Wednesday, July 19, 2006

Question No. 7 Of Natural Gas Pipeline Roundtable - Why Is The Highway Route Best?

Special Note: Revised and reposted on March 8th, 2007 to delete superseded links.

On June 7th, 2006, 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 all of the evening's newscasts. While KTUU has since dumped their archives of all 15 discussions, the account of the seventh discussion survives in this post.

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.

Background: There have been a number of ideas for a gasline. Two separate groups have pitched the so-called all-Alaska pipeline (also referred to as the LNG, or Liquified Natural Gas Route) from Prudhoe to Valdez. There has been interest from TransCanada, Sempra Energy and even Warren Buffett. But the state of Alaska settled on a deal with the three major producers on the North Slope for a pipeline that would run more than 2,000 miles from Prudhoe Bay to Alberta, Canada and from there feeding markets in the Midwest.

Question No. 7: There have been competing interests looking to develop the gas line? Why is the highway plan the best alternative?

Joe Marushack responds: “John, a lot of those competing interests we thought of and we developed ourselves. ConocoPhillips is probably in a unique situation by our ownership in the gas on the slope and our knowledge of LNG and we own the LNG facility that’s expandable down in Kenai. We’ve looked at all the different alternatives. We looked at expanding and bringing gas down to Kenai as a stand-alone project. We’ve looked at GTL. We’ve looked at the gas pipeline project. The gas pipeline project is the only one that has the economies of scale to be successful and create win/win opportunities for not only that project but for everything else”.

“Bill, I’m gonna guess you don’t think this is the best project,” said John Tracy.

Bill Walker responds: “That’s a good guess, John. I don’t agree and we’ve certainly spent a lot of time looking at all the projects, as well. We spent a lot of time in Calgary working with TransCanada. We see that the line through Canada, the highway line, is the path of greatest resistance. We see the project in state as the path of least resistance. Clearly we’ve heard again today and recently there’s not enough gas for the highway project”.

Jim Clark responds: “What we were instructed to do by the Stranded Gas Development Act, which first passed in 1998 and then was re-issued in 2003, was to negotiate a business deal. We were absolutely prepared to litigate to get the gas back if we could not negotiate a business deal with the producers. There was no question in the governor’s mind that we were willing to do that. But over a two-year period after the federal legislation passed in October of 2004, we entered, we were able, over that period, to negotiate the business deal, which is the fastest way to get Alaska’s gas to market”.

David Gottstein responds: “I understand that the North Slope producers feel as though the Canadian route is the most profitable for them, but that doesn’t mean it’s the most profitable for the state. It’s not. It’s the most expensive and the most risky. We need to fully understand the potential impacts across many various price assumptions, tax credits, indemnification and other state protections the oil companies get, and every other major decision before we can properly understand the potential long-term impacts, just for starters. Only by having the proper evaluation tools and opening the process up to free market forces instead of a sole source non-competitive contract, can we see what the potential risk and rewards are”.

Jim Clark responds: “David, how with a straight face can you say that taking the gas down to Valdez, liquefying it, putting it in Jones Act vessels, taking it to Kitimat and putting it through a pipeline that’s not large enough to accept the gas into Canada is more economic than a direct line from the North Slope into Canada? Your proposition makes no sense on its face”.

David Gottstein responds: “I believe you when you say it’s the best project for the producers, but what I do know in answering with a straight face is that the state of Alaska gets an 'F-' in terms of developing mathematical, financial and economic models that compares all the projects. That’s what we need done. I’m the only one at this table who understands how to do that”.

Joe Marushack responds: “Let me tell you what’s ridiculous on this. First of all you start out saying you’ve already proven there’s not enough gas. Well this project doesn’t get built based on gas reserves, it gets built on shipping commitments. And if the three producers and the state are willing to say we will enter a long-term shipping commitment, then that project gets built. It’s not the loan guarantees that make this project happen, it’s the shipping commitment. If you’re going to do LNG, why would we take it to Valdez? You’d take it to where you could expand the existing facility you have. So I'm not trying to argue against an LNG project long-term. But the best project is the one that has the largest economies of scales, has the lowest tariff, creates the most value for both the producers and the state”.

Bill Walker responds: “You know one of the things about LNG projects is they’re a terminal being built around the world as you well know. LNG liquefaction is basically an off the shelf item. The risk is much smaller with that. You know, the biggest risk is in the pipeline, so we have an 800-mile pipeline versus a 3000-mile pipeline. Who has the bigger risk here?”

“Bill, who is going to sign completion guarantees for your project? Which company? Name the company that's going to sign completion guarantees for your project,” asked Jim Clark.

“Each of our contractors, we have talked with who are willing to participate…” said Bill Walker.

“Name one party that is going to sign,” asked Jim Clark.

“Bechtel will stand up for this project,” said Bill Walker.

“Bechtel’s gonna sign completion guarantees for this project?” asked Jim Clark

“They are willing to do this on a turnkey basis,” said Bill Walker.

“We’re gonna check with them,” said Jim Clark.

“I bet you will. And as you do that, you will have driven away Warren Buffett, you’ve driven away TransCanada and now you’ll try to drive away Bechtel, as well,” said Bill Walker.

“We haven’t driven anyone away,” said Jim Clark.

“You have driven them all away and they say they will not come back until we get a governor,” said Bill Walker.

Analysis: A battle of perceptions. The producers and their allies believe only the highway route provides the economy of scale commensurate with this project. However, the Backbone group doesn't believe there is verifiably sufficient gas to justify a project as massive as the highway route at this time. The producers respond to this by claiming it's not a question of gas reserves, but of shipping commitments. They also think it's ludicrous to load LNG onto a tanker at Valdez, then try to offload it into an existing pipeline in Kitinat, Canada which is not large enough to accept the gas.

However, there will be a considerable delay in constructing the highway route until all permitting, environmental impact, and right-of-way issues have been resolved. No such issues exist for the proposed all-Alaska LNG route, since it will parallel the oil pipeline route. The smart thing to do would be to begin building the LNG route now, then by the time it's finished, the other issues would be resolved, and construction could begin on the highway route.

Ultimately, LNG-route gas would not only satisfy Alaska's needs, but also the growing needs of a large Asian market. Highway-route gas could satisfy the needs of Canada and the lower 48. There would be a market for both routes.

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