If it goes ahead, the project would be one of the largest coal gasification and coal-to-chemical projects in North America.

The authorization bill Palin signed does not commit the railroad to do the financing, Alaska Railroad president Patrick Gamble has said. It does allow the tax-free financing as an option for Agrium and potential partners in the project.

Agrium spokeswoman Lisa Parker said her company is on schedule with advanced engineering and permitting for the project and plans to have cost estimates by September. Parker said Agrium is in discussion with other potential investors, including a company to supply gasification technology.

Agrium is exploring several options, including having investors own part of the fertilizer plant, as well as the gasification and a related coal-fired power plant, Parker said. Alternatively, the investors could own just the gasification and coal power plants, which would leave Agrium as sole owner of the fertilizer plant.

Meanwhile, a contract for the project's environmental work has been let to ENSR, a consulting firm that has experience in Alaska, Parker said.

Agrium could give a final go-ahead for construction in 2008, and the gasification plant would be in operation in 2011 or 2012. If the project goes ahead, Usibelli Mines Inc., operator of a coal mine in Healy, would supply about 3 million tons of coal a year for the project. The Alaska Railroad would ship the coal to the Port of Anchorage, and from there it would be shipped by barge across Cook Inlet to the Agrium plant.

A longer-range option to ship the coal is being developed by the Matanuska-Susitna Borough. This plan would build a 43-mile rail spur line from the railroad's existing track near Willow to the Port Mackenzie dock on Knik Arm.

Port Mackenzie is designed to handle bulk commodity loading and, if a rail spur is built, would be more suitable as a shipping point than Anchorage's port, which is designed to handle mainly general freight and containers.

In July, Palin approved a $10 million state capital appropriation to begin an environmental impact statement for the rail extension. The Mat-Su Borough is now working with the Alaska Railroad on preliminary studies that will be used in the EIS.

The total authorization is $2.9 billion, but $500 million is reserved for the railroad to finance improvements related to shipping coal for the project and to finance construction of the rail spur. Mat-Su officials said it is likely that a mix of funding sources would ultimately be relied on to fund the extension, however.

Besides the gasification plant, Agrium's project includes a 250-megawatt pulverized coal power generation plant that would supply about 175 megawatts of power needed for the fertilizer and gasification plants, with about 75 megawatts available to be sold into the regional power grid.

The Alaska Railroad has Congressional authority to finance tax-free industrial development projects with revenue bonds. The railroad has issued some bonds to finance rail-related improvements, but the Agrium project would be the first non-rail project financed using the authority. The Internal Revenue Service would have to sign off on the tax-free status of any revenue bonds before any bonds are actually sold.

Agrium purchased the Kenai ammonia and fertilizer plant from Unocal in 2000 but has had shortfalls of gas supply as production from maturing Cook Inlet gas fields decline. The company was purchasing up to 53 billion cubic feet of gas per year, but is now down to about 10 billion cubic feet a year, with the plant operating at half capacity on a seasonal basis, Parker said.

Unocal built the plant in 1969 as a way to commercialize large reserves of gas that had been discovered in Cook Inlet, but for which there was no local market. Local utility markets have grown substantially since then, while gas reserves in Cook Inlet fields have declined.

Agrium hopes its coal gasification project would allow a switch from gas to coal, which is in plentiful supply in Southcentral and Interior Alaska.

A long-term supply contract with Unocal, which is now Chevron, was terminated and Agrium has been purchasing gas on a year-to-year basis. Current contracts expire in October, Parker said. Agrium is in discussions on new contracts, she said.

The contracts are likely to be on an interruptible basis, and because local gas and electric utility requirements peak during the winter, Agrium is likely to suspend fertilizer production in November and resume in the spring. That would depend on new gas contracts being signed for the plant, which isn't guaranteed.