Natural Gas Pipeline Options

The gubernatorial candidates have been debating alternatives for a natural gas pipeline and which alternative makes more sense. Berkowitz is a staunch supporter of the state building a natural gas pipeline, I assume to Valdez, while Parnell is a supporter of staying the course and supporting AGIA. This article will provide some clarification regarding the passage of AGIA and make some recommendations on the proper path forward, or at least which path not to follow.

First, AGIA was not about the administration getting rolled as Berkowitz says in his ad. Governor Palin, Lt. Governor Parnell at the time, and 59 out of 60 legislators did not get rolled by the pipeline companies, especially Exxon. At the time Exxon was arguing against AGIA. AGIA was about rolling Exxon and the other producers. It was about bribery to get a pipeline company to, as Commissioner Galvin put it, do things they would not otherwise do. The state, through AGIA, made a requirement that the pipeline company, regardless of the results of open season, push the project forward through filing a FERC certificate. As an incentive the state would reimburse the project for up to $500 million. The percent of reimbursement after open season would be 90%. The reason for the 90% was because no rational pipeline company would move forward past open season unless the open season was successful. I assume the AGIA proponents expected the open season to fail; so they made sure the pipeline company had the incentive to move the project forward anyway.

So even though Ethan Berkowitz attempted to rewrite history in his ad and failed, we should still ask if he has a valid point regarding the state building a pipeline to Valdez or other port?

Actually, if his proposal was the right answer, and the all-Alaska option is really a viable economic option, the shippers will have bid at the Trans-Canada open season. Trans-Canada provided all shippers with the option to bid their gas to Valdez. The Trans-Canada option would also have the added benefit of a private company or companies funding and taking the risk on the project.

The only way it makes sense for the state to build the pipeline is if Trans-Canada’s open season failed. Denali’s open season would also have to have failed as well. That means that the shippers of the gas believe the project to Valdez and the project through Canada are both uneconomic. Based on this assumption let's look at the state owned and funded all-Alaska project.

Does Ethan Berkowitz propose the state retrace the same ground the pipeline companies have gone over so far? Does he propose the state appropriate the funds to bring the project to open season? Since the economics of the pipeline project haven’t changed, the pipeline costs the same to build, the owners of the gas are the same, the risks of shipping are the same, wouldn’t Ethan Berkowitz expect the same result to occur at the open season? Only two years from now? Perhaps he proposes the state not hold an open season. Who needs shippers to commit to the pipeline anyway? Maybe the state will just build the $20 to $30 billion pipeline to Valdez. Surely the gas owners will ship their gas on an existing pipeline? And if they don’t, we will sue them and take away their gas. Sounds logical enough ---- except that it is short-sighted and extremely shallow thinking.

If the state does not hold an open season and builds the pipeline without contracts, the shippers will have no contractual obligation to ship the gas. They will only have the reasonably prudent operator standard/obligation under their leases.

A reasonably prudent operator will ship gas when it can make money selling the gas and a reasonably prudent operator will leave the gas in the ground when it is not profitable to ship it.

Lets assume it cost $4 to ship the gas to the point of delivery. It may cost much more if the state is the builder of the pipeline, but lets assume the state was an efficient designer and builder of the pipeline, tankers, and all facilities to get the gas to market. Any time the gas owner can ship the gas for more than $4, they may agree to ship their gas on the state’s pipeline. Any time the price of gas is less than $4, the shippers will leave their gas in the ground and no one will ship gas on Alaska’s pipeline. The state will have taken 100% of the risk of building the pipe and 100% of the shipping risk. Eventually this will backfire on the state because sometime in the future the price of gas will go below the cost of shipping the gas and the state will eat the cost of staffing and owning an empty pipe, not to mention the other facilities required to get the gas to market.

The problem with Ethan Berkowitz’s pipeline proposal is that it sounds good and may get the votes of those who haven’t done their research or seriously considered the ramifications of his idea, but the proposal is not well thought out. He has not considered the viability of his proposal or the risk he is forcing on the state. If you don’t agree with me then help me answer just a few of the questions I have proffered above. How does Ethan Berkowitz propose to fill the pipe? Does he plan to hold an open season? Does he plan to commit the state’s gas to the state’s pipeline? How about the other facilities required to get the gas to market? Who will take the risk of building those facilities without shipping contracts?  How does he plan to fund such an expensive pipe? Please don’t tell me through PFD checks. I have already written another article about the viability of that proposal.

To answer the above questions you can’t guess. You must find the answers in the documentation Ethan Berkowitz has created or in a speech he has given. If you cannot find the answers, then Ethan Berkowitz’s proposal is shallow and not well thought out. If you find the answer, please provide them to me. I will be glad to analyze them and let you know if they are viable. Campaign soundbytes can only get you so far. Eventually someone is going to ask for meat on the bones of your proposal. I'll be waiting.