In-state gas line

On Thursday, March 18th, the Senate Resources Committee held a hearing on SB287. Several dignitaries and past governors testified. The momentum seemed to be in favor of building an instate gas line and building it now. Each gave a compassionate speech on why an instate gas line should move ahead. But none gave an analysis of the economics of the line or the impediments that should be considered if the proposal were to move forward. Perhaps it is because the sum total of the combined pipeline experience of all the presenters on that day didn’t amount to the years of experience of the average mid-level manager of most major pipeline companies.

The legislature needs to hear from experts in the field of major pipeline construction, not politicians. It needs to hear statistical and economic analysis, not political speeches. Below are some of the questions that should be asked of individuals with the experience and knowledge to give the legislature the information it needs to make a reasoned decision.

Ask someone to provide you with a conservative timeline showing the various elements of the project (similar to the ones TransCanada and Denali have provided). The individual should be able to justify to the legislature’s satisfaction the timing of each phase of the proposed project. What the committee will find is that the project will take six to ten years to complete with a reasonable estimate of eight years, not the two to three years the committee heard on Thursday.

The information provided will help the legislature understand that the short-term need for Cook Inlet gas will not be solved by an instate gas line. That issue still needs to be addressed in another forum.

Also aggressive project schedules generally do not lead to projects being completed any sooner, but they do contribute to increased costs to the pipeline. Schedule driven projects are more expensive but not necessarily faster because of the mistakes they end up having to fix, e.g., higher incidence of late design changes. When the calendar, rather than the data, drives the project, the project usually fails.

Ask someone about the impact of cost on the tariff. What would the proposed tariff have to be to make a pipeline from the North Slope more economic than importing LNG? What is the expected cost of the project? What if the pipeline cost $8 billion instead of $4 billion? Would the state be willing to fund the cost overruns in order to maintain the economic advantage over LNG? Where would the state get the extra funds? There is not enough money in the CBR to cover the potential cost overruns. Is the permanent fund a consideration? Should a vote of the public be required before the legislature approves such an expensive and high risk project?

Ask someone about the route? If the route proceeds through Denali, are they sure they can acquire a right-of-way through the proposed route? By the way, what is the proposed route?

SB 287 grants the Alaska Railroad Corporation the authority to move forward with the project. It was even suggested in testimony that the railroad has a great engineering team. I appreciate the quality of the railroad’s engineering team, but I would not recommend them breaking out as gas pipeline engineers on one of the largest gas pipelines in Alaska’s history. The railroad will need to be run efficiently and without major incident to have a project of this magnitude come in on time and on budget. The railroad will need all of its engineers working full time on railroad projects. They won’t have time to contribute any level of effort toward the gas pipeline. The gas pipeline team may be located within the Alaska Railroad for convenience, but it needs to be totally independent from the railroad from a management standpoint.

The Alaska gas pipeline team is a critical consideration for the success of the project. It needs to be staffed with individuals experienced in building large gas pipelines. It needs to be independent, but the legislature needs to determine how much independence. Who makes the decisions at major milestones? What if a decision is going to cost the state an additional one hundred million dollars? An additional billion dollars? Five billion dollars? The pipeline team needs to understand its authority and when it needs to return to the legislature for additional authorizations.

If the pipeline is going to find an owner to share risk, that needs to be done first, because that owner needs to buy off on management team, management strategy, and management authority. If the pipeline bring on a significant owner after the team is established, the reorganization will increase risk of project delays and cost overruns.

A word on open seasons. It has been said that we don’t need an open season to know there is a need for the gas. The legislature needs to have someone testify about the purpose and need for an open season and the difficulties of proceeding ahead without one. Pipeline size? Customers? Shippers? Who takes the shipping risk if there are no long-term contracts? Is the state willing to pay for shipping gas in the line during the less economic times when no gas is being shipped?

