Gara calls in-state gas line premature

Anchorage Democrat holds out hope for large-scale line, which would produce revenues for state; sees Cook Inlet as viable bridge

Stefan Milkowski

For Petroleum News

The House Finance Committee held its first hearing March 13 on House Bill 9, wide-reaching legislation empowering the Alaska Gasline Development Corp. to pursue an in-state natural gas pipeline.

The legislation has influential backers, namely House Speaker Mike Chenault and Rep. Mike Hawker, but also vocal critics. Rep. Les Gara, an Anchorage Democrat who joined the Legislature in 2003 and has served on Finance since 2007, argues the whole in-state project is premature. A large-scale pipeline could still happen, he says, and for now, there’s plenty of gas in Cook Inlet to meet local needs.

Petroleum News spoke with Gara on March 14.

Petroleum News: HB 9 had its first hearing in House Finance this week. What’s your take on the bill?

Gara: There are a lot of gas line options out there. Probably the most expensive gas you could provide for Alaska consumers would be through a small line from the North Slope to Fairbanks and Anchorage. We might have to do that if all the other, cheaper options fail. But the idea of spending tens of millions of dollars now, when we have gas in Cook Inlet, is questionable.

Petroleum News: You’ve consistently argued the state should focus on a large-scale export line instead. What’s better about an export line?

Gara: An export line produces revenue for the state. We don’t tax in-state gas, so there’s a $500 million difference, a $1 billion difference, a $2 billion difference to the state treasury.

A big line will be the best thing we can do to expand oil development on the North Slope. A small line will just use gas we know we already have. A big line will require companies to start exploring for new gas. When they explore for new gas, and have mixed fields that have oil in them, all of a sudden uneconomic oil fields become economic because you’re producing both the gas and the oil.

Petroleum News: You’ve expressed concern that customers of an in-state line could be locked into high tariffs even if a big line was built later.

Gara: We have two studies on the cost of an in-state line, and they’re based on this sort of fiction that companies will sell us gas for $2 per mcf. We don’t know if that’s true.

Even if it is true, the first study said it could cost about $17 an mcf for that gas. The second study said about $12, unless we double our use of gas in the state, which seems unlikely. (Figures are for 250 million cubic feet per day pipeline.)

The economies of scale aren’t there, so it results in a cost of gas that’s maybe double, triple, or quadruple what a big line would produce.

Petroleum News: At yesterday’s Joint In-State Gas Caucus hearing, Chenault warned that the Southcentral gas system is at risk without a pipeline. Is a shutdown a real threat?

Gara: The best information we have is that there’s a lot more gas in Cook Inlet. The private sector believes that, because they have plans to expand the gas storage facility in Cook Inlet that was just built.

The smartest thing is to let companies explore in Cook Inlet and make sure we have a stable supply of natural gas. If we do, we’re not in crisis mode and we don’t have to build a pipeline that produces the most expensive gas in state history.

Petroleum News: How many more years can Southcentral rely on Cook Inlet gas?

Gara: The trouble is that explorers in Cook Inlet only explore for the next contract that comes open. They’re not going to go out there and explore for the next 100 years. The most recent studies we have are that there is a lot of gas left in Cook Inlet.

It might be a few years before a big gas pipeline can be built to either Valdez or Nikiski or the Lower 48, but we can’t give up on that as our main prize.

The worst thing you could ever do is build a pipeline that has gas that’s three times more expensive than a big pipeline that will require that consumers bind themselves to buy the gas for 20 or 30 years. And then the big gas line becomes economic and Alaska consumers watch gas go right by their house that’s much cheaper.

Petroleum News: Just for the record, AGDC’s project plan predicts gas prices of about $9.50 in Anchorage and $10.50 in Fairbanks.

Gara: That’s if it’s half a (billion cubic feet per day). Right now we use something under a quarter bcf.

Petroleum News: They’re assuming an export component or anchor tenant.

Gara: And how are they assuming that? There’s some country that wants us to export the most expensive gas they’ve ever seen? If it’s really $9 an mcf, is anybody going to buy it when they can buy it for half that price now?

Petroleum News: So you’re skeptical they can deliver gas to Anchorage at $9.50 an mcf?

Gara: I’m saying we’re likely going to use something much closer to 250 million cubic feet. And if they think some company is going to move up here to buy the most expensive gas in the country, I would like to see that.

