Persily: Don't get discouraged about gas pipeline

Posted: Saturday, January 02, 2010

Alaskans shouldn't get discouraged about prospects for a $40 billion-plus large diameter gas pipeline project, but they shouldn't have unrealistic expectations either. Alaska gas has to be competitive in the market.

That's the message federal pipeline coordinator Larry Persily gave business leaders in a briefing Dec. 17.

The two pipeline consortiums competing to build the gas pipeline are unlikely to meet their timelines of having initial agreements signed with shippers by Jan. 1 or early spring, but that shouldn't be a surprise given the complexity of the huge project, Persily told Commonwealth North's energy task force.

"These are internal goals and given the complexity of the project people shouldn't be surprised that it's taking longer than expected," Persily told Commonwealth North, an Anchorage-based business group.

Growth of shale gas production in the Lower 48, which has created new supplies and low prices, will eventually slow because costs will rise for shale drillers and public opposition will put limits on the industry, Persily said. There is still an opportunity for gas from Alaska.

For the pipeline project the good news is that both consortiums, TransCanada and ExxonMobil in one and BP and ConocoPhillips in the Denali pipeline, a second project, received multiple bids from potential shippers during initial open seasons in 2010, even though the bids were conditioned.

If and when agreements are eventually signed notices will have be filed with the U.S. Federal Energy Regulatory Commission giving the identities of the shippers and the capacity commitments made, Persily said.

A TransCanada spokesman confirmed that the year-end target won't be met, but said the company hopes agreements will come soon. A spokesman for Denali said his company still hopes to conclude agreements in early spring.

"We are continuing our confidential negotiations with potential shippers, working to reach binding precedent agreements," Denali spokesman Dave MacDowell said in a statement. "We've estimated that these negotiations will carry into the first quarter of next year (2011), but it could take more or less time depending on how the negotiations proceed," he said.

Both projects entail a 48-inch pipeline from the North Slope to Alberta with a large gas conditioning plant at Prudhoe Bay. Officials of both consortiums agree that in the end only one pipeline will be built and that both groups will find a way to come together.

Persily said both pipeline groups are active.

"The Alaska Pipeline Project (TransCanada) sent 19 employees and contractors to recent meetings with FERC and federal permit agencies, and the company plans three dozen open houses to show data in 2011," he said.

Denali, meanwhile, recently briefed federal officials on changes and additions it is making to its environmental and geographic databases, Persily said.

A slowdown in activity for both groups shouldn't be misinterpreted.

"These people are still committed, but they are not going to throw money around," he said.

The current low U.S. gas price outlook and the expansion of shale gas production has created some pessimism in Alaska for the project, but costs for shale gas producers will eventually rise as producers begin drilling into less-prolific shale layers and requirements on handling and disposing of water used in fracturing are imposed.

The enthusiasm for shale will cool as public protests increase, also. "Fracking is becoming as popular as an oil spill," Persily said.

But shale gas could also help the Alaska pipeline project, he said.

"In the long run shale could help Alaska gas by eliminating price spikes, which will get electric utilities to think gas for the long term in planning new power plants. No utility can afford a repeat of a $14 gas spike," Persily said.

Having a healthy amount of shale gas in the market will make utilities more comfortable about gas, he said.

The right ingredients for the Alaska gas pipeline are still there. There is less prospect for federal climate change legislation but the uncertainties over future regulation of greenhouse gas emissions of some kind will encourage utilities to consider cleaner fuels like natural gas.

Regulatory and environmental problems will eventually limit the competition from shale gas. Growing demand will lead eventually to price increases for gas.

The state is willing to negotiate long-term fiscal terms for the project, but Alaskans should also dispel unreasonable expectations, Persily said.

"Alaskans are expecting 'cheap' gas and the development of a world-class industry based on gas liquids, but that's out of touch with reality. Also, the gas pipeline will never replace the state revenues paid by oil. Gas revenues will help the treasury but they not replace the five, six and seven billion dollars a year paid by oil," to the state, he said.

Alaska politicians encouraged the public to have these expectations, and now the public is frustrated that their expectations are not being met.

State and business leaders need to educate the public about who really carries the risks of the project - the gas producers, not the pipeline company - to create a political environment in which the governor can negotiate fiscal terms and the Legislature to approve them.

"Alaskans need to understand how much they really need the gas pipeline project. We need the revenues and the jobs, but mostly we need it to attract new oil and gas investment," Persily said. "The producers have other options, but we don't."

The state could encourage industry to move ahead with the large pipeline project by offering an equity investment of several billion dollars, he said. Alaska is currently flush with oil money. The state has $11 billion in ready cash reserves in its treasury and an additional $29 billion in its Permanent Fund.

"Take some of these billions and negotiate (with the pipelines) and look what can be done to help a large line to North America," Persily said.

In 2006 the state had worked out a deal with the three major North Slope producers to take a 20 percent stake in a pipeline but the deal was not approved by the Legislature.

Given uncertainties the large pipeline faces, the state is now looking at subsidizing a 24-inch pipeline to bring gas from the North Slope to Southcentral Alaska.

Persily, who is a former Alaska deputy revenue commissioner, said using state money to nudge the large pipeline along would be much more beneficial to the state in the long run. A large-diameter line built through Interior Alaska to Canada would make a 24-inch spur line to Southcentral Alaska more feasible, and it would also spur more oil and gas exploration in the state.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.



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