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A Greater Likelihood of Success
In my first article Own a Piece of the Pipe - Part 1, I evaluated the use of the Permanent Fund Dividend check-off as a vehicle to fund state ownership of the pipeline. In this article I will evaluate the argument that state ownership enhances the likelihood of success of a gas pipeline; I will evaluate the justification for that position; and I will propose some principles that should be considered when developing a plan or strategy for State participation in a gas pipeline.
"If we take advantage of this opportunity, we have a greater likelihood of seeing a pipe come true."- Ethan Berkowitz.
In the Frequently Asked Questions (FAQ) portion of his website Ethan Berkowitz, as support for his position that state participation increases the chance for success of the pipeline, refers to the Alaska Natural Gas Development Authority report in FAQ Q.1, the Alaska Natural Gas Development Corporation report in FAQ Q.13, and the Alaska Gasline Development Corporation report in FAQ Q.16. The report I assume he is referring to is the Alaska Gasline Development Corporation Project Progress Report titled “Alaska Stand Alone Gas Pipeline Project Update and FY 2010 Deliverables.” Page 28 of that report states that “All cost of service models run indicate the predicted cost to consumer will be higher than the current costs in the Cook Inlet.”
Dan Fauske, the CEO of the Alaska Housing Finance Corporation, in his presentation of the report update to a group of legislators, recognized the challenged economics of the gasline when he stated "There will need to be some type of equity infusion or some type of subsidy.”
I assume this was the basis of Ethan Berkowitz's position that equity invested in the pipeline through the PFD dividend checkoff will at least partially address the need for equity infusion and create "a greater chance making a pipeline become real."
There are two problems with this position. First, the equity infusion or some type of subsidy Dan Fauske was referring to needs to be of the type of infusion that would ultimately reduce the tariff. Mere ownership does not reduce the tariff. A State capital contribution reduces the tariff, and I am sure Ethan’s PFD owners are not interested in donating their dividends to the pipeline company.
And second, and most important, the report Ethan Berkowitz is using to support his position has nothing to do with a large diameter pipeline. It was drafted as an update on the in-state gasline! The Alaska Gasline Development Corporation was created “for the purpose of planning, constructing, and financing in-state natural gasline projects or for the purpose of aiding in the planning, construction, and financing of in-state natural gasline projects.” The Alaska Gasline Development Corporation and any reports it creates has nothing to do with a large diameter pipeline.
The economics of an in-state gasline and the large diameter gasline are entirely different. And the justification for state participation in a large diameter pipeline are entirely different that the justification for participation in an in-state gasline.
Major concerns of the large diameter pipeline are pipeline costs, cost overruns, tax stability, and the long-term price of gas in the lower-48. The major hurdle for an in-state line is economics of size. The in-state need for gas doesn't justify the cost of building a gasline from the north slope to southcentral Alaska.
This means that the primary justifications Ethan Berkowitz is using to support state participation in the pipeline has nothing to do with the large diameter pipeline he is proposing to own. But it is possible for state participation to enhance the likelihood of success of the pipeline, just not for the justification proposed by Ethan Berkowitz.
Participation in a Large Diameter Gasline
In order to draft a successful plan for state participation in a large diameter gasline, it is important to understand the view of state participation from a pipeline company standpoint.
The following are some principles that should be considered and followed if possible:
1) First, it must be remembered that the State does not have an automatic right to have an ownership share of the pipeline. It will only be invited to participate as an owner if it brings value or adds value to the pipeline entity.
2) A state entity would need to act like a corporation, not a regulator.
3) A state entity would need to keep information confidential that is normally kept confidential by a private corporation participating in the pipeline.
4) The State’s shareholders cannot have access to confidential information. Only information made available to the public in general will be provided to them. The State entity’s board of directors and staff will have access to confidential information, but only if they agree to keep the information confidential.
5) The State’s ownership interest cannot fluctuate throughout the time the pipeline is being built. Voting rights are based on ownership interest and cannot be changed just because more individuals want to invest their permanent fund dividends in the ownership of the state entity.
6) If there are cost overruns and all the other owners are required to pay their proportionate part of the overrun, the State will pay its proportionate share also.
7) The rights and responsibilities of the State entity that is participating in the pipeline cannot be subject to legislative changes that would violate their obligation under the participation contract they sign, commonly an LLC agreement.
