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State lawmakers talk gas line logistics In-state gas caucus in Fairbanks to study worker training efforts, infrastructure upgrades, and financing of hoped-for megaproject Stefan Milkowski For Petroleum News
Does Alaska have the workers it needs to build a natural gas pipeline?
Are its roads and bridges ready for heavy equipment and tons of pipe?
Members of the Joint In-State Gas Caucus met Nov. 9 in Fairbanks to discuss these and other questions as the Alaska Gasline Development Corp. pushes ahead with plans for an in-state pipeline from the North Slope to Southcentral.
Rep. Mark Neuman of Big Lake, who co-chairs the caucus with Sen. Lesil McGuire of Anchorage, said he didn’t have any specific complaints over agency preparations, but simply wanted to keep the discussion front and center. “I really wanted to focus on logistics,” he said. “I wanted to come to Fairbanks because Fairbanks is going to be a hub.”
The daylong meeting was held inside a new 80 by 80 foot welding shop at the Fairbanks Pipeline Training Center. A 10-ton overhead crane waited overhead; posters of pipeline construction hung on makeshift walls. During a break, lawmakers tried their hands operating bulldozers and excavators in a mobile heavy equipment simulator.
A dozen legislators attended the meeting, along with about 50 legislative aides, industry representatives, AGDC officials, and members of the public.
Keeping the workforce here One of the main issues discussed at the meeting was the availability of pipeline workers and the extent to which Alaskans will be prepared to capitalize on pipeline jobs.
Labor Commissioner Click Bishop painted a rosy picture of opportunities for Alaskan workers in the years ahead and claimed the state is better prepared than it was when the trans-Alaska oil pipeline was built. “We’re in a lot better position today than we were 35 years ago when TAPS was conceived, and that’s a good thing,” he said.
Bishop explained that the Department of Labor and Workforce Development had morphed a gas line specific training program required under the Alaska Gasline Inducement Act, AGIA, into a broader oil and gas training plan at the suggestion of lawmakers.
Bishop stressed his efforts to include industry in the development of training programs. He pointed to new technologies that could expand Alaska’s oil and gas resource base, and to the Donlin Creek and Tower Hill mine projects. “I’m the eternal optimist, and I think this state is poised to be on a good 10 to 15 year run,” he said.
Jim Laiti, business manager for Plumbers and Pipefitters Local 375, also expressed confidence over worker preparedness. “We’re much better prepared than we’ve ever been to mobilize on short notice, and that’s how these projects typically come,” he said.
Will Chinn, project development manager for Price Gregory, painted a somewhat gloomier picture. Chinn argued that a slowdown in North Slope oilfield developments could force support companies to move workers and equipment out of state.
While companies that support exploration projects, such as ice-road builders, are finding work, the situation is “bleak” for companies involved in production-related work, Chinn said. “It’s all about maintenance, it’s not new construction. That really does not bode well for our industry.”
Chinn blamed high production taxes for the lack of new developments.
“This training center is probably being used at a fraction of its capacity,” he said.
Bishop acknowledged that was true, explaining that training efforts reflected the amount of work available. Bishop said he had encouraged some of the workers trained in Alaska to seek work in the Lower 48 to keep their skills fresh. Some of the first trainees are coming back now to help train new workers, he added.
After the hearing, House Speaker Mike Chenault of Nikiski, a long-time advocate for an in-state line, said he isn’t worried about having workers for the pipeline, and doesn’t mind if boom times for Alaska brings some workers up from the Lower 48 — that’s how his father got here, he said.
Moving iron and steel Michael Foster, an engineer and chairman of the Knik Arm Bridge and Toll Authority, gave lawmakers a big-picture look at what it will take to build a gas line.
The first step will be to move heavy equipment into place, he said. Because companies don’t keep a lot of the necessary big “iron” in Alaska, and because developers will seek new or relatively new equipment, a lot will have to be brought in. “When a project of this size takes off, you’re probably going to see a sizeable influx of iron coming to the state,” he said.
The next step will be to ship ATCO trailers or other units and build construction camps. After that, companies will have to build pressure stations, which Foster said could be built in Alaska.
Then comes the pipe. Foster said Valdez, Whittier, and Anchorage could all work as ports of entry, using rail or highway to move pipe from there. Point MacKenzie would be ideal for staging equipment and pipe because of the space available.
Foster said Alaska’s rail system is capable of hauling heavy equipment, and that its highways can generally handle any load. The limitations are likely to be bridges on those highways, he said, such as the bridge over Hurricane Gulch.
Echoing Chinn, he added that several trucking companies are leaving Alaska for North Dakota.
Pat Kemp, a deputy commissioner of the Department of Transportation and Public Facilities, said the state has made a lot of progress on bridges in the last few years with federal help. He noted new maintenance facilities on the Dalton Highway and said other necessary projects are already in Alaska’s Statewide Transportation Improvement Program. “We’re slowly but surely chipping away at a lot of the infrastructure needs,” he said.
Kemp added that the state will have to act fast on some projects, which will likely require using state money rather than federal money.
