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Commission backs gas price support for Alaska pipeline
Larry Persily Petroleum News Juneau Correspondent
Although the national energy bill awaiting U.S. Senate action next year does not include a price-support provision for an Alaska natural gas pipeline, a national commission says such a provision would be in the national interest.
The report, issued by the National Commission on Energy Policy, recommends support for federal legislation providing tax credits to partially shield pipeline investors from the risks of low prices as long as the plan also includes a provision for producers to repay the U.S. treasury when natural gas prices rise.
“It is the commission’s strong belief that such interventions generally are justified only where identified market imperfections and regulatory barriers provide a principled public interest rationale for government action,” the report said. Report discusses how to increase gas supply The commission, created in 2002, released its first report — Increasing U.S. Natural Gas Supplies — in late October.
The state of Alaska, ConocoPhillips and BP lobbied hard the past two years to add a commodity-risk provision to the energy bill, saying it is needed to lessen the financial risk to producers of possible low gas prices when the proposed $20 billion pipeline from the North Slope starts feeding Lower 48 markets.
They failed, however, faced with opposition from the president and fiscally conservative members of Congress opposed to anything that looks like price supports. Producers from Texas and other states — and Canada — also lobbied against the provision, arguing it would put them at a competitive disadvantage in the market.
House members approved the energy bill last month, but it fell short in the Senate, which could take up the measure when it returns to work in January or delay action until later in the year.
The national commission recommendation was based on last year’s price-risk proposal for tax credits to kick in whenever North Slope gas fell below $3.25 per thousand cubic feet at Alberta, with producers to pay back any federal tax credits if prices climbed above $4.88. Those price triggers would rise each year with inflation.
Although this year’s lobbying push by Alaska, ConocoPhillips and BP promoted a different tax credit provision — tied to the wellhead value of the gas on the North Slope instead of the market price at Alberta — much of the commission’s analysis would still apply. Supply and demand will rule market “The tax credit mechanism … would not set market prices or distort the process by which price is determined,” the report said. “Market prices will still be determined through balance of supply and demand.”
The commission was founded by a coalition of several nonprofit foundations. Its members include the chairman of ConocoPhillips along with 17 other industry, government, university and consumer protection representatives.
“This tax credit proposal is unlike existing production tax credits for energy, such as the federal wind energy tax credit,” the report said. “Rather than providing a set subsidy for every unit of production, the tax credit would function as a risk management mechanism that would encourage private developers to go forward by providing some de-facto insurance against low-probability, low-price contingencies.”
Looking at the price-risk tax credit under several different sets of market assumptions, the commission determined that in seven of 10 cases the net payout from the U.S. treasury to North Slope producers would be zero. “In each of these cases, there is an initial payout in 2015 (the first year of full production through the pipeline), but the tax credits are fully paid back the next year as the market adjusts to the additional Alaska supplies.” Project presents large risks The report notes the unique — and large — financial risks faced by potential investors in a pipeline to move 4.5 cubic billion feet of Alaska gas to market:
The 10 years from a decision to proceed to the start of gas flow creates “significant uncertainty over future prices and potential price volatility.”
The decline in the market’s use of long-term natural gas contracts linking producers and consumers creates uncertainty for investors, as do regulatory and market changes in the electricity industry.
“This type of project can be characterized — from an investment standpoint — as extremely ‘lumpy.’ That is, it involves a large, ‘all or nothing’ capital investment in new supply capacity.”
None of the factors, the report said, “necessarily represent market ‘failures’ that would themselves justify government intervention.” But looking at the need for new gas supplies, the difficulty in overcoming investor uncertainty in the Alaska pipeline, and the benefits of lower prices to consumers, the commission concluded some form of price-risk protection would be appropriate for the project.
“Cautious government intervention may be justified to promote construction of the pipeline sooner than might otherwise occur in the absence of intervention.” Domestic gas supply a benefit The report also notes that Alaska gas would be a secure, stable domestic supply of gas instead of importing even more LNG into the country, and that lower gas prices “are likely to reduce environmental compliance costs for a number of industries.”
Commission member Archie Dunham, chairman of ConocoPhillips, added a note to the report, acknowledging his company would benefit from the tax credit provision to protect producers against low gas prices. He added, however, “Without the low-price tax credit provision, the pipeline will not be built.”
Another commissioner, Paul Joskow of the Massachusetts Institute of Technology, also added a note to the report, calling on the state of Alaska to help shoulder the risk for the project. Commissioner says state should help, too “I see no reason why the state of Alaska should not share the costs of any subsidies provided to the pipeline since it will benefit from royalty payments produced by sales of Alaska natural gas,” said Joskow, director of the MIT Center for Energy and Environmental Policy Research.
The report also recommended policy changes at the Federal Energy Regulatory Commission to help promote the development of new liquefied natural gas receiving terminals in the United States to meet market demand.
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