8) Some pipeline companies would like to see the state own the same share of the pipeline as its royalty share of the gas. Other pipeline companies are not as concerned with this issue.
If a participation proposal is fashioned that meets the above criteria, it will have a greater chance of getting agreement from a pipeline company to allow the State an ownership position in the pipeline than if the criteria are ignored.
Thursday, September 9, 2010
Wednesday, September 8, 2010
Own a Piece of the Pipe - Part 1
A Straight-forward Idea or a Complex Evaluation
At first blush, Ethan Berkowitz’s Owning a Piece of the Pipe idea seems fairly simple. In fact he stated, "To us and most Alaskans this is a pretty straight forward idea, the notion that Alaskans should also have the right, if they individually choose, to be able to own a piece of the pipe."
The idea may sound simple, but the implementation is decidedly more complex.
For example, Ethan Berkowitz has selected the Permanent Fund Dividend check-off as the appropriate vehicle to raise funds for participation in the pipeline project. But no analysis is provided regarding the impact on Alaska businesses if the program is as successful as he hopes.
A successful PFD check-off program will divert money from the Alaska economy and Alaska small businesses to a pipeline project that may or may not need the assistance of Alaska financial support to be viable.
"If we have about 20 percent of Alaskans participate in this proposal, which is what our projections would be, we'll see the cumulative effect of about $800 million in investment."
Ethan Berkowitz projects about 20 percent of Alaskans will participate in the opportunity to invest in the pipeline resulting in the cumulative effect of about $800 million in investment and perhaps close to $1 billion.
What will the impact be of diverting as much as $800 million to $1 billion away from the Alaska economy and into supporting a gas pipeline project? Many small Alaska businesses, in order to balance their budgets each year, depend on people spending their Alaska PFD’s and purchasing goods and services in Alaska. I think that Alaska small businesses would be very concerned about the impact on the viability of their businesses of such a large diversion of permanent fund dividends to the pipeline project.
An analysis should be done of the impacts of such a substantial loss of revenue to Alaska businesses prior to proceeding ahead with such a proposal.
Who will invest?
Diane Benson, the lieutenant governor candidate, says she would have been excited to have an opportunity like this when she was a young mother of limited means. Her statement suggests that she believes all Alaskans, regardless of their financial status, would seriously consider investing their PFD’s in the pipeline. Actually, reality is far different than the picture she projects. A young mother of limited means is barely able to balance her budget. The last thing she is going to consider is taking her PFD, investing it in a pipeline project, paying the taxes on the PFD income, and hoping some day that her investment will return a profit to her. She, and many others like her, will be using their dividends to catch up on paying bills, and possibly, they hope, have a little left over to do or spend on something special with the surplus.
The typical person that will be able to invest their PFD in the pipeline is a middle to upper income individual that does not need the PFD to pay for the basic necessities of life, a person that has sufficient surplus income that they can afford to lose it if the pipeline project fails to reap a profit.
So even though this program is touted as benefiting all Alaskans, as a practical matter, a much smaller cross-section of Alaskans will be able to avail themselves of the opportunity to participate. And if they participate, there has been no research, and apparently the question hasn’t even been asked, about the impact on the Alaska economy of these individuals diverting their PFD’s to the gas pipeline instead of investing them in their local community.
Ethan Berkowitz may want to reconsider using the Permanent Fund Dividend check-off as the vehicle for providing Alaskans with an opportunity to participate in the pipeline.
He may find that the negative impacts from the loss of revenue to the economy will exceed the benefit received by the pipeline. He might still want to consider some form of state ownership or participation in the pipeline and perhaps allow the public the opportunity to participate in the project through participating in the financing of the project. Perhaps the public could be provided the opportunity to purchase bonds in the project instead of acquiring an ownership interest. This would be a much safer, less risky venture for the Alaska public.
If Ethan Berkowitz continues to propose this idea, the next stage of his multi-part plan should begin to address this issue.
At first blush, Ethan Berkowitz’s Owning a Piece of the Pipe idea seems fairly simple. In fact he stated, "To us and most Alaskans this is a pretty straight forward idea, the notion that Alaskans should also have the right, if they individually choose, to be able to own a piece of the pipe."
The idea may sound simple, but the implementation is decidedly more complex.
For example, Ethan Berkowitz has selected the Permanent Fund Dividend check-off as the appropriate vehicle to raise funds for participation in the pipeline project. But no analysis is provided regarding the impact on Alaska businesses if the program is as successful as he hopes.
