Conference assembles gas line players for debate
Gottstein, an Anchorage financial advisor, aired his opinions at a natural gas policy panel sponsored by the University of Alaska Anchorage Nov. 29.
He said people at Lehman Brothers, a New York investment house, have told him they are anxious to help the state handle financing to build and own all of the pipeline and would be willing to take on the risks as part of the deal.
The state would be better off working with them rather than the North Slope gas producers, Gottstein said.
Dan Dickinson, the state’s tax director and another member of the panel, took sharp exception to Gottstein’s views. Dickinson is also one of the state’s negotiators with North Slope producers on a deal to facilitate a pipeline.
He challenged Gottstein’s idea that investors would be willing to structure a deal where they finance a $20 billion gas pipeline and absorb most of the risk, at least in any arrangement that would also benefit Alaska.
"If they absorb most of the risk they’re going to absorb most of the rewards," Dickinson told Gottstein. "You people (Backbone) seem to be afraid to letting a dollar slip into someone’s pocket."
Disagreements over the state’s approach to the gas pipeline surfaced early in the discussions, and although only a broad outline is known of what is being discussed between Murkowski and the North Slope producers, the lively exchanges Nov. 29 provided a glimpse of what’s to come in public hearings on a gas pipeline deal - if one is agreed on.
The seminar featured a panel of presenters, who gave information on the different proposals for a North Slope project. These included Ken Konrad of BP and Joe Marushack of ConocoPhillips, the managers for their companies on the gas project; Tony Palmer, a senior vice president for TransCanada Corp.; and Fairbanks North Star Borough Mayor Jim Whitaker, speaking for the Alaska Gasline Port Authority, a municipal group trying to do a liquefied natural gas (LNG) deal.
Another panel was organized to ask questions. This group included Gottstein; Anchorage Daily News editorial page editor Larry Persily; Alaska Federation of Labor leader Jim Sampson; Alaska Oil and Gas Association director Judy Brady; and two UAA senior students, Rose Helens-Hart and Lindsay Eberhardt, who are members of the university’s debate team.
The panel was supposed to ask questions of the presenters to probe for details, but some on the panel, like Gottstein, used the forum to air their own views.
Konrad and Marushack gave an overview of the producers’ views on the gas project. Palmer explained TransCanada’s views that it had exclusive rights to build portions of the pipeline in Canada, but also said the company is ready to work cooperatively with the producers and the state on the project.
Marushack said the sheer size of the gas project would create thousands of jobs in construction and logistics, but the "real diamond" in the deal is creation of a new natural gas producing industry for the state. That will enhance the existing oil-producing industry and extend it.
It will also make spin-off industries possible, such as gas-based industries and perhaps even an LNG project, Marushack said.
BP’s Konrad acknowledged that a state equity investment in the project is an idea that gives many Alaskans pause, but he said that part-ownership of the pipe would give the state a source of stable revenue that could offset swings in revenues from royalty gas, which could be affected by volatility in market prices.
Partial state ownership of the pipeline, however, is just one element of state participation in the project, Konrad said. Under the deal being discussed, the state would take its royalty gas and its tax share of production in kind, in the form of gas, and be responsible for marketing the gas. The state does this now with its royalty oil, he pointed out.
The state would also contract for capacity in the pipeline to ship its gas just like the other gas producers would do, Konrad said.
The model for the state’s taking of royalty in-kind and managing its sales is a current U.S. Minerals Management program, where producers take federal royalty gas in-kind and market it. The procedure simplifies administration and reduces disputes compared with the previous practice of producers paying royalties in cash.
The simplification of royalty and tax administration, and the elimination of disputes by having the state as a partner is a big attraction for the producers, Konrad said.
Fairbanks Borough Mayor Whitaker said one of his concerns with the deal being discussed is that the state would be a minority partner in a consortium of pipeline owners dominated by the major North Slope producers.
Labor leader Sampson agreed with Whitaker’s concerns. He is a former trustee of the Alaska Permanent Fund, he said, and the fund used to have a policy of taking only minority positions in properties in the fund’s real estate portfolio.
The trustees soon came to realize that minority ownership meant the fund had no real control over the asset, and the policy was changed to allow majority ownership of properties if the situation warranted, Sampson said.
Whitaker shared his time at the podium with Bill Walker, project manager for the port authority, who explained the group’s LNG proposal.
The project would bring $1.5 billion a year in revenues to the state and municipal governments and $2 billion a year to the producers, Walker said. The estimate assumes long-term Lower 48 gas prices averaging $5 per million British thermal units (Btu) of energy.
The LNG project could bring more public revenues to Alaska than the producers’ proposal for an Alaska Highway gas pipeline route, Walker said.
Dickinson said the state administration’s objective is to "cut a business deal to get the North Slope gas in production with anyone who can come forward with a credible plan."
"We have three proposals out there, but the state has focused its efforts on the producers because they have the resources to put the infrastructure in place. Only they have the balance sheets to make this project actually happen," Dickinson said.
Palmer also said TransCanada believes a fiscal contract setting out agreements on tax and royalty terms between the state and the producers is needed no matter who winds up actually building the pipeline.
Some of the most perceptive questions in the seminar came from the two UAA students on the questioners’ panel.
"What is the likely profitability if the state takes its royalty and taxes in kind?" and what risks are there, asked Rose Helens-Hart.
Dickinson acknowledged that the state’s marketing of royalty gas won’t be "stress-free," but he said marketing managers will be hired to handle the actual sales. "We believe we can be successful," in making more money than if the gas royalty was simply taken in cash paid by the producers, he said.
Marushack said the state’s share of gas will make it one of the largest single marketers of gas in the nation. "You will be a major player in Lower 48 gas markets," he said.
Lindsay Eberhardt, the other UAA student, asked which of the competing proposals could get a project built on the quickest schedule.
Whitaker said the port authority hopes to have its project operating by 2012. Marushack cautioned the audience, however, against promises of completion by a certain date because there are still too many uncertainties.
Palmer said TransCanada believes the project could be built and operating seven years after commercial agreements are made to ship gas, which gives the pipeline company the ability to finance construction.
Marushack and Konrad said the producers agree with TransCanada that the pipeline could be built seven years after an "open season," when contracts are signed to ship gas with the pipeline owners.
Whitaker said "we agree with the producers that the best project for Alaska is the one that actually gets built, but we would add that it’s also the project that can get built first."
Tim Bradner can be reached at [email protected].