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.