A successful PFD check-off program will divert money from the Alaska economy and Alaska small businesses to a pipeline project that may or may not need the assistance of Alaska financial support to be viable.
"If we have about 20 percent of Alaskans participate in this proposal, which is what our projections would be, we'll see the cumulative effect of about $800 million in investment."
Ethan Berkowitz projects about 20 percent of Alaskans will participate in the opportunity to invest in the pipeline resulting in the cumulative effect of about $800 million in investment and perhaps close to $1 billion.
What will the impact be of diverting as much as $800 million to $1 billion away from the Alaska economy and into supporting a gas pipeline project? Many small Alaska businesses, in order to balance their budgets each year, depend on people spending their Alaska PFD’s and purchasing goods and services in Alaska. I think that Alaska small businesses would be very concerned about the impact on the viability of their businesses of such a large diversion of permanent fund dividends to the pipeline project.
An analysis should be done of the impacts of such a substantial loss of revenue to Alaska businesses prior to proceeding ahead with such a proposal.
Who will invest?
Diane Benson, the lieutenant governor candidate, says she would have been excited to have an opportunity like this when she was a young mother of limited means. Her statement suggests that she believes all Alaskans, regardless of their financial status, would seriously consider investing their PFD’s in the pipeline. Actually, reality is far different than the picture she projects. A young mother of limited means is barely able to balance her budget. The last thing she is going to consider is taking her PFD, investing it in a pipeline project, paying the taxes on the PFD income, and hoping some day that her investment will return a profit to her. She, and many others like her, will be using their dividends to catch up on paying bills, and possibly, they hope, have a little left over to do or spend on something special with the surplus.
The typical person that will be able to invest their PFD in the pipeline is a middle to upper income individual that does not need the PFD to pay for the basic necessities of life, a person that has sufficient surplus income that they can afford to lose it if the pipeline project fails to reap a profit.
So even though this program is touted as benefiting all Alaskans, as a practical matter, a much smaller cross-section of Alaskans will be able to avail themselves of the opportunity to participate. And if they participate, there has been no research, and apparently the question hasn’t even been asked, about the impact on the Alaska economy of these individuals diverting their PFD’s to the gas pipeline instead of investing them in their local community.
Ethan Berkowitz may want to reconsider using the Permanent Fund Dividend check-off as the vehicle for providing Alaskans with an opportunity to participate in the pipeline.
He may find that the negative impacts from the loss of revenue to the economy will exceed the benefit received by the pipeline. He might still want to consider some form of state ownership or participation in the pipeline and perhaps allow the public the opportunity to participate in the project through participating in the financing of the project. Perhaps the public could be provided the opportunity to purchase bonds in the project instead of acquiring an ownership interest. This would be a much safer, less risky venture for the Alaska public.
If Ethan Berkowitz continues to propose this idea, the next stage of his multi-part plan should begin to address this issue.
Monday, September 6, 2010
Energy Issues in the Alaska Gubernatorial Race
Over the next several weeks I will add articles to this blog discussing the various oil and gas and gas pipeline issues being proposed by the Alaska gubernatorial candidates. So far, topics included in those articles will be Owning a Piece of the Pipe, AGIA, and Changing the State’s Oil and Gas Royalty and Tax Structure. As the candidates publish additional positions on various issues I will try to include analysis of those positions in future articles.
Friday, July 30, 2010
Alaska Gasline Port Authority Proposal to Purchase Fairbanks Natural Gas LLC
The purchase of FNG by AGPA
The Fairbanks North Star Borough (FNSB) is currently considering authorizing the Alaska Gasline Port Authority (AGPA) to purchase Fairbanks Natural Gas LLC (FNG) as part of its proposal to truck natural gas from the Alaska North Slope to Fairbanks. In order to understand if that is a reasonable decision the FNSB needs to determine why AGPA is asking to purchase FNG. What is the goal they are trying to achieve, and what process should be followed to make that decision?
What is the goal the FNSB is trying to achieve or the value it is trying to protect?