Rep. David Guttenberg of Fairbanks warned it might be hard to find a good staging area in Fairbanks now. When the oil pipeline was built, pipe was staged on the east side of town, where the Richardson Highway, George Parks Highway, and railroad all intersected, he said. Now that area has been taken over by commercial development.
In an interview, Neuman said gas line infrastructure needs were well documented years ago under former Gov. Frank Murkowski. But he suggested certain pinch points, such as Atigun Pass and the Yukon River crossing, might benefit from creative thinking. Laying two or three smaller pipes might be logistically easier than laying one big pipe, he said.
Balancing risk and returns Joe Dubler, AGDC’s chief financial officer, explained the pros and cons of three different potential financing mechanisms for an in-state line.
Private ownership is the most common model in the Lower 48, Dubler said. If Anchorage had 2 million people, private developers would likely have already built a line.
Dubler said private ownership is attractive because the state would not take any risk, but unattractive because it would not have a say in decisions that could affect Alaska consumers. In its modeling, AGDC assumed a private company would use 65 percent debt, 35 percent equity, seek a return of 12 percent on equity, and pay a cost of debt of about 6 or 7 percent.
A public-private partnership, or PPP, is sometimes used for infrastructure projects with a public need, such as highways and bridges, Dubler said. A private party would build and operate the line for a fixed period — most likely 20 years — in exchange for a previously agreed upon fee. The state would use revenues from the line to pay the fee.
A PPP would allow a higher debt-to-equity ratio and a lower cost of debt than private ownership because of the state’s involvement. The state would assume a large amount of risk, as it would be required to pay the private operator regardless of whether pipeline revenues met expectations.
Public ownership would allow the state to reduce costs even further, and would avoid a situation of “privatizing gains (and) socializing losses,” Dubler said. The state could use 100 percent debt financing, and the cost of that debt would be lower than in the other two models. AGDC has asked the Internal Revenue Service whether Alaska Railroad bonds could be used to finance the line.
Dubler said public ownership would be cheapest, but is probably not practical, as companies are unlikely to build the line for a small return or operate it for a little fee. “They’d sure like the state to take all the risk, but they still want the 12 percent return,” he said.
Dubler said a state-owned line would have tariffs of about $1.10 per thousand cubic feet lower than a private line with 30 percent equity. Gas delivered to Fairbanks would cost about $9.35 per mcf instead of $10.45; gas in Anchorage would cost about $8.53 instead of $9.63.
A privately owned line would return more revenue to the state because of taxes on corporate profits, he added.
Rep. Tammie Wilson of North Pole demanded to know why gas would cost more in Fairbanks than in Anchorage.
Dubler explained that the cost of required offtake facilities would be spread among fewer users in Fairbanks. He said if the state tried to use “postage stamp” rates, Anchorage users would likely sue.
Wilson replied that she is willing to take that risk.
Mulling other plans Tom Chappin of the Fairbanks Pipeline Co. challenged lawmakers to think small. He said his company’s Arctic Fox pipeline project could supply gas to Fairbanks with a capital cost of $716 million. A slightly larger — 18 inches instead of 12 — line could meet Fairbanks and Anchorage demand for just $1.2 billion, compared to AGDC’s $7.5 billion for a 24-inch pipe.
“Eighteen-inch pipe will supply all the gas that’s needed in-state for many years to come,” Chappin said.
Chappin claimed his project required no subsidies and could deliver gas by 2015 at a third of the cost residents are currently paying for energy.
Golden Valley Electric Association President and CEO Brian Newton outlined GVEA’s plans to truck liquefied natural gas from the North Slope to use in its North Pole generators.
Under the plan, GVEA and Flint Hills Resources, which operates a North Pole refinery, will each transport about 3.5 billion cubic of gas per year, using 40 trucks per day beginning in 2014. The project is expected to cost $200 to $225 million and save GVEA about $12 million per year in fuel costs.
Newton said GVEA is looking north because gas from Cook Inlet would cost nearly twice as much, and because the utility can get a 17-year contract with a North Slope producer, compared to a two-year contract in Cook Inlet.
“This is a great bridge project,” Newton said, stressing that a pipeline is still needed. “Shame on us if we’re still trucking gas to Fairbanks in 10 years.”
Newton added in an interview that the project will help a gas line by developing demand for gas in Fairbanks. He said he would like to see GVEA truck additional gas to sell to Fairbanks Natural Gas for residential and commercial use.
Larry Persily, federal coordinator for Alaska Natural Gas Transportation Projects, explained that AGIA licensee TransCanada and partner Exxon Mobil are moving ahead with permitting as required by AGIA. Draft resource reports covering socio-economic and environmental aspects of the project are due to the Federal Energy Regulatory Commission, FERC, in December. FERC will hold scoping sessions in January and February, and federal agencies will respond in time for TransCanada to fill data gaps in the 2012 field season.
Regardless of whether people think a large-scale pipeline is still economic, Persily said, “We have to treat it as if it’s serious.”
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