Project phasing. The legislature needs to understand that there are several phases in the building of a major gas pipeline. Each phase has certain milestones that need to be met before the project proceeds to the next phase. If a particular requirement in any phase is ignored, the increased risk associated with ignoring that requirement is borne by the project. If the legislature passes SB 287 prior to receiving the project assessment currently being conducted by the governor’s office, they will have decided to move forward to the project planning phase without the information necessary to make that determination. Making the decision to move forward with the project now but waiting for the governor’s report before actually moving forward with the project doesn’t meet the requirement of reviewing the data provided before making a decision on how to proceed. This is truly form over substance, and a different decision may have been made if the legislature had waited. Once a decision is made, those making the decision often continue to support it even in light of substantial information to the contrary. It is better to make the right decision the first time rather than being required to defend a bad decision later on.

The decision to move forward with an in-state gas line seems to be a foregone conclusion, but if it wasn't the legislature should invite experts to testify regarding the economic alternatives to an in-state gas line. The legislatute may find that an alternative meets the present and future needs of the state for gas better than an in-state gas line at this time. It might also find that an in-state gas line is the best answer to the state's need for energy, but it would have arrived at that conclusion through an analytical process that justified their decision, not a political process based on the current popularity of the alternative.

The legislators are making one of the largest financial decisions of their legislative careers. They need to make sure it is based on good data, not political hyperbole.

Boring

Good decision-making process is boring. It is slow. It is methodical. It does not enflame or excite. It does not get politicians elected. It does not make headlines. But it is good leadership. It results in direction that ultimately benefits the people of Alaska.

Slow growth is boring. But it is easier to manage that boom or bust cycles.

Long-term fiscal plans are boring, but future generations will thank those in leadership who had the fortitude to endure until a rational long-term fiscal plan is adopted.

A methodical approach to a large diameter pipeline is boring. Evaluating those steps the state can perform to encourage a pipeline is boring. Systematically making decisions based on a thorough analysis of the issues is boring.

Giving speeches about expediting processes to bring gas to Alaskans is not boring. Giving speeches makes headlines. Encouraging speed and quick decisions on projects as significant as a large diameter gas pipeline or an in-state gas pipeline is not boring. But it is also not good decision-making.

Good decision-making for an in-state gas pipeline requires a methodical approach. It requires the state to thoroughly evaluate all the options. It requires the state to understand the economic impact of each scenario. It requires the state to understand the risks associated with each scenario? What assumptions are being made to make each scenario a success? What options allow for phased development? What options require a substantial amount of risk? Which options require financial commitment from the state to make them successful? Options that require state participation, by definition, are not economic in and of themselves and should be understood in that context.

Sometimes the state should make a decision to support a project financially, but it should not be because of a dynamic speech, or an enflamed public. It should only be made after a boring, methodical analysis of all alternatives.

Some say we have waited too long. We need to act now. My answer to them is they are probably right. We have waited too long, but that does not mean we throw out good process. It means we put our heads down and get to work. Just because the state has waited a long time to thoroughly evaluate an issue does not provide justification for circumventing process in an effort to make a quick decision. Be leary of those who recommend speed at the risk of sacrificing process.

The in-state gas issue is an emotional one for Alaskans. Many believe that Alaskans should have had access to “Alaska’s gas” years ago. It is easy to get Alaskans emotionally excited about bringing North Slope gas to Alaska, but perhaps they would not be so excited if they understood the relative economics of that option evaluated against other options that may be equally economically viable.

The public will make their own determination of what they believe is right based on what the media and politicians feed them. Most do not have an independent source of information. It is up to the legislature and the media to provide them with good information. Good information comes from good process. Good information comes from methodical analysis. Good information comes from boring process. It is time-consuming, but the result is much better than the alternative.

An in-state gas pipeline may be the right answer, but it will only be the right answer if the proper process is followed. The public should understand an in-state gas pipeline in the context of understanding the relative economics of a large diameter pipeline. What are the chances of success of a large diameter pipeline? What is the timing of such an endeavor? If Cook Inlet needs gas before the completion of a large diameter gas pipeline, what are the option that could accommodate that need? What are the costs of importing liquefied natural gas (LNG), short-term and long-term? Without state financial support, the economics of LNG imports both short and long term may be more economic than bringing North Slope gas to Cook Inlet. What are other alternatives that may be available to span the need for short-term gas in Cook Inlet?