The cost of energy has always been high in the Interior of Alaska. It is an important goal for the FNSB to ensure that future energy needs are met and that those needs are met in the most economic, cost-effective manner possible. The AGPA has proposed the purchase of Fairbanks Natural Gas LLC and the trucking of natural gas from the Alaska North Slope to Fairbanks as the method to achieve that goal. Before a decision on that issue can be made, several questions need to be answered in order to provide the context and justification for the decision, and a reasonable decision-making process needs to be followed to ensure a thorough analysis occurs. The decision should only be made to move forward with the purchase of FNG if the FNSB understands the economics and chance of success of the proposal and of the other alternatives available to the FNSB to meet its goal of long-term, low-cost energy.
What alternatives are available to meet future energy needs of the FNSB?
The AGPA has proposed the trucking of natural gas from the North Slope to Fairbanks as the most economic way to accomplish the goal of low-cost energy for the FNSB. Their proposal includes the purchase Fairbanks Natural Gas LLC (FNG) as a requirement to make that proposal a success. The assumption that trucking natural gas from the North Slope and the assumption that this necessarily means the purchase of FNG as a requirement to meet their goal must be tested against an analysis of the other viable alternatives available to meet the energy needs of the FNSB. This should be achieved through a reasonable agreed upon decision-making process. The following is a proposed process that could meet the need for a thorough analysis prior to making a decision of such magnitude.
What process should be followed before proceeding ahead with the FNG purchase?
First, compare trucking North Slope gas to all the other viable alternatives. Understand the proposed decision in context. For example, the cost of this alternative is substantially greater and the benefit (reduced energy cost) is substantially less than the benefit to the FNSB if a large diameter gas line is built. If a large diameter gas pipeline is built, the cost of energy from that pipeline will be substantially less than trucking natural gas from the North Slope to Fairbanks. But from a control and chance of success standpoint, trucking gas from the North Slope has a much greater chance of success than depending on TransCanada and the North Slope producers to build a large diameter gas pipeline.
The FNSB must also understand that if the utilities sign long-term contracts with FNG, the utilities will not need gas from the large diameter gas pipeline nor will the FNSB be able to benefit from a reduced cost of energy standpoint from a large diameter gas pipeline if it is successful. That doesn’t mean that the FNSB won’t receive any benefit from a successful large diameter gas pipeline, just that the FNSB will not be able to benefit from the reduced cost of energy that a large diameter gas pipeline would bring; the FNSB and the entire state will definitely benefit from a large diameter gasline from a jobs and taxes standpoint.
The economics of importing gas into Cook Inlet and building a gas pipeline from Cook Inlet to Fairbanks or trucking gas from Cook Inlet to Fairbanks should also be understood in comparison to the alternative AGPA is proposing.
Some have proposed building a small diameter gas pipeline from the North Slope as their preferred option. Will that project deliver gas to Fairbanks cheaper than trucking gas from the North Slope? What are the chances of that project moving forward to successful completion?
Other viable energy alternative should also be considered. Basic economics and the chance of success of each option should be the basis for any decision to move forward with an alternative.
In addition, a cost-benefit analysis of the proposed trucking option should be conducted. Assuming what GVEA says about cost savings is true and that electric bills will be reduced by about 6 percent and that 1,100 natural gas customers would save an estimated 30 percent on their electric bills, how much will be saved by the residents of the FNSB. Compare what would be saved each year over the term of the contracts to the cost of participating in the project. If the cost of the project outweighs the benefits of the project, it shouldn’t move forward with FNSB support even if it is the most viable alternative among those considered. This would be the no action alternative because none of the alternatives considered are worth supporting.
If trucking gas from the North Slope is determined to be the most economic viable alternative, what next?
If trucking gas from the North Slope is determined to be the most economic viable alternative, then the FNSB’s next decision is to what extent should the FNSB participate in the project in order to assure the project’s success.
A sovereign’s responsibility, as it relates to economic development, is normally to create a commercial environment where business can excel and grow while protecting the interests of the people. Only when a project is deemed to be essential for the benefit of the people and the business community is not willing to move forward with a project should the sovereign venture into participation in the economic arena and then only to the extent necessary assure the success of the project.
Once it is determined that participation by the sovereign in a project is essential to move a project forward, the next determination to be made is to what extent should the sovereign participate in the project. The sovereign should only participate in a project to the level necessary to accomplish the goal of moving the project forward. That participation could exhibit itself in the form of financing or ownership of any part of the project required to make the project a success.
If commercial entities had determined that the project was economic, they would have pursued the project and the AGPA wouldn’t have been given the option to participate. The FNSB, through participation of the AGPA will be required to participate by financing or ownership of the riskiest portions of the project because no commercial entity can be found to risk their capital on those portions of the project. No commercial entity can be found to take the investment risk necessary to participate in those portions of the project.
