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The BP oil spill in the Gulf of Mexico has affected and will continue to affect the environment and the lives of many in the southern coastal states for years to come. For Alaskans the spill brought back memories of Exxon Valdez oil spill in 1989 and the impact it had on their lives.
Today the BP oil spill has resulted in a more direct impact on Alaska and the future of oil and gas exploration in the State. Today President Obama announced the suspension of Shell’s offshore arctic exploration operation plans. There is substantial uncertainty regarding when and if the Administration will allow exploration in the Arctic OCS to continue.
The purpose of this article is to outline the issues that the Administration needs to address before they decide to allow or disallow exploration in the offshore Arctic.
In the weeks following the Exxon Valdez oil spill, as the exploration permitting director for a major oil company, I submitted my first offshore oil spill contingency plan. The issues we were required to address then are the same issues that should be addressed now as the Obama administration evaluates whether or not to make the suspension of offshore exploration drilling long term or permanent.
There are four areas that should be examined during the review: 1) formation pressures and risk, 2) safety and prevention, 3) spill plan preparedness, and 4) effectiveness of equipment and personnel.
First, formation pressures and the potential risk of blowout
The risk of encountering high pressure pockets of gas or oil should be understood and planned for in the drilling and well casing program. Several wells in the Arctic have lost well control due to encountering high pressure gas pockets that were not managed properly in the drilling program. Luckily none involved loss of well control in an oil producing zone. Even though there have been several loss of well control events, statistically the industry has done a good job understanding and preparing for this type of event.
Second, safety and prevention
In the event of the loss of well control, the operator should be able to utilize the safety mechanisms in place on the rig to stop the flow of oil or gas to the surface. The most well know mechanism, especially after the BP blowout, is the blowout preventer. Functioning properly, it should be able to seal off the well and allow the operator to develop a plan to regain control of the well without release of hydrocarbons into the environment. These safety mechanisms are tested regularly and almost always work. But there are now at least two well known events where they didn’t work: the IXTOC in Mexican waters, and now the BP blowout in the Gulf of Mexico OCS.
Third, spill plan preparedness
Shell has committed a substantial amount of equipment to meet the Alaska Department of Environmental Conservation’s Response Planning Standard and to meet the Minerals Management Service requirements. On paper Shell could handle a well blowout that discharged up to 5,500 barrels of oil into the environment for up to 34 days which is the number of days Shell projects it will take to drill a relief well and stop the blowout. On paper it looks like Shell has met the spill plan preparedness standard.
Fourth, effectiveness of equipment and personnel
The Oil Discharge Prevention and Contingency Plan (ODPCP) contains lists of equipment and nameplate capacities but very little analysis in the way of the effectiveness of that equipment in the environment the equipment will probably encounter.
Generally industry spill plans and presentations regarding preparedness make it look like they are prepared and could clean up oil in any environment they encountered in their operations. Pictures of spill response vessels and spill equipment in the Arctic environment give the audience the feeling that the equipment pictured will be onsite and ready to perform the function to the effectiveness that is listed on its nameplate.
The problem is that nameplate capabilities don’t work in the Arctic. Skimmers that performed poorly in the Gulf of Mexico will perform even worse in the Arctic, even if they are “winterized” for Arctic conditions. Sea ice conditions in the Arctic may prevent spill response vessels and equipment from getting close enough to the oil to deploy the equipment. Oil may be entrained in the ice and under the ice where spill response equipment will not be effective. Oil may not collect in sufficient quantities or may be weathered to such an extent that in situ burning is not an available option.
There is documentation of the amount of equipment available to respond to a spill and the potential response times, but there is little analysis of the effectiveness of that equipment in various arctic conditions. The State of Alaska and the MMS need to understand how much oil can be expected to be picked up under different scenarios and what the impact is on the environment from the remaining oil that is not recaptured.
How effective is the use of dispersants in broken ice conditions? What is the impact on wildlife in the water column and on the ice? Some of the dispersant will get on the ice. What if it is injested by wildlife? What would seem unusual for people is not always unusual or uncommon for animals. There is at least one incident on the north slope where a polar bear injested industrial liquids resulting in the death of the polar bear.
