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Alaska could handle partial gasline ownership
Kristen Nelson Petroleum News Editor-in-Chief
The state of Alaska is considering taking a partial ownership position in the proposed natural gas pipeline from the North Slope. That kind of ownership is “within the state’s means,” Jeff Brown, a Merrill Lynch managing director, told state legislators in Anchorage Sept. 1.
Alaska is not like the Lower 48 states when it comes to oil and gas, Brown, a consultant to Alaska’s Revenue, Natural Resources and Law departments on financing alternatives for a gas pipeline, told a combined meeting of the Legislative Budget and Audit and Senate Resources committees.
“Alaska is really a petro-state,” he said, and governments of petro-states, states which own hydrocarbon resources, “sometimes take a measured amount of risk to jumpstart desirable projects.”
While oil development is typically financed by the oil producers, gas is different. Only places like the Lower 48 and Australia have large natural gas pipeline systems, he said. In the rest of the world gas is trapped, because to get it to market you have to either build a big pipeline or compress the gas to liquefied natural gas. And unlike oil, where shipments can move freely to meet changing demand, “gas is very much trickier and is typically subscribed for with long-term contracts,” Brown said.
So it “tends to get stuck and it stays stuck until somebody makes a pretty big physical investment.”
Because the investment required is big, he said, and the infrastructure required is fixed and can’t be redirected, producers are “unwilling to take all the risk, put up all of the money … when they only get part of the money.”
So host countries have stepped in.
Indonesia stepped in at Natuna, a big offshore gas field, and “according to the U.S. government the total cost was $1.2, $1.5 billion, and the Indonesian government, indirectly … put up about $400 million” of the cost of a subsea pipeline to take the gas to Singapore. Brown said the Natuna gas “would have been effectively near valueless” without the pipeline “which enabled them to get into very long-term fixed … volume contracts.”
Qatar in the Middle East didn’t have a customer within pipeline reach, he said, so they went to liquefied natural gas and the national company, Qatar General Petroleum Corp., went into partnership with ExxonMobil, investing to provide LNG to Japan and Korea. How deep are your pockets? The issues with state investment are “how deep are your pockets and how big is the risk?” Brown said.
Rating agencies project about $3.5 billion as the amount the state would have available for appropriation in 2010, he said. That has to be set against financing risk, construction risk and commodity price risk.
What if the state took a big risk? Pretend, Brown said, that the producers would sell gas to the state at $1 per thousand cubic feet on the North Slope for 20 years, and the tariff on the pipeline is $2 per mcf for 20 years. Then, he said, assume that for 15 years the price in Chicago is $6 an mcf, but for five years the price will be $1.50 an mcf: and you don’t know in advance which years will be which.
If you don’t hedge and your contracts are for spot price in Chicago, and you have two bad years ($1.50 an mcf) in a row, you lose a combined $4.4 billion.
That is the kind of risk the state would face with a big investment. Smaller investment safer But if the state invests an amount equal to its one-eighth royalty gas, about $3 billion, it “gains market access for 500 million cubic feet per day of state gas,” Brown said, and a lot of the investment, perhaps as much as 80 percent, could be in revenue bonds, bonds “serviced solely from the revenues produced by the project.” The 20 percent remaining could be in state-supported reimbursable debt. In that case, the state’s pockets would have to be deep enough to cover the $600 million in reimbursable debt, if things went “awry for a long period.”
The state’s general obligation bonds are about $360 million now, a total of $1.14 billion with state supported bonds and a total of some $2.1 billion including bonding for which the state has a moral obligation. “So $600 million would be about a 30 percent increase for what Juneau is on hook for somehow now,” Brown said.
Brown said that while there is “some maximum ceiling on how much risk that you can take, that’s not somehow laid off in terms of project financing … it is clear to me that there are a bunch of alternatives by which the state could reasonably finance such an investment.”
At the very low end of the gas price spectrum, partial ownership wouldn’t sink the state: “it’s within the realm of the depth of your pockets,” Brown said.
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