The Pipeline Shell Game: Who is right?

May 17, 2010:  With the 2010 primary election just three months away, the focus of the race is narrowing to the candidates position on the Alaska Natural Gas Pipeline.

For the last five months, candidates have been debating the routes, return on investment and viability of three different approaches.

GOP gubernatorial hopeful Bill Walker wants to ship gas to Valdez, load it on tankers and send it to Asian markets. This has been a dream of some for decades.

Another GOP hopeful Ralph Samuels wants a bullet line to Southcentral to supply Alaskans with natural gas until the big line is built that will take gas through Canada to mid-west American markets.   

And the incumbent, Governor Sean Parnell, well he's sticking with the plan that producers have already testified fails to make for an economically viable project.

So who's right, who's wrong and who is just playing politics?

Let's start with Governor Parnell's commitment to AGIA.

I've written extensively about why AGIA will fail for the last three years and nothing has changed. From the overly prescriptive terms, to the role of Transcanada who cuts the profit margins on an already risky project, AGIA fails to recognize legal and financial realities.

Nobody seems to be able to figure out why Parnell continues to stand on the bow of a sinking ship, but until the state gets serious about negotiating tax terms and abandoning the mandates of AGIA, Alaskans will be without a pipeline.

Furthermore, the state's Jekyll and Hyde approach to litigation at Point Thomson is causing heartburn with pipeline hopes because the gas in Alaska's second known gas field is needed to make the pipeline economically viable. 

Next is Bill Walker's plan to liquefy natural gas and send it to Asia.

This is the closest thing to a pipeline fantasy as you can get. Walker has been insistent that he has the permits to make the project happen and that he can break ground in just three years.

This is an absurd promise to voters.

Last week, Federal Pipeline coordinator Larry Persily spoke at length about Walker's idea when he addressed a joint meeting of the Resource Development Council and the Alliance.

First, an exclusive export project is not entitled to the loan guarantee or permitting assistance of the Alaska Natural Gas Pipeline Act of 2004, Persily stated.

While many Alaskans are as enthusiastic over shipping Alaska LNG to Asia Pacific markets as they are pessimistic of a pipeline to the Lower 48, Persily shared some facts with you about an exclusively export market for Alaska gas.

North America consumes three times as much natural gas in an average day as Japan, Taiwan, China, South Korea and India combined. That's not denying that the Asia Pacific market is growing faster than the North America market - it is.

But an Alaska LNG project would have to grab a much bigger share of that growth to be viable than taking a small slice of the much larger U.S. market.

More than 90 percent of the world's gas was delivered by pipeline in 2007; just 8 percent by LNG tanker.

Alaska gas has a lot of low-cost competition in the Asia Pacific LNG market - Australia, Papua New Guinea, Indonesia, Malaysia, Russia and Qatar - none of which need an 800-mile pipeline through the Arctic to get their gas to a liquefaction plant at tidewater.

The Asia Pacific market is in the middle of an LNG supply boom, with new projects totaling 16 billion cubic feet per day coming online between last year and 2015.

Not to mention that China and India are trying to develop their own domestic production, and each has pipeline options to LNG.

And for those who look at past long-term contracts, where gas prices have been linked to oil, generating huge margins for LNG, look again. Spot market and short-term sales contracts now comprise almost 20 percent of the Asia Pacific LNG trade - and growing.

Projections of eternal profits from LNG linked to high oil prices could be wrong.

Remember predictions just a few years ago of a foreign LNG wave hitting the U.S., filling in for declining North American production? Promoters tried selling LNG receiving terminals up and down the West and East Coasts.

They were wrong.

One of the losers was a company that spent six years pushing an LNG receiving terminal near the mouth of the Columbia River; it filed for bankruptcy last week, with $130 million in debts. It had a FERC license, but no gas supply, no gas buyers, no financing.

That was Persily's take on the idea that Bill Walker will be breaking ground in three years.

The second GOP challenger is Ralph Samuels, who was the only lawmaker to vote against AGIA. Today, Samuels looks like a genius for being the only voice against a plan that allows government to try and dictate the economic terms of the pipeline project when they have no skin in the game, sans the $500 million they threw away with TransCanada.

Samuels wants a bullet line to help sustain natural gas needs until a larger diameter line can be built. However Persily warned about this idea as well.

"I can't leave without commenting on the push to build a smaller pipeline to serve Alaskans," Persily said. "While I understand the frustration that has led to the proposal, I caution Alaskans to be careful."

The pipeline right of way from the North Slope is only so wide; there are only so many good spots for construction camps, gravel pits and a gas treatment plant. There also are concerns about a safe separation from the oil pipeline, blast radius, and other issues.

Persily warned about making sure one dream doesn't get in the way of another dream.

A large pipeline moving gas out of state is Alaska's best bet for tens of billions of dollars in tax and royalty revenues, the availability of gas for in-state use and the lowest tariffs for in-state deliveries. Anything else comes up short in one of those categories.

Exxon Mobil, BP, ConocoPhillips and TransCanada have spent in the neighborhood of $400 million total since 2000 to look at the viability of the project. They're still looking, still spending.

Persily suggested waiting for the open seasons to close, waiting for the commercial negotiations that will follow and waiting to see what the producers ask of the state.

Upon review, all three candidates on the GOP side have challenges with their pipeline plans, but Walker's appears to be the most unrealistic.