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State could participate in both midstream and upstream portions of North Slope gas pipeline Different risks, challenges for state in producer-owned vs. pipeline-owned gas pipeline; also has access, expansion and start date concerns Kristen Nelson Petroleum News Editor-in-Chief
There are two ways the state can participate in a gas pipeline, Alaska Division of Oil and Gas Director Mark Myers said Jan. 18: the state can own part of the gas pipeline; it can also ship gas on the line. Those, he told the Alaska House Special Committee on Oil and Gas, are “really distinct issues.”
On the ownership issue, he said, upstream producers want a higher rate of return on their investments than they can get from a pipeline, which is a regulated utility, so capital they invest in a pipeline would be “a net drag” on the rate of return the company uses for investments.
The state, however, might be delighted with a utility rate of return, because “a guaranteed long-term relatively safe” rate of return “looks pretty attractive” to a governmental entity. The state owning part of the pipeline, then, “improves the rate of return calculations for the producers.”
On the other hand, he said, it doesn’t improve their cash flow, because it diverts some of what is “a steady stream” of cash to another owner, the state. “So depending on how the producers look at the investment in the project, (state participation) can be a very positive thing in the sense of raising their rate of return, but it has a potential negative effect on cash flow…”
State ownership also “shows that we’re serious about getting the project done,” Myers said, and puts the state on the side of making sure the project works. Shipper issues different The other participation the state could take is from the upstream, as a shipper of gas on the line. That, Myers said, would be a “multi-billion dollar long-term commitment… And you have to guarantee you have gas to put in the pipeline.”
If the state were a shipper, it “would be freeing the producers of an obligation that they normally have now to transport and market the (state’s royalty) gas.”
The state would also take part of the “shippers’ risk for those periods of time when prices might be low enough that the upstream guy’s not making a lot of money.”
Then there is the capacity issue. The state would contract for a certain amount of capacity to ship gas, and has to make sure it can fill that capacity, “because if we don’t match the amount of gas shipped through our capacity, we have to pay for that capacity anyway,” which would have “a huge negative economic effect on us, so … to do that sort of an arrangement, you have to make sure you can fill your capacity on the line and that you can market the gas at a price generally that’s higher than the shipping price, or your net negative, and that has a huge effect on the state’s overall balance sheet.”
It’s “very complicated,” Myers said, but can work if the state is confident it can fill its capacity. “And remember, the state’s not an upstream producer, so it doesn’t ultimately control the rate of production upstream. So it has to have alignment and agreement with the producers to supply gas sufficient to its shipping capacity.”
These are, Myers said, “very difficult agreements for producers themselves to negotiate” and become “more complicated with a government entity” which needs to negotiate “with multiple producers simultaneously for multiple fields.”
Negotiations for a pipeline-owned line are easier, Myers said, because you’re just negotiating on the pipeline. The state could also own part of this pipeline, Myers said, and “if the project’s robust” this would be a relatively low risk investment. And the state could buy gas upstream from the producers and ship on a pipeline-owned line.
In separate negotiations with the producers and with TransCanada, the state is exploring “a wide variety of options on how we could commercialize and derive benefit and I will say the administration has not picked a horse to ride on. They’re actively pursuing both these negotiations at this time.”
The state is also looking at a liquefied natural gas project, Myers said, but while “we have been successful, I believe, in modeling the intricacies of a highway-type project, we don’t have the same level of confidence in our ability to model the LNG project.”
The state is acquiring data on an LNG project, but isn’t yet in a position to quantify that project and compare it with a highway route. Issues different with different owners Rep. Ralph Samuels, R-Anchorage, who chaired the Legislative Budget and Audit Committee and held hearings on the gas line proposals over the summer, asked Myers: “Would you think it’s fair to characterize it on a philosophical level, saying that the fear of a producer-owned pipeline is that they have too much control — they own the gas, they own the pipeline, they own the market.
“And the fear of an independent pipeline is that they’re essentially in a cost-plus scenario — that they don’t have incentive to keep the cost down? So philosophically, that’s the juggling act that the administration has to do between the … risks associated with each of those?”
Myers said he thought that was a fair characterization, and noted that the state also has “broader things that are important benchmarks for the project.”
One is access and expansion, Myers said. The state wants explorers on the North Slope, “and they have to have some confidence they can get in this gas pipeline” or there is no reason for them to invest in exploration in Alaska.
On the expansion issue, a pipeline-owned line would “naturally want to expand because it’s going to have more capital involved and make its 14 percent on a greater amount of investment.”
But, “if you’re an upstream producer and you’ve got control of the gas market downstream, you obviously aren’t going to want to see a lot more gas coming to that market potentially depressing price…”
The commercial pressures are different, but the state’s interest, Myers said, is to get the best access-expansion terms it can get.
And the start date is also key, he said. The state is looking for both a “start date and work commitments to build that project, to make sure we’re not providing an option, but a real contract that gets a gas line built.”
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