June 28, 2002 --- Vol. 8, No. 67June 2002

Economic rent needs to be redistributed

Lord John Browne, BP's chief executive officer, said this morning in Anchorage that "to be viable, Alaskan gas has to be able to compete head-on with other potential sources of supply, including oil. And at the moment it is not competitive."

What is needed, Browne told a Resource Development Council, Alaska Support Industry Alliance and Anchorage Chamber of Commerce breakfast audience, is redistribution of the economic rent the project will generate so that there is enough return to investors to attract the needed investment.

He said BP has tagged gas project costs at $60 billion: $20 billion capital costs; $20 billion operating costs; $20 billion financing costs.

The current goal, he said, is to reduce the pre-tax capital investment cost by 10 percent, $2 billion, through technologies including high-speed welding, higher-strength steel and more efficient carbon dioxide removal.

But, Browne said, even with a 10 percent reduction in pre-tax capital costs, the project will not be commercially viable because of fiscal issues the way economic rent on the project, the cash generated by a project which is available to pay royalties on the resource, taxes and a return to investors, would be shared.

"As things stand, the current distribution destroys the viability of any such development," Browne said: return to investors is not enough to support the investment.

And that's not something companies can change, he said: it's a public policy call. U.S. and Canadian governments have made policy calls which made a different distribution of the economic rent, he said: production credits for technology to development coalbed methane; incentives for enhanced oil recovery; Canadian measures which allowed development of eastern energy frontiers and tar sands and Mackenzie Valley gas.

The project also needs other things, Browne said: appropriate federal legislation; fiscal stability in Alaska; efficient regulatory process in Canada; relentless attention to costs.

But, Browne said, "it is the commercial reality the distribution of economic rent which will decide the project." Browne said it was far too premature to look at the details of redistributing economic rents: but something is needed.

BP to pig old Cook Inlet pipeline

The Alaska Department of Environmental Conservation said today that BP Exploration (Alaska) Inc. plans to flush an old pipeline in Cook Inlet that the department believes was responsible for sheens in Cook Inlet last year.

DEC said the goal is to clean out the line so that there will be no more discharges from the pipeline, which owned by Amoco and acquired by BP as part of the BP-Amoco merger. DEC said pigging operations are tentatively scheduled for June 29-July 1.

BP will be using a train of gel and foam pigs to clean residue from the line, following a work plan that DEC said had its approval, as well as that of the U.S. Coast Guard.

The pigging operations could result in residual oil leaking from the pipe, causing a sheen on the inlet, DEC said, so Cook Inlet Spill Prevention and Response will be standing by ready to clean up any spill.

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