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Lawmakers turned down sure-thing gas line

Chris Stephens

We got some bad news the other day. The Denali Gas Pipeline project, a joint venture of BP and Conoco Phillips, announced it was throwing in the towel on its proposed natural gas pipeline from Prudhoe Bay to the Lower 48 because it cannot make the project work.

TransCanada and Exxon Mobile are continuing their efforts to sign up shippers for their proposed gas line under the Alaska Gasline Inducement Act (AGIA).

The abandonment of the Denali project is a big blow. The gas line would benefit all of us tremendously. The news is particularly upsetting because we had a gas line agreement negotiated in 2006 by then-Gov. Frank Murkowski. But the Legislature felt his deal was too generous to the oil companies and withheld approval.

There are times to take what may look like a bad deal. Turning down a "for-sure" agreement means betting you can do better. When a transaction is extremely complicated and difficult and the chances of making another deal are risky, what looks like a bad deal may be your only deal.

Making an agreement for constructing a $35 billion gas pipeline is a huge and difficult undertaking. There are so many variables and players that have to line up: securing enough gas to make the line physically feasible; arranging for construction and operation of the pipeline at a profitable cost; obtaining the needed government permits; financing one of the largest private construction projects in history; betting that interest rates won't rise or that gas prices won't fall (which they have -- both deal killers); handling the politics; and on and on.

Beyond those is the opportunity cost. That is, all the benefits we would have gotten with a pipeline but won't get without it. Think of all the jobs, business opportunities, enhancement to our economy and standard of living, and income to the state that a gas line would provide.

When the Legislature turned down Murkowski's agreement for construction of a gas pipeline, lawmakers made a huge bet that all of the above could be overcome with a deal enough better to justify the risk of no pipeline at all. What could they have been thinking?

Some thought we left too much on the table in the 1970s with the trans-Alaska oil pipeline agreement, and they were not going to make that mistake again with a natural gas pipeline.

I discussed this with a friend, a former Alaskan now living in the Lower 48 and a senior executive of a major real estate company that invests institutional money in large commercial real estate. He is extremely skilled at and knowledgeable about investing and making deals.

As to the notion that Alaska gave away too much with the oil pipeline, he asked me how I thought Alaska has made out with the oil line. I started listing the benefits: oil funds about 90 percent of state government with no state income tax; we have a cash surplus; we have Permanent Fund dividends; we have high- paying jobs; proceeds from oil have funded education and capital improvements all over the state; we have a much higher standard of living. He then asked: "So what are people complaining about? If you left a few dollars on the table, so what? Look at all you have gotten."

I don't know what the Legislature thought was "too much" left on the table in the Murkowski deal. Let's say legislators thought the deal was 30 percent too favorable to the oil companies. Well, 70 percent of something is a whole lot better than 100 percent of nothing.

The possibility of a gas line is not dead. I hope TransCanada and Exxon can do with AGIA what BP and Conoco Phillips couldn't with Denali. If not, we may be hanging out the "Will-Entertain-All-Offers" sign.

Real Estate Investor Class

My professional commercial real estate designation association, CCIM, is offering an excellent investment real estate analysis class designed for brokers in June. It has limited seating available to the public. This is the first time in 27 years this class has been offered locally. If you're a real estate investor, I highly recommend this class. For information call Brandon Spoerhase, 762-7590 or email bs@gci.net.

Chris Stephens, CCIM, is a local associate broker specializing in commercial and investment real estate. His column appears every month in the Daily News.


CHRIS STEPHENS
REAL ESTATE