Alaskans would benefit most from a joint project to build the planned 4.5 Bcf/d pipeline from the North Slope to ship natural gas south to Canada and the Lower 48 states along with a spur distribution line to serve southern Alaska, but the state is going to have to chip in with considerable financial support, according to a federal official.

“Politics and market economics are the problems here,” Larry Persily, federal coordinator for the Alaska transportation project, told state legislators Wednesday. “AGIA [the Alaska Gasline Inducement Act] isn’t going to get you a pipeline. All it gets you is the permit to build a pipeline.” By virtue of AGIA Alaskans are paying “to have a $500 million certificate hanging on the wall.”

At a hearing of the Alaska Senate Resources Committee, Persily pointed out that it is not the responsibility of TransCanada PipeLines to negotiate with the producers. Under AGIA TransCanada has contracted with the state to get a certificate. “Getting a project is in the state’s lap. The state is going to have to talk to producers.”

A TransCanada representative testifying the day before had said the pipeline had not had any producers sign up during their recent open season for the 1,715-mile gasline, which would travel from a treatment plant at Prudhoe Bay to a connection with the Alberta Hub.

There will have to be incentives, Persily said. To get an actual pipeline the Alaska government must go back to the bargaining table with producers in a very different economic environment and with natural gas prices in the $4.00/MMBtu area, well below the $6.00-7.50/MMBtu numbers that were current in 2006 when the last negotiations broke down (see Daily GPI, Aug. 7, 2006).

In a capital-constrained world “no one is going to build a $40 billion pipeline on spec. Alaskan expectations of never-ending wealth from oil and gas are destructive. We are not going to get filthy, stinking rich on gas like we did on oil. The economics just aren’t there.”

Persily recommended “decoupling” the way the state treats oil and gas to “recognize that gas just isn’t as profitable…with oil less than 10% goes toward the transportation [of the product], with gas 75% of the value goes to transportation.”

Persily pointed out that producers aren’t going to sign $115 billion, 20-year shipping agreements, facing market risks, potential tariff hikes and cost overruns if they don’t have a fiscal deal with the state. And without those commitments there will be no financing.

There are a lot of creative ways the state can cut a deal on incentives “without calling it a subsidy.” He suggested a “progressive” scheme where the state collects less in the early years. “Look at it as a 50-year project,” where the state doesn’t make as much on the first 10-20 Tcf, but makes it up on the next 60 Tcf. “There’s a lot of opportunities to make money over 50 years.”

While the shale gas boom has pushed prices down, Persily believes that boom will moderate over time and Alaskan gas can be competitive in the lower 48 states in later years. In the meantime Alaskans can benefit through cheap fuel in-state and through jobs and business incentives.

He also noted that while North Slope gas, including development of Point Thomson, might last 14-15 years, if the reserves are committed to keeping a large-diameter gas line full, producers will have to continue drilling, and when they do they are likely to find both oil and gas. Additional oil reserves would help cure the problem of declining throughput on the TAPS oil line to the Lower 48, which he described as one/third full or two/thirds empty (see Daily GPI, July 1).

Persily listed a number of pitfalls to a competing plan to build an LNG terminal to export Alaskan gas, but they come down to one big one: the LNG export market is much, much smaller than the North American overland market. And those who look longingly at the high Asian prices tied to oil prices should consider that that market is changing. There’s a lot of new LNG export capacity under construction around the world and new pipelines being built.

It’s not likely the Asians will be wearing “those $14 handcuffs” forever, Persily said. If LNG backers are factoring in high prices to China, they should consider that China also is gaining new pipeline import capacity and is exploring for its own shale gas. And China is not a country that is going to pay “a Nordstrom price” but more likely “a Walmart price and then squeezing another couple pennies off.”

Persily responded to Alaskan lawmakers that based on his conversations in Washington he didn’t think the Yukon Pacific export license for LNG issued 20 years ago could be transferred. “I can’t believe it would be easy to transfer. Too much has changed.” Other federal and state permits and right-of-ways held by the Yukon project have expired or been canceled (see Daily GPI, May 24, 2010; Sept. 5, 2006; March 30, 1998).

Questioned, Persily said he believed the best course would be to combine the long line to the south with the bullet line to serve in-state needs. Even a smaller bullet line could not be in place in time to serve the short-term needs of Cook Inlet. Short-term there would have to be another solution for southern Alaska (see Daily GPI, Aug. 2). He projected a 2018-19 completion for an in-state spur line compared to the projected 2020 in-service date for the large-diameter pipe.

He suggested if the state was going to set aside $7 billion in tax or royalty forgiveness to finance a pipeline, it might dedicate $5 billion to the major pipeline and $2 billion for the in-state distribution and get the best of both worlds. The two should be built together and go into service at the same time, he said.

Whichever project is pursued, “the producers will have to be on board,” Persily said. Based on comments and questions from the legislators, the federal coordinator appeared to have the support of most of them. One lawmaker agreed “the producers have the checkbooks you need for this project.”

Committee Chairman Joe Paskvan suggested that “as policymakers we are better advised to distribute our lowest-value hydrocarbons, the natural gas, to as many Alaskans as possible and use our highest-value hydrocarbons, which is our oil to increase the treasury to help the other parts of Alaska that aren’t immediately accessible to the natural gas.”

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