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Alaska gas line needs help, says consultant van Meurs Contends Alaska could benefit from agreeing to share line’s financial risks Larry Persily Petroleum News Government Affairs Editor
Sure, an Alaska natural gas pipeline could be very profitable if construction costs and market prices for the gas go in favor of whichever companies hold the risk. But low prices and high tariffs could cause a financial wreck, likely hitting hard at the North Slope producers, international oil and gas consultant Pedro van Meurs told Alaska legislators.
“Under very bad conditions … this project is a disaster,” van Meurs told about 15 lawmakers gathered at an April 7 meeting of House and Senate members. “How do gigantic projects come about? Very carefully.”
The state could help encourage a go-ahead decision for the proposed pipeline by taking a share of the risk, he said. And with that exposure, the state should share in the benefits if the economics go well, van Meurs added. “If the project is good, we should get something back, we should get something extra.”
The combination of lower-than-expected prices and higher-than-projected construction costs and tariffs could knock down the project to a single-digit rate of return, falling far short of what companies need for such a multibillion-dollar risk, van Meurs said.
A low rate of return on such a massive investment could drive a company’s stock price, and debt ratings, so low as to make it difficult to raise money for exploration and new production, possibly leading to a breakup of the company, he said.
Van Meurs is leading the state’s team in its negotiations with the major North Slope producers and other applicants under Alaska’s Stranded Gas Development Act. The state is trying to negotiate a long-term fiscal contract covering payments in lieu of state and municipal taxes, should the producers or any other company or group of companies decide to build the pipeline. Adviser briefs legislators and governor While not commenting on the confidential negotiations, van Meurs briefed legislators on his views of the project’s economics, competitiveness and market conditions. The governor’s office set up the meeting, which was open to the public. The audience included Gov. Frank Murkowski, Lt. Gov. Loren Leman and Murkowski’s chief of staff, Jim Clark.
Van Meurs, 62, who has advised the state on oil and gas fiscal issues since 1996, has consulted for more than 70 countries, always working for governments and never for industry. His clients have included the United Nations, World Bank, Mexico, Kuwait and several of the world’s leading oil and gas producing countries.
He was born in the Netherlands, moved to Canada and, a few years ago, moved to the Bahamas, although he spends most of the year living in hotels, working for his clients.
“Who is actually taking the risk on this pipeline?” van Meurs asked legislators. It will be the shippers that sign long-term contracts, guaranteeing to use the line and pay the tariff regardless of the market price for the gas, he answered. Only with such contracts could a pipeline developer obtain financing.
“Today, the reality is the producers are probably going to be the shippers,” van Meurs said. Though others have expressed interest in taking some of Alaska’s gas, there is no evidence any are willing or financially able to guarantee payment on several billion dollars a year in shipping charges, he said.
“For each of the three companies (ExxonMobil, ConocoPhillips and BP Exploration (Alaska)) … if this project actually comes about it will be their largest project in the world,” the state’s adviser said. Delayed return on investment a problem, too Not only does the size of the investment present problems, but so does the cost of building in Alaska and the reality that developers would spend up to $20 billion over as many as 10 years before seeing the first dollar of cash flow from gas sales, van Meurs said.
“In the case of Alaska, our rate of return is typically below the world,” he said. The heavy, upfront investment for a 2,000-mile gas pipeline just makes it worse. “There is nothing Alaska can do about that.”
His analysis showed the Alaska gas line could produce an internal rate of return as low as 8 percent or as much as 20 percent, depending on pipeline tariffs and market prices for the gas. That compares to a range of between 9 percent and more than 35 percent on the three producers’ combined 30 largest oil and gas projects worldwide.
Alaska looks worst at the far end of the chart, where low market prices and high construction costs are combined. “Under bad conditions the risk is too large for any of the producers,” van Meurs said.
He’s not alone in warning that the “what ifs” are a problem for the Alaska gas line.
The total tariff on a line moving 4.5 billion cubic feet of gas per day would exceed $10 million a day. “Anyone want to guess what the price of gas will be in the Lower 48 and bet $120 a second on it?” ConocoPhillips Alaska Inc. President Kevin Meyers asked the Fairbanks Chamber of Commerce last month. Pipeline company also warns of economics “The project needs to be economic in a wide range of assumptions,” Kirk Morgan of MidAmerican Energy Holdings Co. told the Alaska Senate Resources Committee on March 31. The Iowa-based pipeline company a week earlier dropped its proposal to build the line after the governor refused to grant its demand for exclusive rights to the project.
“Pipeline companies by themselves cannot change the economics of this project,” van Meurs told legislators, acknowledging MidAmerican’s departure — not unless pipeline companies are willing to share in the costs and, so far, no pipe companies have said yes.
A fiscal contract under the Stranded Gas Act could help lessen the risk, van Meurs said, by attempting to provide project developers with more certainty in their payments to the state and municipalities. Passage of the gas line incentives in the stalled federal energy bill also would help.
But the federal provisions and a Stranded Gas Act contract may not be enough to get the line built. The state needs to consider taking a share of the risk, he said. That could include signing a long-term shipping contract for the state’s 12.5 percent royalty share of gas production, guaranteeing payment of the pipeline tariff regardless of the cost or market price for the gas, van Meurs explained. Governor wants funding for state risk study The governor has asked lawmakers for almost $1.6 million for a four-month project this spring and summer to study if state risk-sharing could help the project and, if so, how the state could take on some of the financial risk. The Legislature has not taken action on the request.
The state could have a model completed this summer to show revenues from a gas line under all possible circumstances, van Meurs said.
Oil and gas companies like to get a 15 percent rate of return on their successful investments, van Meurs said, with the return needed to cover the losses from bad investments. That isn’t very far from the 12 percent to 14 percent return that MidAmerican said it wanted on the Alaska project before the company withdrew its Stranded Gas Act application.
Several legislators questioned van Meurs on whether North Slope producers were ignoring Alaska for other natural gas projects in their worldwide portfolio and why the companies are hesitant to proceed in Alaska when gas prices are twice as high as in 1999.
“Would oil companies have ulterior motives to shut out Alaska? I don’t think so,” he said. Gas production is declining across North America and in the companies’ North Sea fields, and all three producers need new supplies. “The only way to stay in business is to develop resources.” Price volatility a concern And despite yesterday’s, today’s and tomorrow’s high natural gas prices, “It is inherently impossible to predict the North America gas prices,” van Meurs said. “That is why producers have to take a conservative approach.”
Lawmakers also asked if the state should focus on a liquefied natural gas project to the U.S. West Coast instead of waiting for a pipeline to mid-America. Doubtful, van Meurs said. “The future is clearly one of huge volumes of LNG being shipped around the world at lower costs. (Alaska) LNG will have a tough time competing.”
And, at 2 bcf per day for proposed LNG projects vs. a gas line at 4.5 bcf per day, betting the state’s future revenues on a smaller LNG project is like selling only the upper floor of a house, he said. “Alaska wants to sell the entire house.”
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