It is possible that no commercial entity can be found to participate in any portion of the project or that only a fully integrated ownership of the project makes the project viable for participation by the FNSB through AGPA. In that case there is one remaining step in the process to complete.
Valuation and purchase of the FNG asset.
If it is determined that trucking natural gas from the North Slope provides Fairbanks with the most viable low-cost energy alternative, and that no commercial entity wishes to participate in any portion of the project, or that an integrated operation is required to make the project viable, then purchase of FNG becomes a critical element in moving the project forward.
The last step is to properly value the FNG assets before a purchase offer is made or a purchase price is agreed upon. Project value should not be based on the value it ultimately brings to the FNSB, i.e., the value of the benefit to the people of Fairbanks over time. That could be tens of millions of dollars. The value should be based on what a commercial entity would pay for FNG in an arm’s length economic transaction. Based on this type of analysis a reasonable purchase price for FNG can be negotiated.
Summary
First, any action the FNSB takes in support of any proposal to bring natural gas to Fairbanks should be made in the context of how it accomplishes the goal of providing long-term, low-cost energy to Interior Alaska. At every stage of the process, what is being proposed and evaluated should be evaluated in the context of how it increases the likelihood of accomplishing the goal of long-term low-cost energy for Fairbanks. Don’t lose sight of the goal.
Next, if the above analysis is followed, and after careful and thorough economic and public policy considerations, the trucking option is chosen as a viable option to pursue, and ownership of the entire integrated operation is required, and a reasonable economic/commercial price is negotiated, then it may be reasonable to proceed ahead with this venture. But, to move forward with a project without a thorough analysis through a well-defined process is shortsighted and could lead to poor decision-making and increased risk of failure of the project. The FNSB needs to complete a thorough review of the proposal through a well thought-out process before it gives the green light for AGPA to purchase FNG.
The Fairbanks North Star Borough (FNSB) is currently considering authorizing the Alaska Gasline Port Authority (AGPA) to purchase Fairbanks Natural Gas LLC (FNG) as part of its proposal to truck natural gas from the Alaska North Slope to Fairbanks. In order to understand if that is a reasonable decision the FNSB needs to determine why AGPA is asking to purchase FNG. What is the goal they are trying to achieve, and what process should be followed to make that decision?
What is the goal the FNSB is trying to achieve or the value it is trying to protect?
The cost of energy has always been high in the Interior of Alaska. It is an important goal for the FNSB to ensure that future energy needs are met and that those needs are met in the most economic, cost-effective manner possible. The AGPA has proposed the purchase of Fairbanks Natural Gas LLC and the trucking of natural gas from the Alaska North Slope to Fairbanks as the method to achieve that goal. Before a decision on that issue can be made, several questions need to be answered in order to provide the context and justification for the decision, and a reasonable decision-making process needs to be followed to ensure a thorough analysis occurs. The decision should only be made to move forward with the purchase of FNG if the FNSB understands the economics and chance of success of the proposal and of the other alternatives available to the FNSB to meet its goal of long-term, low-cost energy.
What alternatives are available to meet future energy needs of the FNSB?
The AGPA has proposed the trucking of natural gas from the North Slope to Fairbanks as the most economic way to accomplish the goal of low-cost energy for the FNSB. Their proposal includes the purchase Fairbanks Natural Gas LLC (FNG) as a requirement to make that proposal a success. The assumption that trucking natural gas from the North Slope and the assumption that this necessarily means the purchase of FNG as a requirement to meet their goal must be tested against an analysis of the other viable alternatives available to meet the energy needs of the FNSB. This should be achieved through a reasonable agreed upon decision-making process. The following is a proposed process that could meet the need for a thorough analysis prior to making a decision of such magnitude.
What process should be followed before proceeding ahead with the FNG purchase?
First, compare trucking North Slope gas to all the other viable alternatives. Understand the proposed decision in context. For example, the cost of this alternative is substantially greater and the benefit (reduced energy cost) is substantially less than the benefit to the FNSB if a large diameter gas line is built. If a large diameter gas pipeline is built, the cost of energy from that pipeline will be substantially less than trucking natural gas from the North Slope to Fairbanks. But from a control and chance of success standpoint, trucking gas from the North Slope has a much greater chance of success than depending on TransCanada and the North Slope producers to build a large diameter gas pipeline.
