Alaskans await progress on Palin pipeline plan
When a pipeline might be built remains a giant question
ATransCanada proposal to build a gas pipeline.
updated 8:36 a.m. PT, Sun., Oct . 25, 2009
ANCHORAGE, Alaska - Sarah Palin hit the vice presidential campaign trail last year and touted what Alaska could provide for the rest of America — a natural gas pipeline to help lead the country to energy independence.
When a pipeline might be built remains a giant question for Alaskans who need the project to support a vulnerable economy and for the Lower 48 states that need the gas, and a petroleum economist who spent more than 25 years in the Alaska Department of Revenue says it may never happen under Palin's plan.
The former governor's proposal used faulty accounting to reach the flawed conclusion that a pipeline owned by a third-party would be more profitable than one owned by major gas producers, who must be on board for any project to be successful, wrote Roger Marks, in his paper, "Why America May Not See Alaska Natural Gas Soon," published last month in the Journal of Economic Issues.
Story continues below ↓advertisement | your ad here
Palin's alternative, Marks said, discourages their participation and may even stand in the way of a more financially viable project.
"The prospects for success in getting a pipeline constructed appear doubtful," he wrote.
‘Found to be without merit’
Palin's replacement, Gov. Sean Parnell, remains committed to her plan however. Marks' former boss, Revenue Commissioner Pat Galvin, says Marks' perspective was thoroughly analyzed and "found to be without merit."
The issue is confusing to the public and even to state legislators who immersed themselves in pipeline details when they passed Palin's plan in 2007. State Rep. Jay Ramras, R-Fairbanks, who has become a critic, said lawmakers "wandered into tall grass without a very good GPS system."
"To have 60 of us (legislators) trying to negotiate a project of this magnitude — we bring integrity to the transaction but we don't bring the sophistication of a Fortune 500 business board of directors," said Ramras, a hotel and restaurant owner. "We lack that. I'm a pretty smart business guy and I lack that."
There's more at stake than Palin's legacy. About 90 percent of Alaska's general fund revenue budget is fueled by the petroleum industry. High prices have kept coffers filled, but Alaska's golden goose, the trans-Alaska oil pipeline, now operates at less than half its capacity as North Slope production winds down.
Natural gas was found at the same time as oil at Prudhoe Bay in 1967. Proved reserves are 35 trillion cubic feet. Tapping that gas as a replacement for oil revenue has been a dream of Alaska leaders. The possibility that Alaskans have bet on the wrong pipeline project has Ramras and other critics concerned about the state's economic future.
Palin in 2006 took on incumbent Frank Murkowski, a Republican governor whose version of a natural gas pipeline project was hatched behind closed doors and perceived as a giveaway to major petroleum companies. Palin crushed Murkowski in the Republican primary. She promised openness in pipeline deliberations and control by Alaskans.
The result was the Alaska Gasline Inducement Act, known by its acronym AGIA. The law promised $500 million in seed money to a pipeline company that would meet performance requirements: getting the project to an "open season," a critical milestone where shippers can reserve space in a pipeline, and then applying for a federal certificate.
Plan has attracted just five bidders
Following Palin's recommendation, the Alaska Legislature in 2008 awarded a license to pipeline company TransCanada Corp. Exxon Mobil, one of three major producers in Alaska, announced in March it would partner with TransCanada to advance a pipeline. The other two major Alaska producers, ConocoPhillips and BP PLC, proposed their own pipeline without the incentives.
A telling sign of the industry view of the Palin plan, Marks said, was that it attracted just five bidders. Three had virtually no assets and four were judged "non-responsive."
"In other words, it received just one bid," Marks said.
Provisions of Palin's pipeline law run counter to commercial arrangements that producers need as gas shippers, Marks said. Under Palin's law, the state will reimburse TransCanada for 50 percent of its expenses as it prepares for next year's open season and 90 percent of its expenses afterward. According to Marks, that motivates TransCanada to skimp on engineering before the open season: Shippers will be asked to make billion-dollar, decades-long commitments for space on the proposed pipeline with a low-quality estimate of its eventual final cost.
The TransCanada application calls for moving Alaska gas into the company's Alberta Hub, pipelines that transfer gas from one part of Alberta to another, where it can go on to pipelines to other North America markets. Gas producers are experts at marketing, Marks said, but under Palin's law, a pipeline company is determining the Market
Downplaying commercial concerns
The Palin administration may have downplayed those commercial concerns, Marks said, because their economic model showed a third-party pipeline to be more profitable to gas producers than a pipeline the producers themselves built, and which has not been forthcoming for three decades.
But producers ultimately pay for any pipeline either by building it themselves or by committing to long-term contracts to use it to move gas, Marks said, and it's viability is not dependent on how it's financed.
Revenue Commissioner Galvin said Marks is wrong. Marks' perspective is based on the premise that the Alaska natural gas pipeline is economically marginal and that North Slope producers must be enticed to pursue it.
The Palin plan, Galvin said, projects long-term natural gas prices that will allow producers to earn billions off North Slope gas. They're holding off support, he said, so they can negotiate valuable concessions from the state. The requirements are in line with commercial terms they accept elsewhere in the world, he said.
Marks expects at most conditional commitments next year. On that, Galvin agrees, but sees it as a positive.
E-governor among plan's skeptics
"The conditions will provide us with a map as to what needs to be done in order to make the project ultimately successful," Galvin said. "That's what the open season is about."
Ex-Gov. Murkowski is among the skeptics. He has suggested paying off TransCanada for their expenses and going back to a pipeline plan with producers.
The BP-ConocoPhillips pipeline plan calls for spending $600 million to get to its own open season next year. All three major producers, including Exxon Mobil, want assurance that Alaskans will not raise tax rates after companies commit billions to a pipeline.
Critics such as Rep. Ramras see the chances of an Alaska gas pipeline erode a bit with every report of abundant shale gas from the Appalachians to Louisiana to British Columbia.
Ramras said he's frustrated that some Alaskans will consider Palin's pipeline process a success if TransCanada merely conducts an open season. He sees a big difference between a finished pipeline and an open season that obtains no commitments.
"If it's a failure," Ramras said of the open season next year, "then AGIA will be a failure, period, and we're not reconciling ourselves to that. Instead we are enjoying some Orwellian reinterpretation of a business transaction being recast like a recreational 10K race, that what's more important is going through the process than reaching a desirable outcome