Pipeline partners?

Ken Thompson forms Pacific Star Energy, opens doors to Alaska companies who want to own a share of the proposed North Slope gas pipeline

Kay Cashman

PNA Publisher & Managing Editor

Pacific Star Energy LLC, a consortium of Alaska companies headed by former ARCO executive Ken Thompson, wants to own a slice of any project that delivers North Slope natural gas to Canadian and Lower 48 markets.

Thompson said four Alaska companies — Arctic Slope Regional Corp., Cook Inlet Region Inc., Koniag Inc., Pacific Rim Leadership Development — have approved startup funding for Pacific Star. Several other companies are taking a proposal to their boards in April, including Ahtna Inc., Chugach Alaska, Doyon Ltd., NANA Inc., Sealaska Corp. and Enstar Natural Gas.

Formerly executive vice president for ARCO’s Asia Pacific region, head of global natural gas marketing and president of ARCO Alaska Inc., Thompson said more companies and institutions are being approached this year to join the consortium.

After a gas pipeline is online, the consortium wants to use its cash flow from the project to help build gas distribution hubs in Fairbanks and Delta Junction, which would “deliver gas for local use via spur lines to communities such as Fairbanks, Anchorage and the Kenai Peninsula, as well as potentially to Valdez for export as liquefied natural gas,” Thompson told Petroleum News Alaska March 20.

The consortium is also interested in using its cash flow from the pipeline to help build a natural gas liquids business in Alaska and assess the potential for a petrochemicals industry in Alaska.

“Not one Alaskan company has a sizeable equity ownership position in North Slope oil production or in the TAPS oil pipeline,” Thompson said. Aside from minor lease positions held by a few Alaskans and some royalty interests held by, among others, ASRC and CIRI, the role of Alaska companies is “limited to providing service and support” to the oil industry.

Five to 10 percent stake

While Thompson originated the idea for the Pacific Star consortium, he has been working closely the past several months with ASRC’s COO Conrad Bagne and CIRI’s COO Mark Kroloff to develop “a more thorough business plan and to get experienced advice about such a startup company.” Both ASRC and CIRI signed a memorandum of understanding in August to assist Thompson in the development of Pacific Star.

“All parties agree that now is the time for the consortium to be broadened to qualified companies and institutions across the state to build investment capacity and to build momentum behind an Alaska gas project,” Thompson said.

No answer yet from North Slope gas owners

What Pacific Star brings to the table, he said, is a combined financial and political strength that could “provide assistance” to the North Slope gas owners in a number of ways, including obtaining permits to cross Native lands and, where needed, lobbying local, state and federal governments. The consortium could also help “foster investments in local natural gas use and value added processing” and “assist in transportation arrangements of gas owned by smaller producers and the state in-kind royalty gas.”

By allowing Alaska companies to own a piece of the gas pipeline project, the producers would be helping “keep more profits within Alaska “ and allowing Alaskans to “play a key role in the evolving North Slope gas industry,” Thompson said.

“We’re very excited about this partnership,” Koniag President Dennis Metrokin said. Koniag was the most recent addition to Pacific Star’s group of companies. “It’s an opportunity to get in on the ground floor in a very promising sector. The long-term prospects are excellent.”

Next step: More companies, develop JV agreement

In 2003-04, he said Pacific Star will work with the majors to “clearly show the value of letting the consortium invest in the gas project.”

What can Alaskans do to help get a North Slope gas pipeline built?

“And phone, write or visit our Alaska delegation in D.C. and others in Congress and voice your support of the pipeline enabling legislation in the federal energy act and in tax legislation. And voice your support that qualified Alaska companies be allowed to have an equity ownership in any gas project.”

Marrs: Native ownership adds political clout

Kay Cashman, PNA publisher & managing editor

CIRI and Arctic Slope Regional Corp., a regional Native corporation with its land base on the North Slope, were the first two Alaska companies to approve startup funding for Pacific Star Energy, a limited liability corporation formed with the intent of owning five to 10 percent of a North Slope gas project. (See adjacent story.)

“We got involved because we think the gas pipeline is inevitable and as a regional corporation we’d like to participate at some level in it,” Marrs told Petroleum News Alaska March 26. “From CIRI’s standpoint we bring something other than just money to the table: We bring political power. … If all the regional (Native) corporations participate (in Pacific Star), along with other major Alaska companies, it will be a pretty powerful organization. We can be a very powerful force in getting this pipeline moving.”

Marrs, who was a member of former Gov. Tony Knowles Alaska Highway Natural Gas Policy Council, said he thinks it’s important for Alaskans to have some ownership in a gas pipeline that carries North Slope gas to Outside markets.

“What we’re trying to do now is something we should have done with the oil pipeline. With (Pacific Star) we have an opportunity to be involved, to have Alaska ownership … to keep some of the profits in the state,” he said. “We’re going to push hard to make it happen.”

Most of the other Native regional corporations have an interest in joining Pacific Star, Marrs said.

Using figures released by North Slope gas owners BP, ConocoPhillips and ExxonMobil, Thompson said the price tag for a gas pipeline from the North Slope as far as Alberta would be approximately $11 billion.

A 10 percent working interest ownership in that project, he said, would likely cost Pacific Star Energy $1.1 billion making the consortium’s project-financed debt share $770 million and its equity share $330 million.

A 5 percent working interest would cost the consortium in the neighborhood of $550 million, with the financed debt share being $385 million and the equity share $165 million.

If Pacific Star elects to go for 10 percent ownership in the gas project, a member company would have to eventually invest approximately $3.3 million equity for each 1 percent interest they own in the consortium (or $825,000 per year from 2007 to 2010).

If Pacific Star decides to take a 5 percent interest, each member’s equity investment would be $1.7 million for each 1 percent ownership, averaging $425,000 per year from 2007 to 2010.

“It is anticipated some member companies may own a one to two percent interest in Pacific Star Energy while other members may choose to own 30-40 percent or more in PSE once pipeline investment starts,” Thompson said.

The dollar amounts could differ, of course, depending on the deal the consortium is able to cut with the majors and if project costs are reduced.

“Near-term, PSE investment is minimal to cover staff expenses, economic studies, external relations, marketing assessments, and other such costs prior to being allowed into the major producers’ pipeline consortium,” Thompson said.

Buffet is investing in gas lines

Gasline investments “fit Buffet’s investment strategy,” Thompson said, which is to:

• Find a business that makes something everyone uses;

• Make sure it is profitable and dominant;

• For existing assets, purchase when undervalued.

Other investors, “particularly some master limited partnerships,” Thompson said, invest in gaslines because of their “stable cash flow with tariffs not volatile with gas price cycles, long life and low-maintenance capital expenditures.”