If an in-state gas line is built, what are the potential upside opportunities that may eventually be created because of its existence? If an in-state gas line is built, what are the ramifications on a large diameter gas line? Some believe that a large diameter gas line would then be uneconomic. A methodical, boring evaluation would shed some light on this issue.

The open seasons will shed additional light on what is necessary to bring North Slope gas to market, but in the meantime the state needs to maintain a slow and boring process that would provide them with information necessary to understand their alternatives in the event it looks like the large diameter pipeline will be delayed or perhaps never get built.

We are now entering a major election cycle - lots of speeches, lots of emotion. But it’s time to be boring. It is time to be methodical. It is time to follow rational process to get to reasoned decision-making. If someone’s speech gets you excited and makes you want to support one option over another, take a second to think about how much information was provided to get you to that conclusion. Was it based on emotion or substance. Always lean toward boring substance. It leads to better decision-making every time. In an election year it is still time to be boring.

Which Pipeline Project is Best

Politicians make comments every day about which gas line is the right one to ensure Alaska’s future. They throw their support for one project over another based on what they believe will bring the greatest value to the state in the short term and the long term. Some may actually hold positions because they believe it is what the people want to hear, and holding that position may actually help to get them elected or reelected. Some have more experience than others in dealing with oil and gas issues and with gas pipeline issues specifically, but none of them have spent their careers focused on those issues.

The pipeline builders and the shippers, on the other hand, have spent their entire careers on oil and gas issues and have substantial experience in modeling the economics of various pipeline scenarios and in building gas pipelines. They don’t waste their time debating the politicians about which proposal is best. They are not engaged in a popularity vote, and they are not attempting to get reelected. They are focused on what they currently believe is the most economic way to bring North Slope gas to market. Sometimes different companies with differing asset bases come to different conclusions about the best way to bring North Slope gas to market.

The Alaska Pipeline Project, is proposed by TransCanada and ExxonMobil. Denali, the Alaska Gas Pipeline, is proposed by ConocoPhillips and BP. Both projects propose to transport gas from the North Slope of Alaska to Alberta, Canada with the potential of eventually transporting gas throughout North America. In addition the Alaska Pipeline Project proposes an alternative that would transport gas from the North Slope of Alaska to Valdez where it will be liquefied and potentially transported to markets in North America and the rest of the world.

Both projects will propose open seasons this summer. Both will provide tariff terms they hope will entice shippers to bid on their pipeline project. Both open seasons will help the pipeline companies and the state understand what the shippers currently believe is the most economic way to transport their gas to market. The conditional nature of these bids may also give the state perspective on what the shippers believe is required to make the project economic.

Eventually the three major producers will have to reconcile their differences for a project of this magnitude to move forward. Once the three majors reconcile their differences, TransCanada will be added to the equation if TransCanada can show they can bring added value to the table. What is noticeably absent from this discussion is AGIA. It can be considered an impediment to the above discussion, but it brings nothing to the table to assist the producers in reconciling their differences.

One thing AGIA may bring to the table is the ability to continue to move the project forward while the producers negotiate with each other. The state’s $500 million will be used by the Alaska Pipeline Project to continue to perform the tasks necessary to obtain a FERC certificate. In essence this gives TransCanada some additional clout in negotiating ownership and operatorship with the producers. By bringing TransCanada into the project they may increase the timing of completion of the project slightly or at least prevent additional delay.

So where does that put the state. For now the only thing the state can do is wait and watch. I still believe that a fair tax and fiscal stability are two of the issues that will eventually need to be addressed, but the open season will help all of us understand the perspective of the shippers.

I could suggest that we all need to keep our powder dry for a while. But this is an election year, and politicians and the public will need to argue the merits of the various proposals. It may help to get some elected over others, but it won’t change the outcome or success of the Alaska Natural Gas Pipeline.