Governor’s advisers tout potential payoffs

Murkowski’s representatives stump in Homer

Posted: Thursday, June 01, 2006

Its engineering complexities are staggering, the financial risks enormous, but if successful, the potential payoffs over the next few decades for Alaska would be written in 10-figure amounts.

That’s what Gov. Frank Murkowski’s representatives said in Homer on Tuesday about the proposed Alaska gas pipeline an undertaking so large it would rank as the biggest construction project in U.S. history.

The proposed pipeline would take 4 billion cubic feet of North Slope natural gas per day down the trans-Alaska oil pipeline corridor, through Canada to Chicago to supply Lower 48 markets.

Known, or “proven,” reserves of Alaska North Slope gas total 35 trillion cubic feet (for perspective, the United States consumed 22 trillion cubic feet in 2004). Industry officials say up to 235 trillion cubic feet may also be present. To make the project viable, another 18 trillion cubic feet would have to be found and developed. More than 9,000 workers could be needed to build the pipeline.

“It is a mega-project by any standard,” said Mary Ann Pease, gas line advisor to Gov. Murkowski, addressing a Tuesday luncheon of the Homer Chamber of Commerce.

Joining her to discuss aspects of the governor’s proposed natural gas pipeline contract with three major North Slope oil producers was petroleum economist Roger Marks with the Alaska Department of Revenue.

The 3,640-mile-long pipe-line would require between 5 and 6 million tons of steel. There are only four steel plants in the world capable of producing the 52-inch diameter, 1.5-inch thick steel pipe, and none is in the United States. Three are in Asia and one is in Europe, Marks said.

Until around 2000 when gas prices started rising, it simply wasn’t economical to build such a gas pipeline. By January 2004, Murkowski and his advisors were negotiating behind closed doors with BP, ConocoPhillips, and ExxonMobil hashing out terms of a contract that could lead to a pipeline construction project. The contract, negotiated under the Stranded Gas Development Act, was released to the public May 10.

It includes no guarantee forcing the majors to build a pipeline, no Alaska labor agreement, and would require Alaska to set aside for decades its ability to change tax rates imposed on producers for 30 years for oil, 45 years for gas. Those issues are key concerns among Alaska residents and lawmakers alike. The tax lock-up provision would very likely end up in court over its constitutionality.

“There’s a case to be made that you can constitutionally do this,” Marks said. “Is it a slam dunk? No. Is someone going to sue? Yes. Will the Supreme Court ultimately decide this? Yes.”

Will court action delay the project?

“It would slow it down,” Marks said.

The governor’s office has been talking to Alaskans at project fairs, public hearings, statewide teleconferences and community presentations.

Pease and Marks said reaction across the state so far had been mixed. Anchorage residents have been fairly inundated with information from the media, Pease said. Fairbanks residents have been generally negative toward the governor’s deal with many there backing the rival Alaska Gas Port Authority LNG project. Rural residents, by and large, have appeared less versed in the background of the gas line debate, but are eager for information, she said.

But everywhere, perception is critical, Marks said.

“There are some hot-button issues with this contract in a 30-second sound bite, it’s pretty easy to say ‘this is a bad contract,’” Marks said noting the contract’s lack of a firm start-up date, and the idea that Alaska would give up its ability to change tax rates. “(But) there are some complex reasons why those are in the contract,” he said.

In engineering, there are three principals that must be balanced, whether one is building a house or a mega-project like the pipeline cost, quality control and timing, Marks said.

“If you put primacy on one of those, the other two will suffer,” he said.

Any number of things could go wrong inflation in the cost of steel or the collapse of gas prices, for instance. That argues for flexibility, that is, no firm date for gas to flow, currently estimated at 10 years out. But Alaska has a card in the hole.

“If the producers don’t exercise due diligence in moving the project, the state can go to arbitration and pull the plug on the contract, in which case the producers would lose their fiscal stability (the locked-in tax rates), which would be a huge blow to them,” Marks said. “They have 35 trillion cubic feet plus on the slope, and they do not want to let that sit idle forever.”

Another issue is that the contract calls for the state to contribute 20 percent of the construction costs and own 20 percent of the pipeline, a significant commitment, Pease said. In exchange, the state would own and be able to use or market 20 percent of the gas.

Pease said estimates show Alaska earning significant revenues under a broad range of possible gas prices. For instance, with gas at $5.50 per million Btu (Chicago), the state’s income would be $77.8 billion over 30 years. It would be about a third of that at $2.50 per million Btu, and at $8.50, the state’s take would be $129 billion.

The benefits to the state would be a stable revenue stream and “a seat at the table” with the other owners.

But the state would also share the risks big ones if circumstances were to halt or significantly delay the project, or if gas prices collapsed once money has been committed, Marks acknowledged.

“Those are called completion risks,” he said. “That’s one of the reasons you get such a high rate of return from regulators.”

For the major producers, the state’s financial involvement helps make the project viable, they said.

Most important to Alaskans is having access to the gas itself. The contract calls for four locations called off-take points where distribution spur lines could tap the main line. One of those could bring gas to Southcentral Alaska and the Kenai Peninsula.

However, it would be gas utility companies, not the majors that would likely be behind financing for an Alaska distribution system.

Alaska could opt to build distribution lines itself, perhaps using earnings from the Alaska Permanent Fund or the proceeds from gas sales.

“I don’t think that is something that should necessarily be ruled out,” Pease said.

A statewide teleconferenced hearing also was scheduled for Tuesday night. Another is scheduled for June 5 from 6 p.m. to 10 p.m. Another public hearing is set for the Challenger Learning Center of Alaska in Kenai on Thursday, June 15, beginning at 11 a.m.

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