Politics

Report says Parnell gas line plan presents 'substantial risks' for Alaska

FAIRBANKS -- With the Senate prepared to vote this week on a landmark gas line bill, a veteran consultant describes the plan as a "radical departure" from the past that poses substantial risks for the state.

The Senate Finance Committee advanced the bill Friday to the full Senate without having held public hearings on critical reports released last month by consultant Roger Marks or on a new report by consultant Rick Harper distributed to some lawmakers Sunday.

Harper said the gas line proposal "will result in a radical departure from the state's historical position and role as a sovereign, as a royalty owner, as a taxation authority and as a regulator which raises a number of issues and presents substantial risks."

In his 17-page report, prepared as one element of a $35,000 contract with the Legislative Budget and Audit Committee, Harper said that the proposal may create greater benefits to the state, but it will lead to a "greater misalignment of interests" between the state and the companies.

"The state will become a direct competitor with the producers in the transportation, shipping and marketing of natural gas and/or LNG. In addition, as a non-working interest owner of production the state will not be similarly situated with the producers in terms of decision making, data, technical analysis, etc.," he said.

Among other things, he said:

• As a minority owner, the state will not have the control it does today through existing law and regulations. "The state will have a minority stake in every regard including gas ownership, pipeline ownership, shipping rights, etc., and will be substantially denied the leverage that it has currently."

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• The proposal for the state to take possession of its gas instead of collecting money will necessitate complicated arrangements for transportation, marketing and sales, marking "a major departure from several policies that have guided previous in-kind sales by the DNR, (Department of Natural Resources) which are designed to protect the state's fiscal and legal interests."

• The state will be in competition with the oil companies to sell its gas. If the state is to have royalties and taxes paid in cubic feet of gas, the point of transfer should be as far from the production area as possible.

• There are no stipulations in the agreements for the companies to commit reserves, develop fields, deliver volumes or maintain deliverability. "The economics, timing and strategy for production carry a distinct set of economic and commercial drivers apart from the pipeline. Once committed to, the producer participants will view the pipeline and related investments as sunk costs and will make production decisions that maximize their positions accordingly just as they would if a third party pipeline were put into service in lieu of the project discussed in the agreements."

• There is no prohibition on the companies against asking for more concessions from the state as a condition of producing gas after the project is sanctioned or built.

• The oil and gas business is "litigious in the normal course of affairs," and the agreements are set up for the state to become a "quasi-business partner." It should be prepared to spend a lot of time in court, he said. "The contract is unique and purposely varies from industry custom and practice in many key areas. In my estimation, the business risk of litigation is very high and must be factored in as a significant probability."

To the extent the agreements limit liability "for loss associated with consequential or incidental damages, including lost profits; or any special or punitive damages, this would represent a significant shift in risk in favor of the producers."

• There are significant concerns that the proposal will not support competition on the North Slope and the entrance of new companies.

"I recommend not presuming that existing FERC (Federal Energy Regulatory Commission) regulations and policies will protect the State's interest and prevent basin control, either overtly or through subtle device," he said.

"A critical element in minimizing the risks of basin control is for the gas line to be expansion friendly both explicitly and implicitly."

• The agreements presented to lawmakers are not backed by the parent companies of BP, Exxon Mobil and ConocoPhillips, but only by stipulated subsidiaries. "There are no restrictions in the agreements to the capital structures of these or any other subsidiaries; to the sale of assets or shares; maintenance of credit ratings or debt/equity ratios; etc. Due diligence on the financial underpinnings or wherewithal of these entities is essential absent parent guarantees. The state of Alaska is not similarly situated."

• The work of consultants presented to lawmakers should not be used as an exact measure of how much cash the state will collect once the pipeline is running. He advised instead that it is critical to understand the range of uncertainty and to test scenarios within that range and estimate the chances of success.

"It is my professional opinion that the economic range of uncertainty is asymmetrical and that the far downside risk exceeds the far upside opportunity," he said, adding that it is next to impossible, given all of the variables, to settle on a single prediction about the future flow of dollars to the state.

Dermot Cole can be reached at dermot(at)alaskadispatch.com. Follow him on Twitter at @DermotMCole.

Dermot Cole

Former ADN columnist Dermot Cole is a longtime reporter, editor and author.

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