Pipeline coordinator discusses project

Posted: Sunday, November 28, 2010

What would have to happen to make the Alaska natural gas pipeline a reality?

That's the $26 billion question Alaskans have to ask if they want the state's long-hoped for project to get built. Tuesday night at the Alaska Islands and Ocean Visitor Center, Larry Persily, federal coordinator for the Alaska Natural Gas Transportation Projects, spoke at a town meeting to update Homer on the pipeline.

"Alaskans need to understand how natural gas markets work so you can make the decision," Persily said. "What do I want? How much am I willing to subsidize in-state gas distribution?"

Appointed by President Barack Obama in 2009, Persily is the federal coordinator of the Alaska Natural Gas Transportation Projects, an office created by Congress in 2004 under the Alaska Natural Gas Pipeline Act to expedite federal permitting and construction of a pipeline that would deliver natural gas from the Arctic to Lower 48 markets.

"Our job is to make sure no federal agency makes a difficult project any more difficult than it needs to be," Persily said.

Permitting isn't the big problem. For example, the law creating the Office of the Federal Coordinator says that if the gas line goes ahead, agencies have to complete environmental impact statements in 18 months.

"There's nothing in Washington, D.C., stopping this project," Persily said. "What's stopping this project is economics."

Persily said he sees a couple of things that need to happen to build an Alaska gas pipeline:

* A demand for Alaska natural gas in 2020 and beyond at prices high enough to cover shipping costs, and

* Assurance to producers that they won't bear the cost alone of the pipeline.

"Producers are worried that they're the deepest pocket in Alaska. What worries them is they are the only pocket," Persily said.

As Kenai Peninsula Borough Assembly Member Charlie Pierce put it, "How much skin do we want to put in the game? How much do we want to give in order to get?"

Pierce also is the general manager for the Kenai Peninsula region of Enstar natural gas, and was one of several policy makers and industry representatives listening to Persily.

The Alaska Natural Gas Pipeline Act authorizes an $18 billion federal loan guarantee to help a project developer build a gas pipeline from the Arctic to the Lower 48. Estimates for the pipeline range from $26 to $42 billion. Congress is considering raising the loan guarantee to $30 billion. The act won't support an all-Alaska pipeline, but it does allow in-state use of the gas.

Two consortiums have formed to consider building a pipeline: the Alaska Pipeline Project, a joint venture of TransCanada and ExxonMobil, and Denali -- The Alaska Gas Pipeline, a joint venture between BP and ConocoPhillips. Those projects would be a pipeline from the North Slope to Fairbanks and to Alberta, Canada, joining the North American pipeline grid.

Alaska Pipeline and Denali both held open seasons to probe interest in shipping gas. An open season could be compared to a shopping center developer looking for major tenants before committing to build.

Right now, both projects are negotiating financial terms with potential shippers. The next step would be the signing of what are called Precedent Agreements. That could happen this month or early next year. A Precedent Agreement commits shippers to backing development costs.

"It really is significant if sometime in 2011 you start seeing Precedent Agreements," Persily said.

Several factors could make Alaska natural gas attractive to the American gas market. Natural gas production in Western Canada is declining, which means there will be room in the North American gas grid over the next decade. Shale gas production also has increased and is now 20 percent of the U.S. gas supply, creating more stable prices.

Shale gas has environmental issues. To produce shale gas, drillers inject water into underground reservoirs, a process called hydraulic fracturing, or fracking.

"If I were a utility, I'm not sure I'd bet on shale gas meeting 100 percent of the needs," Persily said.

Environmental concerns about coal also have made electric utilities think about natural gas, Persily said. The big market for Alaska natural gas isn't the home heating market, but for making electricity.

"In many ways the EPA is our best friend," Persily said of the U.S. Environmental Protection Agency. "Anything the federal government or states do that makes utilities more nervous about burning coal and drives them to gas, drives up gas demand."

Some Alaskans have advocated a bullet line, a smaller natural gas pipeline that would bring natural gas from the North Slope to Fairbanks, Anchorage and other Railbelt markets. The problem with a bullet line is that those markets won't support the total cost of construction and the state would have to subsidize it at a cost of $4 to $5 billion, Persily said. That also won't spur production on the North Slope. Instead of subsidizing a bullet line, why not use that money to leverage a bigger gas line? Persily asked.

Developing a large gas pipeline to the Lower 48 would lead to more exploration, Persily said.

"Because you're moving so much gas off the Slope in a big project, they're going to have to start exploring for gas immediately," he said.

A change in the tax structure would be needed to make producers and shippers more comfortable about investing in a gas pipeline, Persily said. Maybe it could be tax breaks on property that would be deferred until gas starts to ship. Maybe it could be a change in how natural gas is taxed compared to oil.

Splitting taxes on natural gas and oil can be complicated, warned Rep. Paul Seaton, R-Homer. Sometimes the same equipment is used to explore and drill for natural gas and oil.

"It's a lot more complicated than saying 'split apart oil and gas' because you then have to split apart production," Seaton said.

Key to the success of a natural gas pipeline is support for the project by the public -- and confidence it will happen.

"If the public doesn't believe the gas line is possible, then they don't give permission to the legislators to work on a deal," Persily said.

For updates and information on the Alaska natural gas pipeline, visit the Office of the Federal Coordinator website at www.articgas.gov.

Michael Armstrong can be reached at michael.armstrong@homernews.com.

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