When will Alaska get a natural gas pipeline? That seems to be the question on many Alaskans' minds these days as they are looking for the next big boom.
For the last three years the state of Alaska has pursued a pipeline strategy called the Alaska Gasline Inducement Act (AGIA). In doing so, state leaders have ignored all of the fiscal and legal realities that exist when oil and gas companies evaluate projects. These legal and fiscal realities are also known as the four gates.
The first gate is the capital cost.
How much is constructing the project going to be? There have been several cost estimates given on the Alaska natural gas pipeline over the last five years. Over the last few months alone, the cost estimates by two different parties have ranged between $32 billion and $41 billion. These numbers are critical, especially when you consider the remaining three gates you have to get through in order to obtain financing and move forward on constructing the line.
AGIA ignores the importance of cost by propping up TransCanada Corp., which will make money regardless of the price of building the pipeline with a guaranteed rate of return of around 14 percent. In addition, project-cost overruns are paid by the gas shippers. Under AGIA, TransCanada will still make a 7 percent return on cost overruns, while gas shippers, including the state, will pay additional costs.
The bottom line is every penny it takes to build the pipeline will increase revenue for TransCanada and will decrease the revenue to the gas shippers, including the state. Why would the producers pay a middleman to build a pipeline that they can build themselves while saving money?
Given AGIA's terms, it's clear the producers can't pass even the first gate.
The second gate is the estimated price of the commodity (natural gas).
While prices have dropped significantly within the last year, nobody can control the free market. Shale gas developments or another recession could keep the price down below the break-even point for debt holders.
According to one recent study, you could ring fence the United States and still have 100 years worth of natural gas. This again is a risk that the producers and shippers will take, not an independent pipeline company like TransCanada, which under AGIA will receive a guaranteed rate of return, regardless of the market price of gas.
AGIA crashes through this gate by adding unnecessary and costly contractual demands on top of the already significant risks the producers will take with a $32 billion to $41 billion project.
The third gate is the reserves and deliverability of gas to put in the pipe.
In the beginning, the proposal called for a pipe with capacity for 4.5 billion cubic feet (bcf) per day of natural gas. TransCanada's AGIA application proposed the same capacity at initial startup. But while everyone agrees that gas from the Point Thomson oil and gas field has to be available in order to make the gas line feasible, Point Thomason is still mired in litigation.
In addition, offshore oil and gas drilling is the big hope, but environmental lawsuits and agency decisions have left most major prospects on hold.
So do you build the initial pipe capacity for 4.5 bcf when you only have 3 bcf a day? And let's remember, somebody pays for that extra capacity -- and its not going to be TransCanada.
In addition, outgoing Department of Natural Resources Commissioner Tom Irwin (Alaska Attorney General Dan Sullivan is going to replace Irwin) is fond of saying that once a pipeline project appears to be a reality, the North Slope basin will explode with exploration. But as state Sen. Charlie Huggins once replied, "We want to bet on the deliverability of gas, not the exploration."
However, even Irwin's prediction of future gas development shows how out of touch AGIA remains. One of the major objections from the producers was that they didn't want to be on the hook for the cost of their competitors if they come looking for a hookup to the pipeline after the initial risk has been taken. The argument being that the producers took the initial risk and assumed the debt, so there should be no way for a Johnny-come-lately to get subsidized hookup fees after the line is complete. Given the costs and risks involved, no responsible party would agree to this provision.
Again, this is Irwin's AGIA crashing through another one of the key decision gates.
The fourth gate is the government take.
How much will it cost producers to extract the resource from the ground and get it to market? This is why many, including TransCanada, have stated the importance of fiscal certainty.
In 2007, the Legislature, supported by Gov. Parnell, proved not only that the state had the propensity to raise oil and gas taxes, but they also had no problem doing it retroactively. They have proven the case for fiscal certainty. In addition, TransCanada can't build this pipeline without 25-year commitments from the gas producers. So if a company that gets a guaranteed 14 percent return on its investment is demanding 25 years worth of certainty, why shouldn't the producers who will pay for those 25 years get the same fiscal certainty?
Regardless of the rhetoric, the producers have come to understand that Alaska is not the stable market that some want to claim it is. And until the four decision gates can be cleared judiciously by the oil and gas producers, Alaska will not see a natural gas pipeline.
Andrew Halcro is the publisher of AndrewHalcro.com and is a supporter of Sen. Lisa Murkowski.
The views expressed are the writers' own and are not endorsed by Alaska Dispatch.