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ConocoPhillips (COP)
ConocoPhillips Announces New Billion Dollar Pipeline
ConocoPhillips announced that a new natural gas pipeline in Alaska could be on its short list of global projects. The move would allow the company to ship natural gas from Alaska's huge reserves to the continental U.S. to reach energy-hungry consumers. With natural gas prices on the rise, additional supply could provide some relief to both consumers and businesses already facing $100/barrel oil. The big roadblock, however, is whether or not advocacy groups or the government trusts another energy company in Alaska, considering the recent string of oil spills in the area. Does ConocoPhillips stand a chance of getting a thumbs up on the project, or can consumers expect another cold winter with hot gas prices?
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Conoco doesn't have to look very far for a clear indicator of what can go awry in Alaska. BP (BP: Charts, News, Offers) currently operates a major oil pipeline there, and in summer 2006 came under heavy scrutiny by both the public and the government for shoddy maintenance. A spill in its pipeline on Alaska's North Slope, which in itself is costly, resulted in the company having to replace 16 miles of pipes and commit to frequent testing. Within five months of the North Slope leak, BP was shutting down 12 of its 57 wells. Then this past October the company spilled 2,000 gallons of chemicals at its Prudhoe Bay facility. BP's expensive problems are not only something that Conoco must keep in mind during development, but something that it must keep in mind in terms of public scrutiny in the new pipeline approval process.
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Placing the potential environmental impact aside, Conoco is counting on two things to make this idea work: consumer demand and natural gas prices. With oil prices teetering on $100/barrel, natural gas remains the only readily-available alternative that could absorb and potentially satiate a bump in energy demand. While industries still will have somewhat of a choice when it comes to energy sources, keeping Conoco and other natural gas companies from hiking prices too far, consumers generally are unable to switch from gas to an alternative readily. Depending on the consumer side of demand, weather and world supply, natural gas prices will most likely continue to increase. Between January 2000 and August 2007, the price of natural gas in residential areas, as measured in $/BTU (British Thermal Unit), has jumped from $6.37 to $16.85 (165%).
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If the new pipeline does get a thumbs up, Conoco can expect to shell out anywhere from $24bn to $42bn to get everything up and running. For perspective, the company reported $15.5bn in profits in 2006, and $13.5bn in 2005. Because of the high cost, Conoco's CEO Jim Mulva indicated that the company is considering other players who might want to get involved in the endeavor. Two major companies, ExxonMobil (XOM: Charts, News, Offers) and BP, are the likeliest candidates.
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While the project costs will be spread out over a long time frame, the revenues will be relatively quick to surface. The pipeline could ship up to 4 billion cubic feet of natural gas a day. With natural gas prices on the rise, it is pretty safe to say that the money could be seeing some serious revenues in the future.
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