Exploration drilling activities are planned to begin on or about July 4th and drilling in hydrocarbon bearing zones would end on or before October 31st, depending on ice and weather. What if a blowout occurred late in the drilling season, or what if sea ice prevented the drillship from getting back on location? There may not be sufficient time to drill a relief well during that drilling season and the drillship may have to return the next summer drilling season to complete the relief well. If the existing drillship burns up in the ensuing fire, the relief rig will not be available to drill a relief well until the next drilling season. What is the impact on the environment from an uncontrolled well blowout that continues to release oil in the environment for 6 months or longer?
Shell’s exploration plan states that “A very large spill from a well-control incident is not a reasonably foreseeable event in connection with the OCS exploration activities set forth in Shell’s EP, and therefore, this EA does not analyze the impacts of such a worst-case scenario.” Lets hope they are right.
You don’t plan for meteors hitting the earth, but you do plan for earthquakes. The likelihood of a catastrophic oil spill in the arctic is somewhere in between the two.
If the state and federal government approve Shell moving forward in the Alaska OCS, they need to understand that a major oil spill from a blowout will not be easier to stop or clean up in the arctic than it was in the Gulf of Mexico. It will be more difficult. The best we can hope for is good management practices and the statistical likelihood that the incident will not occur.
Thursday, May 27, 2010
Monday, May 3, 2010
The Red Pen Challenge Update
This morning I called and left messages regarding the Red Pen Challenge at the following gubernatorial campaigns:
Ethan Berkowitz
Hollis French
Sam Little
Sean Parnell
Bob Poe
Ralph Samuels
Bill Walker
Donald Wright
If you know of a candidate for governor that is not on this list that would like to be included in the challenge, please ask them to contact me, or if you are one of the above candidates and somehow did not receive my message, please contact me as well. For the sake of convenience I have reprinted the Red Pen Challenge below.
I call this proposal The Red Pen Challenge.
I propose that every candidate for governor should review the capital budget and identify those items they would veto and submit them to the people of Alaska at the same time the Governor submits his signed capital budget bill, with appropriate vetoes if any, to the people of Alaska.
Rules of the Challenge
1) The governor agrees, in advance, to the date and time he will make public his decision on the capital budget.
2) Each candidate will submit their proposed capital budget to the public on the same date prior to the governor’s submittal to the public.
3) Governors Rules apply. – Each candidate will be required to provide the public with a copy of the budget with the specific “vetoed” items lined out and initialed, just like the Governor is required to do.
4) All newspapers will be encouraged to post on their web pages all responses so the Alaska public can compare the “decisions” of each of the participating candidates and add this information to their overall evaluation of who they want to support for governor.
I believe the above proposal will provide the appropriate scrutiny that was not applied during the legislative process to each and every appropriation in the capital budget.
Since the capital budget has not been transmitted to the governor there is still plenty of time for each of the candidates to comply with the above challenge. They will have the same amount of time to review and analyze the capital budget as the governor has.
I am also certain that if a candidate needs more information about the value of a specific appropriation, the recipient of that appropriation will be glad to provide the candidate with as much information as the candidate needs to make their decision.
I will be contacting each candidate and the governor over the next week to see who will be willing to rise to the challenge. The governor is the only candidate that will automatically participate because he is required by law to make a decision on the capital budget. The governor still needs to agree to a specific date and time when he will communicate his decision on the capital budget to the public.
I am looking forward to sharing their responses to the challenge in a future article.
Ethan Berkowitz
Hollis French
Sam Little
Sean Parnell
Bob Poe
Ralph Samuels
Bill Walker
Donald Wright
If you know of a candidate for governor that is not on this list that would like to be included in the challenge, please ask them to contact me, or if you are one of the above candidates and somehow did not receive my message, please contact me as well. For the sake of convenience I have reprinted the Red Pen Challenge below.
I call this proposal The Red Pen Challenge.
I propose that every candidate for governor should review the capital budget and identify those items they would veto and submit them to the people of Alaska at the same time the Governor submits his signed capital budget bill, with appropriate vetoes if any, to the people of Alaska.
Rules of the Challenge
1) The governor agrees, in advance, to the date and time he will make public his decision on the capital budget.
2) Each candidate will submit their proposed capital budget to the public on the same date prior to the governor’s submittal to the public.
3) Governors Rules apply. – Each candidate will be required to provide the public with a copy of the budget with the specific “vetoed” items lined out and initialed, just like the Governor is required to do.
4) All newspapers will be encouraged to post on their web pages all responses so the Alaska public can compare the “decisions” of each of the participating candidates and add this information to their overall evaluation of who they want to support for governor.
