Currently, oil revenue provides 90% of the state’s budget. North Slope oil production is on the decline and will continue to decline, but the decline has been hidden by the high price of oil. The state’s budget situation will become critical well before 2016. Alaska needs to move rapidly and decisively toward replacing its oil-based economy with a more diversified economy based on natural gas. Gas is the new Prudhoe Bay. “Eventually, the production decline gets us. That’s the frank reality that nobody wants to talk about.”
TAPS vs. Gas Pipeline
- TAPS was built in the 1970s.
- At its peak, it transported two million barrels per day.
- Currently, it’s transporting fewer than 800,000 barrels per day.
- Oil pipelines are common carriers, which means they are required by law to provide service to all legitimate applicants.
- Gas pipelines are contract carriers, which means the transporter provides service on a contractual basis.
- Third-party ownership - Perception
- Third-party will build cost overruns into tariff.
- Why pay a middleman to ship the State’s gas?
- High tariffs make more profits and companies will strive to meet this objective.
- Producers will tie up explorers.
- Explorers will be at a disadvantage by being forced to pay their competitors for transporting gas.
Tariff: The cost of shipping gas to market, usually given in millions of British Thermal Units (as opposed to millions of cubic feet). Tariffs only incorporate the cost of the pipeline, including return on equity, and treatment — not the cost of exploration and development. Right now, 8 billion cubic feet of gas is reinjected into the reservoir to pressurize the reserves so more crude oil can be recovered. Some say we should have built the gas pipeline in the 1970s, but the truth is that, right now, the gas is more useful in the ground, helping pressurize the reserves for recovery of higher-priced crude. We have a “monstrous amount of natural gas” in our reserves.
Ownership of pipe vs. ownership of gas: What are the risks, and who takes them? You’ll never build a pipeline with no gas in it. You get contracts in place, take them to Wall Street, and then you get the money to build. Currently, the risk is with TransCanada. In AGIA, the State of Alaska assumed half that risk by fronting $500 million.
Compression: Expansion by compression offers relatively inexpensive addition utilizing compressors. It increases throughput. Generally speaking, compression drives the tariff down, depending on how much additional gas is added. If Conoco, Exxon and BPXA all agree to ship gas at a tariff of $5, and then another producer gets on board and more compression stations are added, the tariff is decreased for each producer.
Looping: Increasing capacity of a transmission system by inserting an additional section of pipeline. This is less expensive if included in the original design. Generally speaking, looping drives the tariff up.
Two types of tariffs for expansion:
- Rolled-in tariffs: Costs are borne by all shippers, both new and old. Usually in the U.S., tariffs are only rolled in when the tariff is lowered for existing shippers.
- Incremental tariffs: Additional costs are borne by the entity that caused the expansion.
- FERC must approve tariff changes.
FERC: Federal Energy Regulatory Commission. “FERC is the king. FERC will make the decisions that govern what the tariff is.” President Obama is in favor of this project. Of course, so were President Bush and President Clinton. FERC does NOT regulate retail electric/natural gas sales to consumers, nor do they have oil pipeline or local distribution oversight.
Risks:
- Completion risk
- Cost overrun risk
- Firm transportation risk
- Market price risk
- Political, tax and regulatory risk
- Midstream (Pipeline builder) - Risk from now until open season.
- Upstream (Shipper) - Risk beginning in open season
There will not be two pipelines ever built. We may not get one pipeline; we certainly won’t get two competing pipelines.
Alaska Natural Gas Pipeline Act (ANGPA):
- Expedited the approval process
- Prohibited an over-the-top route
- FERC required to adopt regulations for open season
- Environmental reviews
- FERC given expansion rights for the first time
- Drue Pearce, federal coordinator, 2006
- Study of alternatlive means of construction
- Loan guarantees
- Judicial review
- Special in-state provisions
Capacity allocation: Put yourself in the shoes of Conoco Phillips. They own a third of the gas in Prudhoe Bay. Say they bid it in Chicago — it’s sold in Chicago. Then the State says, “No, we want to take gas from Point Thomson.” Conoco only owns five percent of Point Thomson. Now they have a sale but no product. How am I going to sign a 20-year deal with Chicago Light and Power when I don’t know where my gas is going to come from?
Financing:
- Department of Energy loan guarantees
- Firm transportation (FT) commitments
- Debt equity ratio
The DOE loan guarantees were authorized to the sum of $18 billion, indexed for inflation. They are to be administered by the Secretary of Energy. They are not to exceed 80% of the total capital costs of the project — including interest during construction. Terms of any loan are not to exceed 30 years.
Firm Transportation commitments (FTs) are binding commitments made by a shipper to a pipeline to ship gas (or pay even if no gas is shipped) at a specified volume and cost, for a set period of time. The FTs are the bottom line. They are what gets the money to build the pipeline. It’s a piece of jargon you need to know.
Debt-equity ratio: What formula will be sought for financing? FERC mandates the rate of return on equity.
You want to look down the road 20 years, but you also need to look at tomorrow. You’re planning on 30 to 40 years of cash flow. Other issues: Completion risks, international issues with Canada, First Nations claims (don’t forget that TAPS was the impetus to settle Alaska Native land claims), etc. Many of these issues are common to Denali and AGIA. Natural gas pipeline stakeholders include the people, the governor, the legsilature, the builders, current and future shippers and explorers, and the governments of the United States and Canada. “You have to deal with all of them; you’re not going to steamroll any of them.” You’re going to have to sit down and address some of this risk mitigation.
For those of you who are in broadcast media, Samuels says, he feels feel sorry for you. To cover this in a three-minute segment at the top of the news is nearly impossible; it’s dense stuff. He thinks that many of his former colleagues still don’t fully get it.
— Maia Nolan
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