Gara: We’ve built gas storage in Cook Inlet so that companies have an incentive to produce gas even when we’re not using it. That’s always been the problem — companies have to shut in their wells in the summer. Now with storage facilities, companies will know that once they start producing a well, they have a place they can put the excess.

We do have the gas we need right now in Cook Inlet. Very likely we have enough gas to export it to Fairbanks.

Petroleum News: At the Finance hearing yesterday, you expressed concern that an in-state line from the North Slope could discourage exploration in Cook Inlet. What’s your concern there?

Gara: You want to create a friendly business climate for people in Cook Inlet. It’s not very friendly if you’re saying, Come up and explore, but after you explore, we might have a gas pipeline coming from the North Slope that the state subsidizes $2 billion, $5 billion, maybe $7 billion that will render all the gas they find in Cook Inlet useless.

The (Fairbanks North Star Borough) is negotiating a deal to truck North Slope gas to Fairbanks. If we want a bridge, why don’t we spend a little money subsidizing the trucking plan?

Fairbanks’ other alternative is a pipeline from Cook Inlet, if it turns out the gas supplies are as large as we’ve been told by consultants.

Petroleum News: What evidence is there that the economics of a large-scale line will improve?

Gara: All of the major price forecasts coming out are forecasting gas prices to rise from $3 and $4 an mcf up to $5, $6 or $7 an mcf. It just stands to reason that as the economy keeps ticking up, and when they finally solve the European economic woes, the price of gas is going to start going up.

And it’s going to go up because the shale gas in the Lower 48 is going to get more and more regulated and as the easy shale gas disappears, they have to start fracking for difficult shale gas.

Petroleum News: Is there anything the state can do to encourage a large-scale pipeline?

Gara: I wish this governor’s administration had a better working relationship with the federal government. Instead, they send off two press releases a week criticizing the feds.

How about putting politics to the side and having a governor sit down with the president and say, What can we do?

Petroleum News: Does the Legislature have a role in setting the gas tax or offering fiscal stability?

Gara: Right now the gas tax is a mess. Sen. Bert Stedman tried to fix it a couple years ago, I agreed with him, and the governor vetoed the bill. That was decoupling.

To avoid the decoupling bill, the Department of Revenue rewrote the gas tax in a way that’s impossible to understand. They wrote a series of regulations. We will certainly need to rewrite the gas tax.

Petroleum News: How many years are you willing to wait for a big pipeline?

Gara: As long as Cook Inlet provides a stable supply of natural gas and as long as we can use that or trucking subsidies to help Fairbanks and maybe get propane to some of the rural Alaska villages.

If everybody’s projections turn out wrong and Cook Inlet doesn’t hold the gas we need, then we probably do have to build an in-state pipeline. But people are jumping off the diving board way too soon with $10 million here, $100 million there, on studies for a pipeline that is our last resort.

The danger is that studies on this project are going to bleed the state dry. It’s all backwards until we determine whether we need to select this last option.

Petroleum News: Are there specific provisions in HB 9 that concern you?

Gara: Yeah. HB 9 takes away the consumer protection of letting the RCA (Regulatory Commission of Alaska) have a role in setting consumer gas rates. I think there should be a consumer watchdog that can protect consumers.

I’m not a big fan of confidentiality provisions, especially as we realize over the last couple years that many of the bills we’ve passed had too many confidentiality provisions.

Petroleum News: What would you like to see happen with oil taxes this year?

Gara: I think the Senate is taking a rational approach. Before the governor’s oil bill came up, all the oil companies said was that at very high oil prices, we think your tax is too high. The governor wrote a bill that reduced taxes at not just high prices, but low prices and average prices.

Only at high prices were we not competitive. So the Senate is saying we’ll fix that.

And they’re saying we want something in return for our money. They have the tax credit (for increased production).

Petroleum News: Would you support the version of SB 192 that came out of Senate Resources?

Gara: I would like to see a processing facility tax credit in addition, personally. But the Senate bill is smartly written to address the concerns the oil companies made before the governor offered them the $1.8 billion giveaway. Once you offer the $1.8 billion giveaway, they of course all come back and say, Oh, we need that.

Petroleum News: Anything else?

Gara: Without a big gas line, this state is in trouble. It’s the most important project on the state’s horizon. And I still think we can make it happen. That’s one area where I do agree with the governor.