I believe the above proposal will provide the appropriate scrutiny that was not applied during the legislative process to each and every appropriation in the capital budget.
Since the capital budget has not been transmitted to the governor there is still plenty of time for each of the candidates to comply with the above challenge. They will have the same amount of time to review and analyze the capital budget as the governor has.
I am also certain that if a candidate needs more information about the value of a specific appropriation, the recipient of that appropriation will be glad to provide the candidate with as much information as the candidate needs to make their decision.
I will be contacting each candidate and the governor over the next week to see who will be willing to rise to the challenge. The governor is the only candidate that will automatically participate because he is required by law to make a decision on the capital budget. The governor still needs to agree to a specific date and time when he will communicate his decision on the capital budget to the public.
I am looking forward to sharing their responses to the challenge in a future article.
Wednesday, April 28, 2010
A System Failure and An Idea
On the last day of the legislative session the Alaska Legislature passed House CS for CS for Senate Bill No. 230(FIN) am H also known as the capital budget. Its largess rivaled any other capital budget in the history of the State of Alaska. Some said they were being good stewards. Others likened the passage of the bill to irresponsible spending. What is clear is that in Alaska where the Permanent Fund Dividend is sacred and a proposal to tax the people to pay for public services might be cause for a revolt, members of the legislature are not rewarded for exercising fiscal restraint, especially in an election year. Did the system fail or did it produce the results it was designed to produce?
In years where there are not enough funds to balance the budget, legislators are rewarded (by reelection) for cutting the budget and minimizing the pain to their constituents. This usually means cutting special programs with limited constituents and cutting or miminizing the increase in administrative budgets.
In years of plenty politicians get elected for obtaining funds for their communities. If there are no short-term negative consequences, there is generally no opposition to spending, even excessive spending, so long as the legislator’s constituents receive a portion of the benefit of that excess.
In the legislature’s defense, they did pay back the remaining funds that had previously been borrowed from the Constitutional Budget Reserve, and they did forward fund education. So what is the problem with spending a little extra when you have it?
Perhaps that question should be asked of the Alaskans who may be most impacted by excessive spending. Perhaps we should ask the Alaskans who are not at the table and who cannot defend themselves against the poor decisions of this generation. Perhaps we should ask the Alaskans who will bear the costs of such a decision. The costs will be borne by those who are not at the table: the future generations of Alaskans. The financial impacts of excessive spending in the short term and the failure to spend in the context of a long term plan are not borne by the present generation. They are borne by future generations when the poor decisions of this generation finally come to roost. The decision makers of future generations will be blamed for the failure, for the failure to plan, for the failure not to forsee the collapse. But it is the current generation of legislators that should be held accountable.
Luckily there is a balance of power in the Alaska political process. The governor has a right to veto those appropriations he feels are inappropriate or excessive. The governor, unlike the legislature, is not accountable to a small group of constituents from a specific district. The governor can provide the leadership necessary to protect both the present and future generations. The governor can examine each appropriation with an eye to the benefit it will provide to the people of Alaska. The governor can examine each appropriation with an eye to the increased maintenance burden placed on this and future generations. The governor can examine each appropriation with an eye to understanding that perhaps saving in years of plenty is a logical choice to meet the needs of those years when there will be budget shortfalls. Perhaps the governor can provide the balance and leadership that was not available during the legislative process.
But this is an election year. Will election year politics affect the governor’s decisions? Will the governor calculate the number of votes lost by every line item veto? Will the other gubernatorial candidates cherry-pick the line item vetoes they think were wrong in an effort to gain advantage over the governor in the election? Will good decision making by the governor be sidelined in an effort to get reelected?
In light of the pressures of election year politics on good decision making, I have a proposal to make that should balance the field between the candidates and should provide a snapshot of how each gubernatorial candidate would lead the State over the next four years.
I call this proposal The Red Pen Challenge.
I propose that every candidate for governor should review the capital budget and identify those items they would veto and submit them to the people of Alaska at the same time the Governor submits his signed capital budget bill, with appropriate vetoes if any, to the people of Alaska.
Rules of the Challenge
1) The governor agrees, in advance, to the date and time he will make public his decision on the capital budget.
2) Each candidate will submit their proposed capital budget to the public on the same date prior to the governor’s submittal to the public.
3) Governors Rules apply. – Each candidate will be required to provide the public with a copy of the budget with the specific “vetoed” items lined out and initialed, just like the Governor is required to do.
