Van Meurs: Global gas competition tough

Consultant says Alaska participation in gas pipeline will reduce investment required, keep total revenues to state the same

Kristen Nelson

Petroleum News

The administration of Alaska Gov. Frank Murkowski has been trying to move a pipeline gas project forward through negotiations for a fiscal certainty contract with the North Slope producers.

In the 1990s Alaska tried to move a liquefied natural gas project forward with the original Stranded Gas Development Act. This LNG proposal was the project Yukon Pacific had been promoting, consultant Pedro van Meurs said Jan. 20. It would have moved Alaska North Slope gas to the Far East as LNG.

That project didn’t work out, he told the Alaska Support Industry Alliance “Meet Alaska” conference, “because of strong competition from other projects in the East Asian market.”

Van Meurs, the State of Alaska’s chief consultant in the gas fiscal negotiations, said there are stranded gas reserves in the world equal to 150 North Slope projects, all seeking markets. Each year there is room for one stranded gas project in the world market.

“So you can imagine that the competition is fierce,” he said.

Alaska’s gas project weak

At a Chicago gas price of $5.50 per million Btu, he said, the project makes a 20 percent rate of return. The future price of gas may average $5 per million Btu over the next couple of decades, but van Meurs said he had been in the energy business long enough “to know what whatever goes up comes down. After every boom, it’s a bust. And consequently the most dangerous thing today is that we are now in a boom and we don’t know when the bust will come.”

You can’t base the pipeline on “fantasy prices that may occur,” he said. The state has compared this project to other projects at a “stressed price” of $3.50 in Chicago, and at that price the project makes a 15 percent rate of return.

Van Meurs said he researched more than 50 projects worldwide and “could only find one that made a lower rate of return number at stressed price,” a field in Norway with special financing.

The Alaska project is weak “from the rate of return point of view,” he said, and that “justifies that we consider this stranded gas and that we have stranded gas negotiations” on the project.

Strengthening the profitability

The State of Alaska could improve profits by eliminating its take from the project. Van Meurs said he looked at a case where the state set all of its taxes for the project at zero: no royalty, no production taxes, no property taxes and no corporate income tax.

At a stressed gas price of $3.50 that improved the project’s rate of return by about 2.5 percent.

“That’s not much: there’s not much Alaska can do about this project,” he said.

That’s because the project is so large and the lead time is so long — and then for every dollar Alaska takes off, the federal government gets 35 cents. “So taking money off is an inefficient way of promoting this project.”

Reducing the investment

Alaska, he said, loses nothing: “The total revenues to Alaska are the same as under the status quo; in fact, they are slightly better.”

Van Meurs said that in his model he had deducted what the state had to invest in the line as well as $700 million (5.5 cents per million Btu) for extra gas marketing costs.

What the state has proposed, he said, is to take its royalty and tax in-kind, make its own shipping commitment, market its own gas and participate for 20 percent of the gas pipeline.

“And this is such a significant boost to the economics of this project, and lowers the fiscal risk of this project so significantly that we have dramatically improved the possibility that this project will actually come about, and not be nibbled to death by other more competitive projects over the next 10 years.”

The stick

Rep. Eric Croft, D-Anchorage, the sponsor of House Bill 223, introduced last year, told the House Ways and Means Committee Jan. 13 that Alaska falls in line behind foreign gas projects for company investment because the companies that own the North Slope natural gas, BP, ConocoPhillips and ExxonMobil, also have gas in other countries.

If a company has reserves elsewhere in the world and there is pressure to develop those reserves, if Indonesia and Russia and the Middle East are better at pressuring for production, then Alaska’s gas reserves will stay at the end of the line, he said.

Croft told the committee that the fundamental idea of a state oil and gas lease is that the state puts itself in the same place as the companies. The equation breaks down, he said, when our interests start to diverge from those of the companies.

Reserves are important to a company’s stock price and as companies combine and get larger and larger there is pressure for more reserves: “I don’t want to be Exxon’s reserves,” he said.

Croft said his bill, which proposes a tax on large North Slope gas accumulations, ensures that Alaska won’t be a warehouse for the companies’ reserves.