State should be catalyst in a diversified gas industry

Alaska must lose “project mentality” to establish long-term benefit from gas development says former ARCO Alaska president

Steve Sutherlin

PNA Managing Editor

The Alaska government must take the lead in creating a diversified natural gas market, Ken Thompson told Alliance members in early March.

The former ARCO Alaska Inc. president rated a gas hub near Fairbanks or Delta Junction as the key element in a five-point strategy to ensure a thriving gas business that guarantees 50 years of economic benefits to the state. (See PNA’s initial coverage on this topic on page A4 of the January edition.)

Thompson, currently an executive with Pacific Rim Leadership Development in Anchorage, said his other four priorities are:

• A gas line that traverses Alaska.

• Retaining a royalty share in kind for the state rather than collecting royalties from the producing companies.

• A government equity stake of at least 12.5 percent in the pipeline leg from the North Slope to a hub.

• State policies and methodologies for clear and transparent pricing of gas at the hub.

Thompson said Alaska must shed its “project mentality,” and take an active role in developing a broader vision of how it wants to benefit from gas development.

He is strongly opposed to an “over-the-top” pipeline, using an undersea Beaufort connection from the North Slope to Canada’s Mackenzie Delta, arguing that would cut Alaska out of the gas business.

“Any single pipeline out of the state into Canada would hold the state hostage to one market, he said.

“Without multiple markets Alaska would always be at the mercy of what happens to the natural gas market in the Lower 48,” Thompson said, noting that five years ago the Midwest market was weak, but Asia looked promising, whereas the reverse is true today.

He noted the objectives of the state and the producers are not the same.

For producers, the primary concern is the discounted present worth of their rate of return on investment; for the state, gas represents half a century of economic benefit, he said.

Natural gas could be a feedstock for the state’s petrochemical business and could stimulate the construction and expansion of LNG terminals at tidewater to facilitate shipping by sea, Thompson said.

If the “over-the-top” route were built, delivery of gas to the state would occur at a much later date, he said.

If an Alaska gas hub was built, the operating rules should be established at the outset, not after the gas is flowing, Thompson said.

“There should be a known formula and methodology to calculate the netback price at the hub,” he said.

More than just being a physical facility, a hub would iron out formulas, fees and access and allow gas to be sold by bid at a competitive price, he said.

Thompson said the state should take its 12.5 percent royalty in kind —representing 200 million to 500 million cubic feet per day — hiring marketing firms such as Enron or Williams Energy Trading to sell state gas.

“The only way the state will know the market value of its gas is to market the gas,” he said.

If producers were to get a lower netback than the state’s marketing company that would impact tax receipts; conversely, if producers got higher prices, the state would be alerted to better price opportunities, he said.

State investment in gas line

That ownership would be the best mechanism to accurately know and have input on the transportation costs, while avoiding the lawsuits and hearings over the calculation of operating costs that occurred on the trans-Alaska Pipeline, he said.

Transparent pricing resulting from state involvement could help avoid similar disagreements over gas, Thompson said, adding that the best time to determine the net back prices was before the gas started flowing. The state could contract with a private company to manage its share of the line, he said.

If government leaders refused to make the investment then Alaskan companies such as Native corporations should have the chance to hold a 12.5 percent share, with the stake held by companies based in Alaska, Thompson said.

Thompson spent his last two years with ARCO as the head of global gas marketing. ARCO had gas holdings in China and Malaysia, he said, adding that it was remarkable to see countries prosper through development of a broad natural gas business.

After retiring from ARCO, Thompson and his wife returned to Alaska. “Now it’s good to think as an Alaskan rather than to represent the interests of a corporation,” Thompson said.