State would get $66.1 billion from gas line

Net present value analysis shows TransCanada’s project economics to move Alaska North Slope gas are ‘extremely robust’

Kristen Nelson

Petroleum News

With a net present value of $66.1 billion (cash flow of $261.5 billion discounted at 5 percent) to the State of Alaska and a likelihood of success, TransCanada Alaska’s proposal under the Alaska Gasline Inducement Act meets the act’s requirements, members of Alaska Gov. Sarah Palin’s gas team said May 28, the first day of the administration’s three-day public forum on its AGIA determination.

Commissioner of Natural Resources Tom Irwin called the project “hugely” economic.

Palin, opening the forum, said the TransCanada project was “wildly” economic for all parties involved.

Estimates of revenues to the major North Slope producers are a net present value of $13.5 billion (cash flow of $147.4 billion at a discount rate of 10 percent).

Commissioner of Revenue Pat Galvin said the TransCanada proposal would maximize a number of benefits to Alaskans: the state would get a gas pipeline; there would be associated jobs and long-term careers; opportunities for affordable energy; state revenues would be maximized and there would be opportunity for future growth of the state’s economy.

The true prize, he said, is the exponential effect of North Slope gas exploration and development afforded by a true open access pipeline, with crucial features of expandability and a fair tariff.

The Alaska Legislature passed AGIA last May. The act provides that the state will match up to $500 million of the initial costs of a pipeline project to take Alaska North Slope gas to market in exchange for commitments to 20 must haves. The administration found TransCanada to be the only one of five applicants fully compliant with requirements of AGIA and the request for applications in early January. The commissioners of Natural Resources and Revenue have determined that issuing an AGIA license to TransCanada will maximize benefits to the state. The Legislature will officially receive the determination June 3 and will have 60 days to approve the license. Legislative approval is required.

Btu an issue with LNG project

And adding to comments the administration made May 22 on the comparison between TransCanada and LNG projects, Irwin said the Asian markets require a higher Btu than a gas pipeline to the Lower 48, which means only propane could be taken out in Alaska.

Galvin said that because of higher Btu requirements in Far East markets, liquids the state had hoped to strip out for a petrochemical industry would have to be left in the gas if it went to Far Eastern markets. Galvin also said that today’s high Far East price for LNG is likely to come down, so the future premium for selling LNG to that market would be lower. The price difference, he said, is swamped by the higher LNG project cost.

For all of the LNG cases studied the net present value is lower to the state and to the producers than an overland pipeline project, he said. The lower return to the producers raises a question about their willingness to commit gas for LNG, he said, and confirms the producers’ view that an overland project is a greater value to them.

Galvin also said LNG projects are less likely to succeed because of their complexity — the entire project stream has to come online at the same time. And because reserves have to be certified for the entire term of the LNG sales contract there is a risk with LNG of having exploration stifled because an LNG project would likely tie up known reserves and LNG projects require gas expansion in large quantities — enough gas to justify addition of an LNG liquefaction train.

Liquefaction plants are another open access pinch point, he said, and export authorization is a challenge.

Galvin said many of the hurdles of an LNG project are eliminated by the overland project going first. The overland project becomes the anchor and an LNG project provides more gas volume and more markets for North Slope gas.

What about Denali

Galvin said Denali is more risky for the state because there are no commitments, the tariff terms are undefined, state fiscal concessions for Denali are undefined and there is no certainty on expansion provisions.

He said the Federal Energy Regulatory Commission recently approved 50-50 debt-to-equity ratios for some pipelines, which would raise the tariff on an Alaska gas line by $1 compared to a 75-25 debt-to-equity ratio under AGIA. The lower equity reduces the return to the pipeline company, producing a lower tariff.

Without certainty of expansion, Denali would stifle North Slope development, resulting in loss of long-term jobs and loss of the potential of LNG development, he said.

Galvin said the state needs to use the power of competition to protect Alaska’s interests and said competition is a more powerful tool than the state’s sovereign power.