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Today’s gas price no reason to postpone pipeline, says Thompson Former ARCO Alaska president says if the North Slope producers aren’t going to build a gasline, they should step aside and let the pipeline companies do it Kay Cashman PNA Publisher
On March 5, Exxon Mobil Corp.’s chairman told analysts in Houston that a pipeline to transport North Slope gas to Lower 48 markets would not be built until North Slope gas owners could be sure of sustained higher gas prices.
On March 7, BP’s program manager for Alaska gas development told attendees of a gas conference in Calgary the final results of a feasibility study by BP, ExxonMobil and Phillips Petroleum Co. due to be made public shortly will reaffirm earlier conclusions that a North Slope gas project is uneconomic with gas prices in the range of $2.50 per thousand cubic feet.
That’s nonsense, says Ken Thompson.
“None of the North Slope producers make investment decisions on near-term prices — whether low price cycles or high price cycles,” the former president of ARCO Alaska Inc. and head of global gas marketing for Atlantic Richfield, told PNA March 8.
“Rather, they look to future price forecasts assessing overall supply and demand in a market. I know of no company who is forecasting $2.50 per Mcf for the long-term.” (See Phillips’ gas price information in sidebar on page 20.)
Thompson pointed out that the Department of Energy’s information group, which is traditionally conservative in its price forecasting, said in early March that if there is moderate economic recovery, natural gas prices would climb to $3 per Mcf and “stabilize” there. But if U.S. economic growth is slightly stronger, the Energy Information Administration predicted $3.65 per Mcf.
EIA also said U.S. gas consumption is likely to rise 48 percent by 2020. Producers used $3 gas Thompson, a member of the governor’s gas policy council, said the three major North Slope gas owners — BP, ExxonMobil and Phillips — testified in September that they used a long-term gas price forecast of $3 per Mcf in their project cost estimates and “cited that the investment rate-of-return for the southern route along the Alaska Highway was 11 percent after all taxes, assuming a capital cost of $17.2 billion and a gas volume of 4 billion cubic feet per day.”
That was last year.
Since then, the cost of the project has come down and the rate of return is now more than 12 percent — and that’s penciling in a gas price of $3 per Mcf, Thompson said. If gas prices go up, so could the return.
What has changed since the North Slope producers testified in front of the council last fall? (See related news item on page 2.)
“Number one, the pipeline companies stated their estimated cost from Alaska to Alberta is $7 billion versus the producers’ $8 billion, a savings of $1 billion,” Thompson said.
“Number two, TransCanada PipeLines announced the new line proposed by the producers for $5 billion is not needed and TransCanada believes they can expand existing lines for half this cost, a savings of $2 billion plus.”
Thompson said a third cost cutter is the proposed federal energy bill which has the support of the both Republicans and Democrats in Congress. It provides the streamlined permitting that the producers and the pipeline companies have requested to shorten the time for gasline construction. It also improves present worth and rate of return.
Thompson said he doesn’t understand why BP and ExxonMobil appear to be ignoring the obvious advantages in the bill.
“The bill will include a tax credit if natural gas prices at the Henry Hub fall below $3.75 per Mcf,” he said “This improves the rate of return and greatly reduces risk. The bill also includes government loan guarantees up to $10 billion. This greatly reduces financial risk.”
Another major change since the producers cited 11 percent as the rate of return on the pipeline was the state of Alaska’s offer of Alaska Railroad bonds for helping finance the line, effectively saving the pipeline’s owners more than $1 billion over the life of the line. A commercial project exists “A commercial project exists today,” Thompson said. “One with a rate of return of over 12 percent.”
Why aren’t the producers moving forward with a gasline?
“They have other investments internationally at higher profits and rates of return,” he said.
“I do not think the producers will build this line. That is fine. But they must not stand in the way of alternative investors — the pipeline companies and others,” Thompson said.
“The producers need to sell their gas to a consortium as long as the pipeline consortium offers them a wellhead price that is a ‘reasonable price,’ as stipulated in the North Slope lease covenants,” he said.
Phillips to align with pipeline companies? Thompson believes it’s “very positive” the North Slope gas owners are disbanding their study group.
“I had proposed they do so over six months ago when I saw the outcomes being dominated by ExxonMobil and BP with their ‘over the top’ economics,” he said.
In the March 8 PNA news bulletin, which quoted John Carruthers, BP’s program manager for Alaska gas development, Carruthers “expressed disappointment” that the U.S. Senate had approved an amendment to the energy bill mandating a North Slope gasline follow the Alaska Highway route.
“ExxonMobil and BP appear to be very insensitive to the fact that most Alaskans do not want just revenues,” Thompson said. “Alaskans want revenues and clean energy, much like the peoples of other countries where these companies operate.
“My hope is that the disbanding of this study group may now allow the more entrepreneurial Phillips Petroleum to align successfully with the pipeline consortium, the consortium to offer a ‘reasonable price’ to BP and ExxonMobil at the wellhead, and the consortium to get this commercial project moving forward,” Thompson said.
“This would be the best world of cooperation and ‘win-win.’” Pain and gain clauses both needed But if BP, ExxonMobil or Phillips stand in the way of a pipeline consortium project by refusing to sell their gas at a “reasonable price” by the end of 2003 and if there is no gas flowing by the end of 2008, then Thompson wants the state to levy a reimbursable gas reserves tax on the big three North Slope gas owners as a penalty for non-performance under the lease covenants.
Thompson said the state should be open to other innovative penalties as well.
“Many countries” he said, “have signed agreements with these same companies that involve ‘pain and gain’ or ‘incentive and penalty’ clauses. In the past two years, the Alaska and U.S. governments have worked hard and have developed incentives close at hand: potential low interest bond financing, streamlined permitting, tax credit at low gas prices and loan guarantees.
“It’s only fair that they consider penalties along with the incentives.”
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