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Alaska looks at sharing risk Governor willing to consider taking on some risk for gas line project Larry Persily Petroleum News Government Affairs Editor
Alaska Gov. Frank Murkowski says the state may need to take some of the financial risk if it wants to see a North Slope natural gas pipeline built.
And to figure out how the state might take on some of the risk, and whether it really would help, the governor will soon ask lawmakers to fund a study of the possible benefits and options. The work could last four to six months and is expected to cost several hundred thousand dollars, said Mike Menge, Murkowski’s special assistant on oil and gas issues.
The state could carry some of the risk by varying its tax or royalty structure to help ease the financial pain on gas line users during periods of low prices, or perhaps by covering a percentage of shippers’ financial commitments, Menge said.
“We’ll take a look worldwide at the various risk-sharing models out there,” he said.
The governor first discussed the possibility of state risk-sharing at a March 26 press conference in Juneau, at the same time he was telling Alaskans that Iowa-based pipeline operator MidAmerican Energy Holdings Co. had walked away from gas line negotiations with the state.
Regardless whether a pipeline company undertakes the project or the major North Slope producers build the line, the size of the undertaking likely will require some sharing of market price and tariff risks, Murkowski said.
“Nobody individually is willing to take that risk with this project,” he said of the estimated $20 billion pipeline. “I think the state will have to share some of the risk.” State would prepare a risk model The study group that Murkowski wants the Legislature to fund would put together a risk model, Menge said, plugging in market price and tariff possibilities and seeing how much money is actually at risk and where the state could help.
Alaskans have been waiting for more than 30 years — ever since oil and gas was discovered at Prudhoe Bay — for someone to build a pipeline to move natural gas to market. The state could earn $30 billion or more over the life of the project in tax and royalty payments.
Rather than just sitting back and counting potential dollars for the state treasury, it makes more sense for the state to see what it can do to attract the billions of dollars in private investment needed to build the line, Menge said.
“It’s not a traditional role for the state to play,” but may be needed to put together a deal to get the line built, he said.
Murkowski has listened to the major North Slope producers and others interested in building the pipeline, including MidAmerican and TransCanada Corp., and all have said the state needs to help, Menge said. MidAmerican and TransCanada both told the governor the state would have to take on some of the risk that market prices at times may not leave much, if any, value at the wellhead.
“Over the months, it’s become clear something needed to be done,” the governor’s aide said. Murkowski wants to take the time to investigate what the state could do to help. A lot of money depends on market price and tariff As proposed at 4.5 billion cubic feet per day of North Slope gas, the line would carry more than $6.5 billion worth of gas a year at $4 per thousand cubic feet. The producers have estimated it could cost almost $4 billion a year to move that much gas to Midwest markets. But if market prices were 20 percent lower and the construction cost and resulting tariff 20 percent higher, the wellhead value of the gas would drop to almost nothing.
And, for example, if prices were to drop just a dime below the pipeline charges, the producers could stand to lose almost half a million dollars a day unless they had managed to transfer that liability to the gas purchasers or shippers or pipeline owners — anyone else who agreed to assume the risk.
One concern is how such a large, new supply from Alaska could temporarily knock down North American gas prices. “When you bring in 4.5 bcf per day of new supply, there is going to be a market response,” and prices will fall, Kirk Morgan, project manager for MidAmerican’s Alaska gas line venture, told the state Senate Resources Committee on March 31.
“The project needs to be economic in a wide range of (price) assumptions,” Morgan said.
Although MidAmerican has abandoned its effort to possibly build the Alaska line, Morgan testified before the committee on what the company thought was needed to get the project under way. Governor asked companies their opinion Murkowski met March 22 in Anchorage with the producers and officials from MidAmerican and TransCanada and asked whether it would help for the state to shoulder some of the financial worry, Menge said.
“The premise was to get some response on the state’s willingness to share the risk,” and would it make a difference to private investment in building the line, he said. Murkowski was careful to say he was not endorsing state risk but rather was willing to investigate the possibility, his aide said.
Since the state cannot influence market prices, its best bet at helping the project would be to ensure a stable fiscal structure and a timely regulatory review process, especially to help prevent delays and construction cost overruns, Dave MacDowell, gas project spokesman for BP Exploration (Alaska), said in a March 30 interview.
The governor believes the project eventually will be built with the producers, a pipeline company and the state all sharing in the risks and reaping the benefits when profits are high, Menge said.
Possibilities for government risk sharing could include underwriting a portion of shippers’ risk that temporary dips in market prices might not cover the pipeline tariff, or perhaps guaranteeing a portion of the shippers’ payments, Menge said. Other possibilities could include a state equity investment in the line, changes in Alaska’s royalty structure, or perhaps changes in the tax structure to reduce payments during times of low prices while increasing the state’s take when natural gas prices are high.
The governor’s office would hire consultants and start work on the study this spring, if lawmakers approve funding for the undertaking, Menge said.
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