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Governor: Alaska must have stake in gas pipeline
Kristen Nelson Petroleum News Editor-in-Chief
Pedro van Meurs says Congressional passage of Alaska gas pipeline provisions was “miraculous.”
Van Meurs, who is advising the state in its negotiations with potential builders of a gas pipeline from the North Slope, called what Congress passed “such an intelligent bill.” And in gaining passage, he said, Alaska’s congressional delegation “taught the entire Congress that to get the project we have to reduce risk.”
Van Meurs followed Alaska Gov. Frank Murkowski, who told a hearing of the Legislative Budget and Audit and Senate Resources committees in Anchorage Oct. 13 that “a critical element of a successful negotiation will involve the state taking an equity position and significant level of project risk.” And because the Legislature does not have the ability to change a contract negotiated under the Alaska Stranded Gas Development Act, the governor said he wanted legislators to have an opportunity to discuss the element of risk with their constituents now.
He said that he could not discuss details of the confidential negotiations, “but I can tell you that a critical element of a successful negotiation will involve the state taking an equity position and a significant level or project risk.”
And Murkowski said he didn’t want the administration’s team “to spend months negotiating a contract with equity and shippers’ risk incorporated into the document only to have you, as a legislative body, tell me that that this concept is a complete non-starter.”
We may have missed the boat with the trans-Alaska oil pipeline, he said: ownership would have put the state in a better position to obtain more of the revenue for Alaska, although it would have also exposed the state to significant risk — in the case of the trans-Alaska pipeline, cost overruns on construction. But, the governor said: “We have stood on the sidelines for nearly 30 years watching a lot of revenue flow to those who were willing to take the risk.” Competitors take risks Van Meurs, who has advised governments in negotiations with oil and gas companies for 30 years, said there is a risk-reward balance: The more risk a government is prepared to accept, the higher the government revenues.
Alaska’s competitors — countries around the world with stranded gas resources — are getting their gas developed by lowering the project risk. “Your competitors understand the risk-reward balance,” he told legislators, citing developments in The Netherlands, Venezuela, Russia, Brunei, Oman, Qatar, Norway, Malaysia, China and Colombia.
And on the subject of Russia van Meurs noted that Alaskans were a little naïve in wishing former ConocoPhillips Alaska head Kevin Meyers well on his transfer to Russia. Russia is a competitor of Alaska, van Meurs said. Alaskans should have been asking if Meyers was taking ConocoPhillips’ money with him. Unique Alaska issues All of Alaska’s competitors are doing quite well, van Meurs said, and Alaska is not yet out of the starting gate.
So that’s the problem? It’s the unique risks of an Alaska project.
The project is huge: compared to the current 40 largest oil and gas projects in the world, the Alaska natural gas pipeline project, at $18 billion, is three times the size of the next largest. According to van Meurs’ data, even at $14 billion (connecting to Canada infrastructure) the Alaska project is more than twice the size of the next largest, with a capital expenditure of some $6 billion.
The “gigantic size” of the project, he said, is a risk by itself: if you failed with this project the risk for your company is “horrible.” Size creates another risk: the huge up-front capital requirements mean the project has a low rate of return compared to competing projects, and that’s related to the project size, van Meurs said, not to Alaska’s fiscal system.
Natural gas price uncertainty and cost overrun risk are also downside risks, although van Meurs said the upside, with fiscal stability, is also very high.
Then, he said, there is the regulatory environment: North America, he said, has the most complex regulatory environment in the world. Competitors, he said, don’t have regulatory risk.
“To get this project going requires unique solutions,” van Meurs said: “It won’t go by itself.”
The passage of the federal gas pipeline legislation was “a gigantic step forward,” he said, but the onus is now on Alaska: “Now we are the only ones standing in the way of this project.”
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