Harbour Addresses Alaska Railroad Board - Eric Lidji Thoughtfully Addresses A Gas Pipeline Alternative

Could A Government Sponsored ANS Bullet Line Kill Cook Inlet Private Investment in Gas Exploration and Storage?

Alaska Railroad Testimony, 3-25-10

Commentary By

Dave Harbour

Juneau Empire by Pat Forgery.  Some Alaska legislators are promising big things by developing Alaska's natural gas for use by its citizens, but Gov. Sean Parnell and others are warning that such hopes may be overblown.

 

Day before yesterday, the Alaska House of Representatives passed two well-intended pieces of natural gas related legislation which could both affect the Alaska Railroad's (ARR) mission and operations. 

The bills, if enacted into law, could also improve or confound gas supply in Southcentral Alaska, involve billions of dollars of state savings accounts as ANS oil revenue decreases, and produce important trade-off disputes among stakeholders.  

In appearing before the ARR Board yesterday, I alerted Members to these bills which, having passed the House, would be soon before the Senate.  I urged them to be mindful of important questions arising out of the entire milieu of Cook Inlet and Alaska North Slope gas pipeline issues.

First, let's understand the bills.

HB 280, entitled the Cook Inlet Recovery Act, or CIRA, was sponsored by House Finance Committee Co-Chair Mike Hawker (NGP Photo-r), R-Anchorage and House Speaker Mike Chenault (NGP Photo-l).  "In a few years, the Cook Inlet gas reserves we depend on today will not be enough to meet the demand of Southcentral homes and businesses," Hawker said in a release. "Acting now, before there is a crisis, is critical to securing a stable and affordable energy source for our community.  

A legislative release continues to quote Hawker's belief that, "The Cook Inlet Recovery Act will provide incentives to develop and authority to regulate new gas storage facilities, which are essential to the utility provider's ability to meet peak deliverability on the coldest days.  CIRA also enhances existing tax credits for exploring for new gas in the Cook Inlet."

CIRA provides a tax credit, based on storage capacity, and a 10-year exemption from state land lease charges to owners of new gas storage facilities that meet specific deliverability requirements and are established by 2015. The financial incentives are available only to facilities that provide storage to regulated utilities and the benefit of the tax credits are required to be passed on to the consumer. (Note: Proprietary and third party storage should be treated equally and all credit benefits should not have to be passed on to consumers, otherwise the investor incentive disappears, -dh) The bill also makes existing Cook Inlet gas exploration tax credits more attractive and easier to use by giving companies full value for the credits during the first year, allowing companies to receive the highest percentage available under current law, and removing barriers to using credits earned in the Cook Inlet against taxes accrued on activities in other areas of the state.

Chenault, added that, "HB 280 will reduce the risk of gas delivery disruptions and "brown outs."

So, the primary focus of HB 280 is to make sure the most populous area in Alaska avoids natural gas shortages by providing natural gas explorationists, developers and storage investors with incentives to find and store adequate natural gas supplies.  I would only add that Representatives Johnson, Neuman, Ramras, Millett, Johansen and Hawkers have sponsored HB 308 which would generally improve the investment climate for energy companies.

On the other hand, the Alaska State House also unanimously passed House Bill 369, also sponsored by Speaker Mike Chenault, which would create a, "Joint In-State Gasline Development Team," charged with building a government gas pipeline.  The team, let by the Executive Director of the Alaska Housing Authority, would include the Commissioner of the Department of Transportation and Public Facilities, the CEO of the Alaska Railroad, the CEO of the Alaska Natural Gas Development Authorityh and an In-state Gasline Project Manager.  Together, they would submit a project plan by July 2011 and have a mission of transporting gas from the North Slope to Southcentral Alaska before 2016.  According to a House statement, "The team will cover all aspects of the line's development, from planning and design to financing and gas delivery. HB 369 also charges the team with selecting the most economically sound route to deliver the gas to Alaskans, and share previously-completed work to expedite project planning and development."  

Chenault concluded "This is an opportunity for Alaska to move forward, and put the weight of our many assets behind obtaining a stable gas supply for Alaskan businesses and families."
 
My appearance at the ARR Board meeting yesterday enabled me to list questions that the Governor and Lawmakers should also be asking themselves.  Here is my complete testimony.
 