The FNSB must also understand that if the utilities sign long-term contracts with FNG, the utilities will not need gas from the large diameter gas pipeline nor will the FNSB be able to benefit from a reduced cost of energy standpoint from a large diameter gas pipeline if it is successful. That doesn’t mean that the FNSB won’t receive any benefit from a successful large diameter gas pipeline, just that the FNSB will not be able to benefit from the reduced cost of energy that a large diameter gas pipeline would bring; the FNSB and the entire state will definitely benefit from a large diameter gasline from a jobs and taxes standpoint.
The economics of importing gas into Cook Inlet and building a gas pipeline from Cook Inlet to Fairbanks or trucking gas from Cook Inlet to Fairbanks should also be understood in comparison to the alternative AGPA is proposing.
Some have proposed building a small diameter gas pipeline from the North Slope as their preferred option. Will that project deliver gas to Fairbanks cheaper than trucking gas from the North Slope? What are the chances of that project moving forward to successful completion?
Other viable energy alternative should also be considered. Basic economics and the chance of success of each option should be the basis for any decision to move forward with an alternative.
In addition, a cost-benefit analysis of the proposed trucking option should be conducted. Assuming what GVEA says about cost savings is true and that electric bills will be reduced by about 6 percent and that 1,100 natural gas customers would save an estimated 30 percent on their electric bills, how much will be saved by the residents of the FNSB. Compare what would be saved each year over the term of the contracts to the cost of participating in the project. If the cost of the project outweighs the benefits of the project, it shouldn’t move forward with FNSB support even if it is the most viable alternative among those considered. This would be the no action alternative because none of the alternatives considered are worth supporting.
If trucking gas from the North Slope is determined to be the most economic viable alternative, what next?
If trucking gas from the North Slope is determined to be the most economic viable alternative, then the FNSB’s next decision is to what extent should the FNSB participate in the project in order to assure the project’s success.
A sovereign’s responsibility, as it relates to economic development, is normally to create a commercial environment where business can excel and grow while protecting the interests of the people. Only when a project is deemed to be essential for the benefit of the people and the business community is not willing to move forward with a project should the sovereign venture into participation in the economic arena and then only to the extent necessary assure the success of the project.
Once it is determined that participation by the sovereign in a project is essential to move a project forward, the next determination to be made is to what extent should the sovereign participate in the project. The sovereign should only participate in a project to the level necessary to accomplish the goal of moving the project forward. That participation could exhibit itself in the form of financing or ownership of any part of the project required to make the project a success.
If commercial entities had determined that the project was economic, they would have pursued the project and the AGPA wouldn’t have been given the option to participate. The FNSB, through participation of the AGPA will be required to participate by financing or ownership of the riskiest portions of the project because no commercial entity can be found to risk their capital on those portions of the project. No commercial entity can be found to take the investment risk necessary to participate in those portions of the project.
It is possible that no commercial entity can be found to participate in any portion of the project or that only a fully integrated ownership of the project makes the project viable for participation by the FNSB through AGPA. In that case there is one remaining step in the process to complete.
Valuation and purchase of the FNG asset.
If it is determined that trucking natural gas from the North Slope provides Fairbanks with the most viable low-cost energy alternative, and that no commercial entity wishes to participate in any portion of the project, or that an integrated operation is required to make the project viable, then purchase of FNG becomes a critical element in moving the project forward.
The last step is to properly value the FNG assets before a purchase offer is made or a purchase price is agreed upon. Project value should not be based on the value it ultimately brings to the FNSB, i.e., the value of the benefit to the people of Fairbanks over time. That could be tens of millions of dollars. The value should be based on what a commercial entity would pay for FNG in an arm’s length economic transaction. Based on this type of analysis a reasonable purchase price for FNG can be negotiated.
Summary
First, any action the FNSB takes in support of any proposal to bring natural gas to Fairbanks should be made in the context of how it accomplishes the goal of providing long-term, low-cost energy to Interior Alaska. At every stage of the process, what is being proposed and evaluated should be evaluated in the context of how it increases the likelihood of accomplishing the goal of long-term low-cost energy for Fairbanks. Don’t lose sight of the goal.
