Volume limit is hobbling our gas line project

An interesting project now in advanced planning is the effort by the state-owned Alaska Gasline Development Corp., or AGDC, to build an "in-state" natural gas pipeline from the North Slope.

AGDC's mission is important, so it's worth some discussion.

The notion of a 24-inch "bullet line" to bring gas south from the Slope was first promoted by former Gov. Sarah Palin, the argument being that a small pipeline to the Slope would be a fallback for Alaskans needing gas in case the big gas project, a large gas pipeline to Canada, stalls out.

It now looks as though that is happening, so there's added impetus to the bullet line. Gov. Sean Parnell still hopes to pull a rabbit out of the hat with a large liquefied natural gas project, and we wish him luck. But we've been hearing about LNG projects for years and nothing has happened.

The principle behind the bullet line is that we're running out of gas in Southcentral Alaska and need gas from the Slope. However, explorers are now finding new gas in Cook Inlet so this may be less urgent.

Still, a strategy of using the bullet line to goad the Slope producers into doing a gas project still makes a certain amount of sense. The idea is, "If you won't build it, we will."

However, this strategy means we have to have a credible tool in our kit, a pipeline that might really be workable. Unfortunately, we don't.

At this point let me credit the very competent managers on this project, first former DNR Commissioner Harry Noah, then Bob Swenson, the state geologist, and now Dan Fauske, chief executive of the Alaska Housing Finance Corp. These people have assembled good technical teams.

Still, no one I talk to outside of Juneau believes a 24-inch, high-pressure pipeline in the bullet line plan will ever be built. It is too small and inefficient; thus the gas will be expensive. If it's expensive, there will be no buyers.

It is too small because of the limitation imposed at the beginning by the politicians: to design a project moving only 500 million cubic feet of gas a day. Industrial-scale customers, who are needed to make this project float, need a lot more gas than that and at a cheaper cost than this project, as it's designed now, can deliver. To get the customers we need, like a large liquefied natural gas (LNG) plant, or gas-based manufacturing like a fertilizer plant or a gas-to-liquids plant, we need a larger pipeline.

How did we get this 500 million-cubic-feet-a-day limit? The history is a bit murky. The official explanation is that we signed a contract with TransCanada Corp. (the "AGIA" deal) that prohibits the state from financially supporting a competing project moving more than 500 million cubic feet of gas daily.

TransCanada's intent in asking for this makes sense if its project is moving ahead. If the pipeline to Canada is built, most of the gas, about 4 billion cubic feet a day, will be needed for to pay for it. If TransCanada builds its line, the state would want a spur line to Southcentral. TransCanada is understandably concerned about reserving enough gas to make its pipeline work. We agreed to this in a contract.

But applying this to AGDC's project doesn't make sense. The bullet line is an alternative. If the big pipeline isn't built, which now appears likely, why the limit?

There has been an interpretation that the contract limit carries over to the backup, the bullet line. It's time for a new interpretation. We pay lawyers good money to find loopholes and wiggle room, don't we?

The deeper question is why the limit was put on this project right at the start. Harry Noah, the highly respected first bullet line manager, resigned because of political interference from Juneau when he wanted to expand the pipeline and work with potential customers.

I'm not a conspiracy buff but I almost believe there were people in the government working to undercut this effort.

The Legislature has since stepped in to take this project out of the governor's office (can you believe that, a project like this managed from the governor's office?) but the volume limit is still there, hobbling the project.

The AGDC folks are good people doing good work, so let's unshackle them.

I remember when this bullet line was launched. I was there. Sarah Palin, then governor, called a press conference and announced it. Legislators saluted (they were afraid of Palin because of her popularity) and promptly appropriated money, and consulting firms licked their chops.

There were already signs that the AGIA pipeline might stumble. The talk I remember was that an influential lobbyist convinced Palin that her star would shine brighter if she promoted this pipeline-for-Alaskans. This boat was launched as a political deal to begin with.

If this is all politics, let's play it smarter. Let's make it a credible tool to goad the producers.

Let's let AGDC design a more robust pipeline that would move enough gas, at a low enough cost, to allow industrial customers to buy the gas.

The governor should back this up by making clear the state's interest in partnering on this with any competent private party. If the producers don't join the deal, someone else could.

For example, Japan's Mitsubishi Corp. has long been interested in Alaska LNG. Why not them? Or let's send DNR Commissioner Dan Sullivan off to Beijing to invite Sinopec, the giant Chinese energy company, to be our partner and LNG customer.

Sullivan should also call on Sasol, the South African giant with gas-to-liquids expertise, which has previously been interested in Alaska gas.

The governor has said he wants an answer from the Slope producers on his LNG idea this summer but what will he do if he doesn't get an answer? Maybe he has a plan. Maybe it's something like I'm describing.

Let's buy Commissioner Sullivan a Chinese phrase book. How do you say in Mandarin, "Let's make a deal"?

Tim Bradner writes for an Alaska economic reporting service. He also consults for private clients and writes for business publications. His opinion column appears every month in the Daily News.