Thursday, June 22, 2006

Question No. 3 Of Natural Gas Pipeline Roundtable - Timeline & Milestones?

Special Note: Revised and reposted on March 8th, 2007 to delete superseded links.

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 aired on the "5 O'Clock Report," the "NewsHour" and the "Late Edition." While KTUU has since dumped their archives of all 15 discussions, the account of the third discussion survives in this post.

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 #3: Why is there no timeline and no specific milestones in the contract?

Joe Marushack responds: “John, I’m glad you asked that question. I’m an engineer and I build projects for a living. This project we have designed much like every other project around the world, except it’s $20 billion. It’s infinitely bigger than the rest. There are no specific timelines in there because under prudent practice you must go through and develop all the work you need to do before you start that construction period."

Marushack continues: “Let me just, if I could, give you an example of what that really means. Under project start, we start, right after the contract’s signed, we bring in all the engineers, we spend about $120 million, we go ask for board approval to spend about $1 billion and then we’re moving ahead through the front-end engineering, evaluation, design, to project sanction right there. This is exactly like every other project we put together is."

Marushack concludes: “If you were to say that I needed to know when this date was, nobody could deliver that. Nobody knows where you’re going to get the steel. Nobody knows how the steel’s going to be milled. Nobody has all the permits, and none of us control all that. What we will be doing is diligently moving forward, spending hundreds of millions of dollars at risk to bring it to a point where we’re actually starting the construction period”.

David Gottstein responds: “Well, before we offer a sole source contract, we should get a commitment. If the producers truly wanted to build a pipeline, there would be a timeline and specific milestones and a clear commitment to build. It’s true you can’t pick a specific day, but you can pick a year after which penalties accrue. The producers aren’t even willing to pick a decade that they’ll complete the pipeline. That should be enough information for us. The reserves tax is just one way to add additional economic incentive to get the producers to move forward and if they do build it in a reasonable time frame, then we will all have won. Remember that the producers have competing gas reserves all over the world that they want to deliver to the American market before Alaskan gas is done. And it’s OK that they want to do that. It just doesn’t serve Alaska’s interests”.

Jim Clark responds: “We heard from all of the experts that the greatest threat to this project is construction cost overruns, and the greatest way to achieve a cost overrun is to have a specific date by which you hit a project. These are the timelines that show up in the qualified project plan that’s in the contract to which we have tied the requirement of advancing the project diligently as is prudent under the circumstances. That is a real test. We have real timelines from which to work, but we have not locked ourselves into something that would cause us construction cost overrun. With respect to a reserves tax, that’s no incentive, that’s a poison pill that would kill this contract if it’s allowed to proceed”.

Bill Walker responds: “I actually disagree with Jim Clark that the greatest threat to this project is, the greatest threat is that it not be built, not necessarily the cost overrun. That can be contracted away, and it is every day around the world on different projects. I guess I’m concerned when we see that there’s a proposal for a $120 million study, I think that’s what you said, Joe. Well, it appears that way. And my word, not yours. I was here in 2000 when we did the $125 million study. The Legislature’s (put) a lot of pressure on the administration. What’s going to happen when they put out a $125 million study. We don’t hear anything about that now. And now it’s as though we’re going to have a planning meeting, we’re going to start from scratch. What happened to that last study? Now you say that there’s no benchmarks or milestones (on) any project around the world. That’s actually not correct. I looked at a project that's actually on the
Web site of BP, the Caspian pipeline project (see map at left - click to enlarge). There are firm schedules of deadlines, when things have to happen and if they don’t, the penalty is they lose access to the resource. It’s a bright-line test so to say that there are no milestones anywhere else is absolutely incorrect. Look on the Web site of BP for the Caspian gas pipeline and you will see there are milestones in that contract and significant penalties. We have no penalties, zero penalty. If we’re able to terminate this, and I agree the chances are between nil and zip that we’ll ever be able to terminate this. But if we are, there are no penalty provisions. That’s very troubling when in other contracts, other countries, the penalty is you lose all rights, all access to the resource”.

Joe Marushack responds: “No penalty is absolutely false. If this contract gets retracted, if this contract gets pulled, then the state at that point can implement whatever law of the day is. If that’s a reserves tax, or whatever it might be. So there are significant penalties and significant benefits from having this contract move forward and that’s why the producers are interested in keeping this. But in terms of the $120 million, you said what came out of that? Four years ago when we did the $125 million work, what we developed at that point in time is we needed federal legislation. It took us two and a half years to develop that federal legislation. We also needed a gas contract. We’re now to the point after that $125 million really helped us assess where the risks and where you minimize those risks, that we can move forward with the project. We’ve got the federal work done, we’ve got a contract in front of the Legislature. Once they start that, we start moving forward with the contract”.

Analysis: The producers and their allies line up against the LNG (all-Alaska) crowd on this one. The LNG contingent wants more specific goals and milestones to better hold the producers accountable. They don't expect specific days and months, but they do expect specific years. They feel Alaska should be treated by the same ground rules as other locations, and are citing the current Caspian Pipeline Project as a model and precedent.

The producers, on the other hand, believe no two situations are exactly alike and want contractual language they believe will best reflect Alaska's unique circumstances as well as the common elements of all similar projects. They believe they need to further develop the work before starting construction, and also are concerned that imposing over-specific timelines could lead to cost overruns (particularly in terms of overtime pay). Marushack implicitly acknowledges that the reserves tax initiative on this November's ballot is a concern to them.

Click here to read discussion on Question No. 1.

Click here to read discussion on Question No. 2.

Click here to see the proposed gas line contract and other associated documentation.

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