Why state shouldn’t invest in gas pipeline

Kristen Nelson

When asked why the state shouldn't take an ownership in a gas pipeline project, petroleum economist Roger Marks came up with a list of reasons, from 'ownership is not a proper role for government' to 'there is no lack of capital for the project.'

Bill Corbus, chair of the State Ownership/Tax Committee of the Governor's Alaska Highway Gas Policy Council, had asked Marks, who is with the Alaska Department of Revenue, to present the 'minus' side of the question: should the state take an ownership position in a gas pipeline. But Corbus hadn't connected with anyone willing to give the 'plus' side of the question by the committee's Sept. 21 meeting, so Marks was unopposed.

Natural gas economics are different than oil economics, Marks said. Oil markets are supported by a cartel, Marks said, which limits output to control prices. There is no cartel for natural gas. And there are fuel substitutes for natural gas, but not for oil.

Gas is very expensive to transport, with as much as 90 percent of its value lost in transit, compared to only a 20 percent loss of value in transit for oil. If the price declines, the producers of gas could be left with nothing, and gas could be below $2 a thousand cubic feet this month, Marks said.

The economics of gas projects, Marks said, require throughput guarantees — regardless of the price, the gas will be shipped to meet contractual obligations. But with throughput guarantees, he said, there is no lack of capital to finance the project.

The income a pipeline owner makes is determined by regulators based on risk, and Marks said there may be some extra risks, but basically no more or less than any other pipeline — and the state can get that amount of return without the risk of a pipeline. In addition to construction risks, there are also operation risks and liabilities, Marks said. In the worst case of an explosion along the line, the state as partial owner would share culpability.

All things considered, Marks said he does not believe that pipeline ownership would be a windfall.

State ownership wouldn't reduce project costs, Marks said, and the state can get a 'seat at the table' influence development decisions in ways other than ownership.

A large investment from the Permanent Fund would be legally imprudent, and ownership would reduce diversity in "an already drastically under diversified portfolio, he said.

State ownership would also create a conflicts of interests in regulatory, environmental and tax areas. In the tax arena, for example, Marks said, the state would want a low tariff because that raises the wellhead price. But as a pipeline owner it would want a high tariff.

And, Marks said, there is the issue of whether ownership is a proper role for government.

Asked by council co-chair Jim Sampson if these views were his own or represented the Department of Revenue, Marks said he had had informal discussions with the commission and deputy commissioner and that, while the department does not have an official position at the moment, he said what he presented to the committee probably reflects their personal views. Deputy Revenue Commissioner Larry Persily, participating by phone, said that while the department has not adopted a position, there are serious questions people need to answer about state pipeline ownership — and significant risks.