Wednesday, June 21, 2006
Question No. 1 - 15 Questions About The Natural Gas Pipeline
On June 7th, KTUU-TV's John Tracy met with Jim Clark, Joe Marushack, Bill Walker and David Gottstein to discuss the natural gas pipeline. The 15 questions discussed will air on the "5 O'Clock Report," the "NewsHour" and the "Late Edition." Click here to see all 15 questions (without the answers).
Alaska’s next pipeline could funnel billions of dollars into the state’s treasury. It’s the proposed natural gas pipeline, and the contract negotiated by the Murkowski administration is now up for public review. On June 7th, 2006, KTUU's John Tracy met with four primary project "players" to discuss the natural gas pipeline. Tracy developed and asked a series of 15 questions about this project. The discussions will be aired on KTUU over the next few days on the Five O'Clock Report, the News Hour, and the Late Edition. Click here for the story about Question No. 1.
The Panel: John Tracy, News Director of KTUU, serves as the moderator.
1). Jim Clark: Governor Murkowski's chief of staff and the state's chief negotiator. He represents the executive branch.
2). Joe Maruschak: ConocoPhillips' vice president of gas commercialization and one of the primary negotiators representing the producers.
3). David Gottstein: A financial analyst and a co-chairman of Backbone 2, a resource watchdog group.
4). Bill Walker: General counsel for the Alaska Gasline Port Authority, the organization promoting an LNG project (the "all-Alaska gas line") from Prudhoe Bay to Valdez. Since he's relying upon work done by Econ One for the legislature, he can be considered a "proxy" representative of the legislature.
Answers to questions presented without summarization.
Question #1: The contract is being negotiated under terms established under the Stranded Gas Development Act, which allows the state to offer incentives to encourage development of a pipeline. Considering the current value of natural gas, is the gas stranded, and are the incentives necessary?
Jim Clark (pictured at left) responds: “Good question. There are 6,000 trillion cubic feet of natural gas around the world, so you need to consider that as prices go up, all projects go up. What we had to do to make this project competitive was to change the economics. Right now under royalty and value the producers pay 100 percent of the cost to get 80 percent of the gas. We changed that by taking the gas in kind, taking state ownership of 20 percent and providing fiscal certainty. And those three things changed the economics so that we could get a contract. So the price alone does not un-strand the gas".
David Gottstein (pictured at left) responds: “Of course the gas isn’t economically stranded. Even the governor admits that now. Virtually all the legislative consultants have testified to such. It’s an abuse of power and very inappropriate to continue to use the stranded gas act as a way to grant huge economic wealth concessions to the producers. The gas is just being held hostage by the oil companies as a way to extract hundreds of billions of dollars of concessions from the state. It would be so easy in the free market to prove that the gas isn’t stranded by taking Point Thomson back, putting it out to free market bid and let the highest bidder show up. If nobody shows up, then it’s stranded".
Joe Marushack (pictured at left) responds: “Very simple answer, John -- of course the gas is stranded. This is the biggest project of its type on earth. There is no transportation system to come off of the North Slope. Any time you’re looking at a situation where you’ve got 35 tcf of gas on the slope but yet it’s over a $20 billion project -- and that’s when we did this back in 2001 -- you can’t just look at the price of gas and say it’s not stranded. The only time the gas is not going to be stranded is once we have that transportation system in place, and gas is flowing."
Bill Walker (pictured at left) responds: “Clearly the gas is not stranded. I rely upon work done for the Legislature by Econ One, last year they did an analysis and presented it to the Legislature saying that a gas pipeline, a status quo gas pipeline, one without any stranded gas act, ,any concessions, would return 23 to 83 percent return to the producers depending upon the ownership configuration, so any time you can get a 23 to 83 percent return on a project that tells me that clearly that gas is not stranded, it could not be clearer".
John Tracy then asked a follow-up question, first addressed to Jim Clark: “Jim, can the state compel the industry to sell the gas if prices are high enough"?
Jim Clark responds: “There’s a question about whether we can do that under the existing state leases, and there’s a belief that we could compel. But why when we have a sign-able deal ready to go right now, would we tear that up and go to litigation and take years through litigation with an uncertain result and do that instead of going forward with the agreement we have now”.
David Gottstein responds: “It’s an absolutely ridiculous comment to say that the price is not sufficient enough to make it economic. All we need is access to the gas, if we look at the industrialization of China and India going out decades ahead, that means there will be undue pressures on the oil and gas industry around the world to increase capacity sufficient to meet demand. We have high energy prices for the rest of our lives. They may not stay as high as they are but they don’t need to stay nearly as high as they are to still be economic. The whole issue for Alaskans is gaining access to our gas. Since the price is high enough to be economic, a free market open bidding system will put that infrastructure in place,”
Jim Clark replies to Gottstein: “How do you answer the question that as it goes around the world, the gas in Indonesia, which is right at tide water, the gas in Qatar which is right at tide water also becomes more economic because the same world wide price applies everywhere. That is the key thing. Everybody’s price goes up as the, or value of the project goes up as the price goes up. We need to do something in Alaska that makes us different in terms of the economic than our competitors around the world and that’s what we’ve done in this contract”.
Analysis: The complexity is epitomized by the lack of consensus about "stranded". Clark and Marushack, who both prefer the Canadian route, consider the gas currently stranded. Gottstein and Walker who both prefer the all-Alaska route, consider the gas not stranded. Of course, the legislature, which was only 1% apart on the proposed petroleum profits tax and came up with a compromise 22.8% figure in conference, couldn't even pass that (although they had no problem passing Con Bunde's ridiculous seat belt law).
Click here to see the proposed gas line contract and other associated documentation.
Related Post: "Lawmakers Defer Oil Tax, Tackle Gas Line Contract", May 11th, 2006