive as well.

"My expectation is if we went back and looked at the costs again, they would have gone up dramatically," he said. "It involves lots of steel, lots of compressors, lots of valves, all the same things you need for the Canadian project."

The comments from the chief of the world's largest publicly traded oil company, and one of Alaska's three top oil producers, resonated with the administration of Gov. Sarah Palin. She is the latest in a succession of Alaska governors trying to find a formula to persuade or force major oil companies or someone else to pipe out the vast North Slope gas riches.

The oil companies historically have said the high cost to build a natural gas pipeline is a factor in keeping Alaska gas stuck in the ground. As part of recurrent negotiations over the years, Exxon and the other companies often have spoken of how government can provide tax relief to reduce the project risk and sweeten profits.

The ballpark figure for an Alaska gas pipeline long was considered to be something north of $20 billion. But Exxon's top man in Alaska, Craig Haymes, told state lawmakers in February the company reckoned costs have spiked well above $30 billion.

Marty Rutherford, the state's deputy natural resources commissioner and one of Palin's top gas pipeline team members, said Tillerson's comments were neither surprising nor a significant departure from Exxon's previous stance.

"They have been sort of making similar comments, maybe not as explicit, for some time now," she said.

But Rutherford said Tillerson's comments aren't the full story.

Even if costs of steel and other materials to construct the pipeline have surged, the price of natural gas is historically strong and market watchers see robust long-term gas demand, she said.

"Given the gas prices and forecast, I'd say the project is still pretty deep in the money," she said.

Also, previous cost estimates for an Alaska gas line have pertained to a pipe laid all the way to Chicago, some 3,640 miles away, Rutherford said. A more likely scenario is a less costly pipeline into the Canadian province of Alberta, where it could tie into a pipeline network that connects Canada and the Lower 48, she said.

The administration of outgoing Gov. Frank Murkowski last year estimated a gas-processing plant on the North Slope and a 2,140-mile buried pipe from Prudhoe Bay to Alberta would cost $13.6 billion, in 2005 dollars.

The state in the first week of July expects to solicit proposals from would-be pipeline builders as provided under Palin's Alaska Gasline Inducement Act, which lawmakers passed in mid-May.

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