In it, I said, "I am not opposed to an ANS gas bullet line or LNG project but with respect to the sense of urgency with which our politicians are currently approaching that issue, one wants to be sure that critical mistakes are not made in haste, with the best of intentions, a-la-ASI, Mat Maid and Valdez grain elevators. To the extent you do become involved in discussions of a bullet line, I prepared a few questions you may want to consider:
·         To what degree should the ARR be involved in gas pipeline activities, and at what cost to the Railroad’s primary mission?   
·         Yesterday, Rep. Hawker’s HB 280 also passed the House, encouraging more Cook Inlet exploration and investment in gas storage; does creation of the Gasline effort  via HB 369 contradict the worthy goals of HB 280?
·         Just having heard Mary Ann Pease’s Commonwealth North Energy Report, one would ask several questions regarding a gas pipeline project’s relationship to Cook Inlet gas exploration and other issues:
o   Fundamentally, does the state want to support a private sector solution to gas deliverability shortages as envisioned by HB 280, or does it wish to promote a government solution, as proposed by HB 369? Are the goals of the two bills mutually exclusive? Let’s go a little further…
o   If almost 200 wells need to be drilled in Cook Inlet to enable adequate, future gas supply for Southcentral Alaska, will investors go forward if the state focuses on a bullet line accessing ANS Gas?
o   If the State focuses on ANS gas via a bullet line, would investors want to spend money developing storage for gas or determining feasibility of a cheaper LNG import concept for Southcentral Alaska?
o   Would imported LNG molecules be cheaper for our businesses and residents than molecules transported here from the North Slope? 
o   Would Alaskan citizens prefer to burn more expensive ANS molecules over potentially cheaper imported molecules because they are “Alaskan”.
o   If a bullet line is built to Southcentral and several years later a mainline is built, who pays for the stranded section of bullet line?
o   Will ratepayers and utilities agree to pay the whole cost of construction even if they could have obtained cheaper fuel supplies via Cook Inlet exploration and LNG Imports?
o   Will citizens throughout Alaska subsidize a bullet line for Southcentral citizens? If so, what will they receive in return and is the state willing to pay the price? 
o   What other projects will not be built with the bullet line subsidy that would otherwise have been possible?
o   Will government own and operate a bullet line? 
o   Will decisions of the bullet line managers be protected from political influence?
o   To ‘make gas cheaper’ will government be tempted to subsidize state royalty gas or try to force producers to artificially lower the price of their gas? Is this a desirable policy area for ARR managers?


We applaud Speaker Chenault and Finance Chairman Hawker for their initiative.  The dangerous natural gas shortage in Cook Inlet does require leadership and action.  The question raised here is whether or not an all out, government-subsidized ANS in-state gas pipeline is justified: with unknown economic impact on consumers, cook inlet explorers, developers and storage investors, and with huge potential impact on state savings accounts and growth in government.


I didn't want to presumptionsly suggest what the ARR 'should do' in yesterday's testimony, but hoped that the questions posed might serve the public interest by encouraging further discussion and analysis.


But now, a day later, I've further considered the questions.  It now seems logical that pouring huge but unknown and dwindling government assets toward building of a government owned gas line to serve Interior and Southcentral utilities pounds a stake in the heart of any future Cook Inlet gas exploration, optional gas development or gas storage projects; or, an LNG import concept that might be much cheaper for consumers and government alike. 


If an in-state gasline is to be built, state leaders would be well advised to let the private sector do it.  If private investors don't bite, the market has spoken: it's not feasible under current conditions!  
 
One might argue that the government has so spoiled Alaska's climate for investment, that the only large projects that can be built are government projects.  If that is what Alaska's Legislature believes, then perhaps its more complete attention should be focused on improving the investment climate...than reacting to it by resorting to government projects.  Won't adopting a government project mentality just deplete the treasury, repel investment, increase the size and momentum of goverment growth at a time when revenue is waning, and result in a new generation of abandoned and disreputable government projects!  
 
What say you?
Alaska Dispatch.  Larry Wood describes two 'in-state gas pipeline' concepts.

ADN by AP.  Chief administrative officer Harold Curran declined to say why North Slope is pulling out until after the borough assembly meets to discuss the matter next month.

Alaska Dispatch by Eric Lidji (NGP Photo). ... The over-the-top route strikes some gas pipeline watchers as preferable because it reduces distance and duplication. The two highway routes on the table now -- one proposed by BP And ConocoPhillips, known as Denali, and the other by TransCanada Corp. and Exxon Mobil Corp. -- each stretch nearly 2,000 miles through northern Alaska and western Canada. In comparison, an over-the-top route would run about 200 miles directly into Canada and connect to the proposed Mackenzie pipeline.   By merging two pipelines -- a major assumption made more realistic because the same general players operate in both natural gas basins -- the over-the-top route cuts down on the amount of steel pipe that must be made and purchased, and keeps one pipeline from monopolizing the trained workforce needed to build the other. Combining the pipelines would presumably end the perennial discussions about which will come first, Alaska or Mackenzie.  (Comment: Why would Alaskans not want to obtain higher wellhead values and royalties for our children via a more efficient system, even at the expense of a few thousand temporary construction jobs?  -dh)

The Alaska Standard by Dan Fagan.  One of the most ridiculous hurdles came recently from the Army Corp of Engineers. The Corp denied Conoco Phillips a permit to build a much-needed bridge with an attached pipeline in NPRA. The Corp instead insisted Conoco Phillips run the pipeline under the river. Understandably, Conoco Phillips says that plan would not represent the most environmentally safe plan. And remember if something goes wrong, the media will hold Conoco Phillips responsible, not the Army Corp of Engineers.  (Note:  We will address these federal issues in Monday's posting!  -dh)