Next, if the above analysis is followed, and after careful and thorough economic and public policy considerations, the trucking option is chosen as a viable option to pursue, and ownership of the entire integrated operation is required, and a reasonable economic/commercial price is negotiated, then it may be reasonable to proceed ahead with this venture. But, to move forward with a project without a thorough analysis through a well-defined process is shortsighted and could lead to poor decision-making and increased risk of failure of the project. The FNSB needs to complete a thorough review of the proposal through a well thought-out process before it gives the green light for AGPA to purchase FNG.
Monday, June 14, 2010
BP Gulf Oil Spill Response Plan Review
The gulf oil spill is now headed into its eighth week. Many have commented on the inaccuracies and weaknesses of the BP Oil Spill Response Plan, but few have analyzed it for what needs to be done to ensure the same results do not happen again. The plan is inadequate as it exists. BP’s Plan and all other plans like it need to be changed, and the state and federal agencies need to take this opportunity to collect additional information on performance of spill personnel and equipment to assist in the analysis of what is necessary to make future plans more effective.
The BP Oil Spill Response Plan is primarily an outline of the Incident Command structure, the responsibilities of the different members of the Incident Command Team, a listing of State and Federal Agencies that may need to be contacted in the event of a spill, incident forms, flow charts, decision diagrams, response organizations and equipment lists. It sounds like and is more of a resource manual that a response plan. It provides little assistance to the Incident Commander in determining what to expect for response times and effectiveness for deployed equipment or reaction of the oil to the environment.
The models upon which the spill plan is based were so inaccurate that they provided the Incident Commander with little or no understanding of when and where to expect the oil. They were woefully inadequate in assisting the Incident Commander in understanding the volume of the spill, the trajectory of where to look for the spill or the speed of the spill through the environment.
The models should be redesigned to provide more accurate projections now that there is actual data to compare. If the models are inconsistent with what happened, the models are wrong and they need to be changed to reflect reality. Even if the models are changed, they will still be wrong the next time, but they may not so grossly underestimate the speed and trajectory of the oil as to be useless to the Incident Command Team.
Only three pages of the 582 page spill plan are dedicated to a written analysis of the worst case scenario and much of that is merely an explanation of the scenario and a listing of the different response methods and their capacities to recover oil. An Incident Commander would find no assistance in this section of the plan on how to respond to the spill or what to expect from a spill of this magnitude.
There is little anywhere in the spill plan in the way of analysis to assist the Incident Commander in understanding what to expect from the response options he is provided. Equipment lists have nameplate capacities but no analysis of their effectiveness in the environment. Skimmers with nameplate capacities totaling 491,721 barrels per day are identified in the plan and give a false sense that they should be able to easily capture a spill of 250,000 barrels and remove it from the environment. But oil does not collect in one place waiting to be picked up, and nameplate capacities are not the same as effective rates.
Spill plan worst case scenarios should have estimations of how much oil is expected to escape into the environment; estimations of daily rates and how long will it take to contain and stop the spill from continuing; estimations of how much is being dispersed into the water column and how much is suspended in plumes in the water column. Of the oil collecting on the surface, the Incident Commander should have an understanding of how much will probably aggregate in sufficient quantities to be retrieved by mechanical skimmers and what percentage can be attacked with dispersants or burned? The Incident Commander should understand what percentage is escaping, the quantity of oil, the quality of the oil and when and where to expect the oil onshore.
BP needs to collect information regarding effective rates for deployment of its spill response equipment. For each piece of equipment deployed the following information should be collected:
1) the time required for equipment to be deployed onsite should be recorded, from the time it was requested to the time it was deployed onsite;
2) data should be collected regarding standby time for each piece of equipment, transportation time to get equipment to a new location for deployment, and time deployed in response to the spill;
3) during the time deployed the volume of liquid retrieved should be recorded, and data regarding the oil/water ratio should also be captured.
If this information is captured and analyzed it would provide the data necessary to calculate an effective response rate for each piece of equipment deployed. Effective response rates provide the Incident Commander with a more accurate tool than nameplate capacities in planning a response to a major oil spill.
Once the information has been collected from the spill it should be analyzed with the response team, state and federal agencies, and other stakeholders to determine the requirements for future offshore exploration and operations spill plans.
In addition, a plan that is only required to be updated once every two years is going to have a certain number of errors. I recommend annual updates and a certification by the person signing the plan as to the accuracy of the plan. That would require someone in the organization to attempt to verify all the numbers in the plan at least once a year.