4) All newspapers will be encouraged to post on their web pages all responses so the Alaska public can compare the “decisions” of each of the participating candidates and add this information to their overall evaluation of who they want to support for governor.
I believe the above proposal will provide the appropriate scrutiny that was not applied during the legislative process to each and every appropriation in the capital budget.
Since the capital budget has not been transmitted to the governor there is still plenty of time for each of the candidates to comply with the above challenge. They will have the same amount of time to review and analyze the capital budget as the governor has.
I am also certain that if a candidate needs more information about the value of a specific appropriation, the recipient of that appropriation will be glad to provide the candidate with as much information as the candidate needs to make their decision.
I will be contacting each candidate and the governor over the next week to see who will be willing to rise to the challenge. The governor is the only candidate that will automatically participate because he is required by law to make a decision on the capital budget. The governor still needs to agree to a specific date and time when he will communicate his decision on the capital budget to the public.
I am looking forward to sharing their responses to the challenge in a future article.
In years where there are not enough funds to balance the budget, legislators are rewarded (by reelection) for cutting the budget and minimizing the pain to their constituents. This usually means cutting special programs with limited constituents and cutting or miminizing the increase in administrative budgets.
In years of plenty politicians get elected for obtaining funds for their communities. If there are no short-term negative consequences, there is generally no opposition to spending, even excessive spending, so long as the legislator’s constituents receive a portion of the benefit of that excess.
In the legislature’s defense, they did pay back the remaining funds that had previously been borrowed from the Constitutional Budget Reserve, and they did forward fund education. So what is the problem with spending a little extra when you have it?
Perhaps that question should be asked of the Alaskans who may be most impacted by excessive spending. Perhaps we should ask the Alaskans who are not at the table and who cannot defend themselves against the poor decisions of this generation. Perhaps we should ask the Alaskans who will bear the costs of such a decision. The costs will be borne by those who are not at the table: the future generations of Alaskans. The financial impacts of excessive spending in the short term and the failure to spend in the context of a long term plan are not borne by the present generation. They are borne by future generations when the poor decisions of this generation finally come to roost. The decision makers of future generations will be blamed for the failure, for the failure to plan, for the failure not to forsee the collapse. But it is the current generation of legislators that should be held accountable.
Luckily there is a balance of power in the Alaska political process. The governor has a right to veto those appropriations he feels are inappropriate or excessive. The governor, unlike the legislature, is not accountable to a small group of constituents from a specific district. The governor can provide the leadership necessary to protect both the present and future generations. The governor can examine each appropriation with an eye to the benefit it will provide to the people of Alaska. The governor can examine each appropriation with an eye to the increased maintenance burden placed on this and future generations. The governor can examine each appropriation with an eye to understanding that perhaps saving in years of plenty is a logical choice to meet the needs of those years when there will be budget shortfalls. Perhaps the governor can provide the balance and leadership that was not available during the legislative process.
But this is an election year. Will election year politics affect the governor’s decisions? Will the governor calculate the number of votes lost by every line item veto? Will the other gubernatorial candidates cherry-pick the line item vetoes they think were wrong in an effort to gain advantage over the governor in the election? Will good decision making by the governor be sidelined in an effort to get reelected?
In light of the pressures of election year politics on good decision making, I have a proposal to make that should balance the field between the candidates and should provide a snapshot of how each gubernatorial candidate would lead the State over the next four years.
I call this proposal The Red Pen Challenge.
I propose that every candidate for governor should review the capital budget and identify those items they would veto and submit them to the people of Alaska at the same time the Governor submits his signed capital budget bill, with appropriate vetoes if any, to the people of Alaska.
Rules of the Challenge
1) The governor agrees, in advance, to the date and time he will make public his decision on the capital budget.
2) Each candidate will submit their proposed capital budget to the public on the same date prior to the governor’s submittal to the public.
3) Governors Rules apply. – Each candidate will be required to provide the public with a copy of the budget with the specific “vetoed” items lined out and initialed, just like the Governor is required to do.
4) All newspapers will be encouraged to post on their web pages all responses so the Alaska public can compare the “decisions” of each of the participating candidates and add this information to their overall evaluation of who they want to support for governor.
I believe the above proposal will provide the appropriate scrutiny that was not applied during the legislative process to each and every appropriation in the capital budget.
