Greenspan spurns Alaska gas pipeline “subsidies”

Federal Reserve chairman endorses “fully commercial” Mackenzie project

Gary Park

Petroleum News Calgary Correspondent

For the second time, Federal Reserve Board Chairman Alan Greenspan has warned that a shortage of natural gas could undermine a fragile U.S. economic recovery, but he does not see a subsidized Alaska pipeline as the answer.

Sticking to his market-knows-best theme, he told the U.S. Senate Committee on Energy and Natural Resources July 10 that government financial help is not needed when gas prices are expected to remain above $4.50 per million British thermal units through 2009.

Profitability at that level is “quite adequate by any measure,” he said.

Greenspan, noted that Canada’s is proceeding with a pipeline from the Mackenzie Delta to the Lower 48 pipeline structure, with “as best I understand it, minimal to no subsidies at all. It is a fully commercial project.”

The comment was made in response to Democratic Sen. Jeff Bingaman, who asked whether the Alaska subsidies in the Senate version of the energy bill would help ease future U.S. gas prices.

Push for more production

“I would much prefer that we met domestic consumption with effectively North American production,” he said, although LNG could be a solid back-up to U.S., Canadian and Mexican volumes.

“LNG is the ultimate safety valve, even if we don’t use it,” he said. “Without the flexibility such (LNG) facilities will impart, imbalances in supply and demand must inevitably engender price volatility.”

For now, he warned that perceptions of shrinking long-term supplies are “beginning to price some industrial demand out of the market,” although he was not certain whether those losses are temporary or permanent.

Gas-fired industries at risk

He told the committee that today’s tight gas markets have been a long time coming and “distant future prices suggest that we are not likely to return to earlier periods of relative abundance and low prices soon.”

Meanwhile, despite gains in U.S. storage, Lehman Brothers analyst Thomas Driscoll estimated U.S. production declined 3.0-3.5 percent in the second quarter, compared with a year earlier. For Canada, which supplies about 16 percent of U.S. needs, he is still counting on a decline of 2.0-4.0 percent this year.

With gas seizing such high-level attention, Energy Secretary Spencer Abraham announced July 9 that his department will hold a second summit at an unspecified date later this year on both the supply outlook and LNG.

He said LNG-exporting countries — such as Trinidad, Algeria, Australia, Nigeria, Oman, Qatar, Indonesia and the United Arab Emirates — will be invited to the meeting.

Abraham is also stressing the importance of conservation and has launched a “smart energy use tour” to promote better use of gas and electricity, which is increasingly being generated by gas-fired power plants.

ConocoPhillips calls them “incentives”

Kristen Nelson, Petroleum News editor-in-chie

Joe Marushack, vice president Alaska North Slope gas commercialization for Conoco- Phillips Alaska, told the Alaska Natural Gas Development Authority board July 7 that legislation ConocoPhillips is proposing for an Alaska Highway natural gas pipeline project is necessary if a gas pipeline is going to be built.

Federal legislation, he said, “is needed to improve the risk profile of the project.”

The regulatory side of the proposed federal legislation, he said, is basically to provide “certainty around the U.S. permitting process, because you can spend years and years and years, investing billions of dollars, and never get to your permits.” The regulatory legislation, he said, would provide “timing certainty.”

On the fiscal side, the risk profile of the project needs to be improved because of the volatility of gas prices.

“Commodity price, extreme high volatility, that’s been the single biggest problem” in the way of getting Alaska gas to market, Marushack said. The federal tax legislation, he said, addresses that volatility problem, and “is structured similar to other federal incentives.”

What is proposed is a credit against federal income tax for very low natural gas prices — Marushack called it “essentially an insurance policy.” The government studied the proposal and projected, based on public data, that gas prices wouldn’t get low enough for the mechanism to kick in.

What if the unexpected happened and natural gas prices dropped low enough to trigger the federal tax credit? “If it does kick in, the consumer gets the benefit of that” lower natural gas price. And without the tax mechanism, Marushack said, “the risk is just probably too great to see this project go.”

And the proposed loan guarantee?

That, he said, would conceivably lower the interest rate for the project, which would make the tariff lower, raising the royalty to the state of Alaska.

As for letting the market decide when the project should be built, with recent gas at reaching extremes of $2 and $10, how do you decide when the market is ready? Marushack asked.