Half of BP’s Incident Command Organization Chart did not have individuals identified to fill the incident command positions. I recommend that all leadership positions in the Incident Command structure should be identified in the organization chart and those individuals should be required to participate in a response drill at least annually.
If the above recommendations are followed, they won’t prevent incidents from occurring, but incident responders will have more effective tools to assist them in their response and they will be more prepared to respond to the incident.
Steve Porter is a former exploration permitting manager for a major oil company and was responsible for the preparation and approval of offshore oil spill response plans.
The BP Oil Spill Response Plan is primarily an outline of the Incident Command structure, the responsibilities of the different members of the Incident Command Team, a listing of State and Federal Agencies that may need to be contacted in the event of a spill, incident forms, flow charts, decision diagrams, response organizations and equipment lists. It sounds like and is more of a resource manual that a response plan. It provides little assistance to the Incident Commander in determining what to expect for response times and effectiveness for deployed equipment or reaction of the oil to the environment.
The models upon which the spill plan is based were so inaccurate that they provided the Incident Commander with little or no understanding of when and where to expect the oil. They were woefully inadequate in assisting the Incident Commander in understanding the volume of the spill, the trajectory of where to look for the spill or the speed of the spill through the environment.
The models should be redesigned to provide more accurate projections now that there is actual data to compare. If the models are inconsistent with what happened, the models are wrong and they need to be changed to reflect reality. Even if the models are changed, they will still be wrong the next time, but they may not so grossly underestimate the speed and trajectory of the oil as to be useless to the Incident Command Team.
Only three pages of the 582 page spill plan are dedicated to a written analysis of the worst case scenario and much of that is merely an explanation of the scenario and a listing of the different response methods and their capacities to recover oil. An Incident Commander would find no assistance in this section of the plan on how to respond to the spill or what to expect from a spill of this magnitude.
There is little anywhere in the spill plan in the way of analysis to assist the Incident Commander in understanding what to expect from the response options he is provided. Equipment lists have nameplate capacities but no analysis of their effectiveness in the environment. Skimmers with nameplate capacities totaling 491,721 barrels per day are identified in the plan and give a false sense that they should be able to easily capture a spill of 250,000 barrels and remove it from the environment. But oil does not collect in one place waiting to be picked up, and nameplate capacities are not the same as effective rates.
Spill plan worst case scenarios should have estimations of how much oil is expected to escape into the environment; estimations of daily rates and how long will it take to contain and stop the spill from continuing; estimations of how much is being dispersed into the water column and how much is suspended in plumes in the water column. Of the oil collecting on the surface, the Incident Commander should have an understanding of how much will probably aggregate in sufficient quantities to be retrieved by mechanical skimmers and what percentage can be attacked with dispersants or burned? The Incident Commander should understand what percentage is escaping, the quantity of oil, the quality of the oil and when and where to expect the oil onshore.
BP needs to collect information regarding effective rates for deployment of its spill response equipment. For each piece of equipment deployed the following information should be collected:
1) the time required for equipment to be deployed onsite should be recorded, from the time it was requested to the time it was deployed onsite;
2) data should be collected regarding standby time for each piece of equipment, transportation time to get equipment to a new location for deployment, and time deployed in response to the spill;
3) during the time deployed the volume of liquid retrieved should be recorded, and data regarding the oil/water ratio should also be captured.
If this information is captured and analyzed it would provide the data necessary to calculate an effective response rate for each piece of equipment deployed. Effective response rates provide the Incident Commander with a more accurate tool than nameplate capacities in planning a response to a major oil spill.
Once the information has been collected from the spill it should be analyzed with the response team, state and federal agencies, and other stakeholders to determine the requirements for future offshore exploration and operations spill plans.
In addition, a plan that is only required to be updated once every two years is going to have a certain number of errors. I recommend annual updates and a certification by the person signing the plan as to the accuracy of the plan. That would require someone in the organization to attempt to verify all the numbers in the plan at least once a year.
Half of BP’s Incident Command Organization Chart did not have individuals identified to fill the incident command positions. I recommend that all leadership positions in the Incident Command structure should be identified in the organization chart and those individuals should be required to participate in a response drill at least annually.
If the above recommendations are followed, they won’t prevent incidents from occurring, but incident responders will have more effective tools to assist them in their response and they will be more prepared to respond to the incident.
Steve Porter is a former exploration permitting manager for a major oil company and was responsible for the preparation and approval of offshore oil spill response plans.
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