Since the capital budget has not been transmitted to the governor there is still plenty of time for each of the candidates to comply with the above challenge. They will have the same amount of time to review and analyze the capital budget as the governor has.
I am also certain that if a candidate needs more information about the value of a specific appropriation, the recipient of that appropriation will be glad to provide the candidate with as much information as the candidate needs to make their decision.
I will be contacting each candidate and the governor over the next week to see who will be willing to rise to the challenge. The governor is the only candidate that will automatically participate because he is required by law to make a decision on the capital budget. The governor still needs to agree to a specific date and time when he will communicate his decision on the capital budget to the public.
I am looking forward to sharing their responses to the challenge in a future article.
Monday, April 5, 2010
The Point Thomson Unit - The Next Step in the Process.
In September 2005 the Director of the Division of Oil and Gas, Department of Natural Resources disapproved the Point Thomson Unit (PTU) owners’ 22nd Plan of Development (POD) because “it did not set out a plan to bring the PTU into commercial production within a reasonable time frame.”
The Director believed that the pace of prospecting and development for the PTU should be more aggressive than what the PTU owners proposed; so he rejected the POD. Ultimately the Superior Court upheld his decision rejecting the 22nd POD.
After several years of appeals, and after the current appeal to the Alaska Supreme Court, the next step in the process will be for the Director to explain what he considers necessary to diligently develop the PTU. As a part of that explanation the Director can state that if his determination is not accepted by the PTU owners, the unit will be terminated. This explanation would normally take the form of a proposed POD that would be agreed to by the PTU owners. Once the Director explains what he believes is necessary to diligently produce the PTU, the Director will give the PTU owners at least 30 days notice for an opportunity to comment on the proposed POD.
After the hearing the Director will make a final determination regarding the rate of prospecting and development for the PTU. If the PTU owners disagree with the Director’s decision, they can once again appeal that decision to the Commissioner and to the Superior Court.
The PTU owners’ obligation will be to convince the court that what the Director proposed is “in excess of that required under good and diligent oil and gas engineering and production practices.” Because the decision involves substantial agency expertise and not merely an application of the law, the court will apply the reasonable basis test and give deference to the department in its review of the Director’s decision.
To quote the court “Under the reasonable basis standard of review for administrative decisions involving complex issues involving agency expertise, the court is to give deference to the agency’s determination so long as it is reasonable, supported by evidence in the record as a whole, and there is no abuse of discretion.”
This means that unless the Director grossly oversteps his authority, the Superior Court will uphold his determination. The PTU owners understand this and will not risk losing the PTU over an appeal unless the PTU owners believe the Director clearly overstepped his authority in what he required of the PTU owners.
Once this step in the process is completed the PTU will be back on track moving toward development.
The Director believed that the pace of prospecting and development for the PTU should be more aggressive than what the PTU owners proposed; so he rejected the POD. Ultimately the Superior Court upheld his decision rejecting the 22nd POD.
After several years of appeals, and after the current appeal to the Alaska Supreme Court, the next step in the process will be for the Director to explain what he considers necessary to diligently develop the PTU. As a part of that explanation the Director can state that if his determination is not accepted by the PTU owners, the unit will be terminated. This explanation would normally take the form of a proposed POD that would be agreed to by the PTU owners. Once the Director explains what he believes is necessary to diligently produce the PTU, the Director will give the PTU owners at least 30 days notice for an opportunity to comment on the proposed POD.
After the hearing the Director will make a final determination regarding the rate of prospecting and development for the PTU. If the PTU owners disagree with the Director’s decision, they can once again appeal that decision to the Commissioner and to the Superior Court.
The PTU owners’ obligation will be to convince the court that what the Director proposed is “in excess of that required under good and diligent oil and gas engineering and production practices.” Because the decision involves substantial agency expertise and not merely an application of the law, the court will apply the reasonable basis test and give deference to the department in its review of the Director’s decision.
To quote the court “Under the reasonable basis standard of review for administrative decisions involving complex issues involving agency expertise, the court is to give deference to the agency’s determination so long as it is reasonable, supported by evidence in the record as a whole, and there is no abuse of discretion.”
This means that unless the Director grossly oversteps his authority, the Superior Court will uphold his determination. The PTU owners understand this and will not risk losing the PTU over an appeal unless the PTU owners believe the Director clearly overstepped his authority in what he required of the PTU owners.
Once this step in the process is completed the PTU will be back on track moving toward development.
Sunday, March 21, 2010
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.
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.
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