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Vol. 15, No. 33 Week of August 15, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Legislators hear from new in-state natural gas line team

Fauske, head of AGDC, promises practical report based on HB 369; predicts subsidy required, but wants a one-time infusion

Kristen Nelson

Petroleum News

The new in-state natural gas team is organized, meeting with prospective natural gas suppliers and users, and is working on requests for proposals for evaluations of gas-to-liquids projects, liquefied natural gas and natural gas liquids.

The team, established by the Alaska Legislature this spring in House Bill 369, is charged with developing a plan for in-state natural gas.

Dan Fauske, president of Alaska Gasline Development Corp., updated members of the Legislature’s in-state gas caucus Aug. 9. AGDC is the name chosen for the subsidiary of Alaska Housing Finance Corp., which Fauske also heads. AGDC is charged with presenting legislative requirements for an in-state pipeline by the end of the year and a plan by July 1.

Fauske was named in HB 369 to head the team, which also includes the commissioner of the Department of Transportation and Public Facilities, the governor’s in-state gas line coordinator, the CEO of the Alaska Gasline Development Authority and the chairman of the board of the Alaska Railroad Corp.

That an in-state natural gas line would cost a lot was obvious July 1, when previous work done on the project by a group headed first by Harry Noah and most recently by Bob Swenson, the governor’s in-state gas line coordinator, was turned over to the team established by HB 369 (see “Bullet line gas pricey” in July 11 issue). A small-diameter pipeline from the North Slope to Southcentral was pegged at $3.8 billion; a gas treatment plant and other facilities would add between $1.9 billion and $8 billion, depending on the volume of gas, whether the gas was “spiked” with NGLs and where the gas treatment plant and other facilities were built, bringing the price tag for the so-called in-state “bullet” line to between $5.7 billion and $11.8 billion.

The open season concern

Sen. Lesil McGuire, R-Anchorage, who chaired the meeting, said she was hearing concerns that since the Alaska Pipeline Project announced that it had received multiple bids for significant volumes when its initial open season closed July 30, that the work of the in-state team would stop.

She said she’s “tried to reassure people as best I could that your team is tasked with moving forward and a set of deliverables will come to the Legislature” Dec. 15 and July 1 “and that that’s not going to change.”

Those deliverables, McGuire said, will be in the state’s tool chest in the event a large-diameter North Slope to market line doesn’t move forward.

Negotiations on conditions included in the open season bids might fail, she said, if they included items such as a requirement that the Legislature guarantee a gas tax for 20 years at a certain rate.

Another legislator not willing to rely solely on a main line was Sen. Charlie Huggins, R-Wasilla, who said what AGDC presents to the Legislature should include a timeframe for “pulling the trigger” on an in-state line if the big pipeline doesn’t move forward in a timely manner.

Just assuming there’s a big pipeline coming isn’t enough, he said “because the big pipeline may be 30 years away,” so a timeline needs to include a recommendation for going ahead with an in-state line.

Caucus members differed on the value of discussing the cost of doing nothing, but Fauske said it’s something he often talks about in the context of the Alaska Housing Finance Corp., which has a portfolio of “several billions of dollars of mortgage loans.” If there is no energy for the homes on which mortgage loans are being paid, those loans are “worth nothing,” he said.

Fauske credited the Legislature and the governor for HB 369, which established the new team, but said he believes the “catalyst was what occurred in Anchorage, in terms of an absolute kind of wakeup call.” Anchorage isn’t special or better than anyplace else, he said, but “Anchorage is the state’s largest city — the mayor conducted a brown-out practice here and it really, it woke people up to what are we doing. And what can we do to get gas to market?”

Fauske agreed that a successful open season raised the issue of why build a small line, why not use LNG or find some other way in Cook Inlet “to make sure that you avoid a disaster in your largest city, which would absolutely hammer the state’s economy,” and depend on in-state off-take points from the main line.

He said “it’s up to all of us to consider what’s the best use of our capital,” whether that should be to “forego economic ruin and collapse” in Anchorage.

Fairbanks and others pay more for fuel than they want to, but they have a resource.

“And I’m not saying that lightly — it’s too much that people are paying and we need to fix that,” Fauske said.

Whether to go with a short-term solution based on a the ultimate success of a large-diameter line or work on an in-state line “are the things that we’re going to answer over the next few months,” he said.

Relative value

The cost of an in-state line relative to industries such a line might support was a concern raised by Rep. Jay Ramras, R-Fairbanks. He told Fauske he was part of a group that toured the Agrium plant when it was still open, but facing closure because of sporadic supplies of natural gas.

“They wanted to do coal gasification and so we were fascinated with that technology for the Interior,” he said.

But, Ramras related, when he asked about the value of the Agrium plant officials put it at about a billion dollars and the cost of coal gasification at about $2 billion.

In business, he said, you’re not likely to spend $2 billion chasing after $1 billion.

Ramras said his concern was that even with LNG, GTL and NGL, “when you aggregate all of Alaskans together, with or without a subsidy, there simply aren’t enough of us to take the capacity for half a b (half a billion cubic feet a day) in a pipeline. There aren’t enough of us; there’s not enough industry in Alaska at this point.”

We know we can build mines, he said, referring to large potential energy users.

“But a lot of these projects that we’re talking about (GTL, LNG, NGL) are serial number zero-zero-one and they are large projects.” A report on GTL for Fairbanks was $5 billion to $7 billion, and even smaller plants in the range of 25,000 barrels per day of synthetic fuel are expensive, he said.

What if you find a project that could create industrial demand, Ramras asked Fauske, but it costs as much as the in-state gas pipeline: “We’ve got to be careful that you’re not basing the construction of the in-state gas line on anticipation of a one-off project that may have just as much underlying capital cost.”

Practical report

Fauske said what the team brings to the Legislature will follow HB 369, but said he thinks the decision will come down to being willing to do work that will create opportunities that will only occur “long after most of us are gone.”

He said “the primary goal is to secure an energy resource for the corridor going forward, and what are the costs of doing that.”

A good anchor tenant would be the best result, “but I don’t ever envision myself advocating spending 2 billion to go earn half a billion, because it just makes no economic sense.”

Fauske repeated what he told legislators in June, “that there will need to be some type of equity infusion or some type of subsidy, based simply on the numbers of people we have and the construction costs we’re looking at.”

He said he doesn’t think that’s a bad thing, as long as it is a one-time subsidy “where you drive costs down on the construction side … or capital side: You pay it and it’s done with.”

What you want to avoid, Fauske said, is “lifetime subsidies” where you subsidize deliverability of something that doesn’t compete at market demand and end up “subsidizing in perpetuity.”

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