Without viable economics accounting for the risks involved, the “global mega-project” to build a pipeline from Alaska’s North Slope to the Lower 48 states is not going to happen, North Slope producers told Alaska legislators this week.
Lawmakers should not underestimate the “world-scale undertaking” involved in the largest private investment in North America, Martin Massey, joint interest manager for ExxonMobil, told members of the Alaska state finance committee on Wednesday. He said the cost estimate of $20 billion was made in 2001, but today it would be substantially higher. For one thing, he pointed out that the price of steel has doubled.
The plan advanced by Alaska Gov. Sarah Palin for the pipeline construction, the Alaska Gasline Inducement Act (AGIA), does not account for the upstream risks faced by producer shippers, Massey said.
It is the shippers who will be underwriting the project by making long-term capacity commitments. The project will be built “directly on the backs of long-term transportation commitments,”Massey said, and the upstream and pipeline economics must be integrated.
“Only a limited number of companies are capable of mega-projects,” Massey said, noting that there are not many with the experience in large projects around the world and the financial strength to pull it off.
The producers can handle the geologic risk, the risk of cost overruns and the risk of volatile natural gas prices, he said, but they cannot cope with changing fiscal rules imposed by the state. The rules for taxes and royalties need to be “durable and predictable before producers commit to the long-term contracts necessary to get the project financed,” Massey said.
Massey, the third representative of the three major North Slope producers to testify before the committee, said the rules laid out in the AGIA for companies to bid to construct the pipeline are too prescriptive, and are not likely to foster competitive bids for the project. The producers recommended that the project rules be more flexible to allow project sponsors to develop viable plans.
In late March, the federal coordinator for the Alaska natural gas pipeline project predicted that Palin would have a gasline bill on her desk by the end of the state legislative session and likely would issue a request for proposals in July (see Daily GPI, March 27). The legislative urgency to get the project moving seems to be intensifying as the project’s backers continue to cast their doubts. In February, Sen. Lisa Murkowski (R-AK) said she felt like the “window of opportunity is closing” (see Daily GPI, Feb. 26). FERC Chairman Joseph Kelliher said he backed Palin’s pipe proposal, calling it the “best hope” for an Alaskan gas pipeline (see Daily GPI, Feb. 28).
Earlier in the week executives from BP and ConocoPhillips also told legislators the project criteria in the AGIA would have to be loosened or there wouldn’t be any viable bidders.
“There has been too much focus on the pipeline and not enough on the upstream,” said Brian Wenzel of ConocoPhillips. There needs to be a fiscal package for upstream resources with “long-term clarity on state taxes and royalties.”
Testifying for pipeline builder Enbridge, Ron Brintnell said his company was not interested in having the whole project. For his company a project that size would be “betting the farm.” Enbridge would like to be a 10-20% equity owner.
A proposal to build a long-line pipeline south from Alaska through Canada has been under consideration for more than 20 years. Most recently, a plan proposed by former Gov. Frank Murkowski got hung up in the legislature last year over the issue of resource taxes and royalties. The plan now under consideration was put on the table by the new governor, Palin.
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