It's official: Gov. Bill Walker is again pursuing a state-led natural gas pipeline as an alternative to the Alaska LNG Project, the partnership of the three major North Slope producers as well as the state.
Keith Meyer, new president of the state-owned Alaska Gasline Development Corp., or AGDC, told state legislators June 29, the concept of such a plan has been presented to Slope companies who are the state's partners in the jointly owned Alaska LNG Project.
The governor has wanted to go it alone, doing his own thing, for years, as far back as when he led the Alaska Gasline Port Authority, a municipal group desiring to build a pipeline.
For those of us who have watched the gas pipeline efforts over the years there's a terrible sense of déjà vu about this. It's like the movie "Groundhog Day," where Bill Murray, plays a TV anchor covering the annual awakening and querying of Pennsylvania's Punxsutawney Phil on the coming of spring.
A wobble in time traps Murray's character in repeat, reliving the same day over and over…. Go rent the film and watch it.
Here we are now in our own movie with gas market conditions again undercutting an industry-led project for a fifth time (there have been six efforts at pipelines since the 1970s). Each time the projects flops, Alaskans pop up, in this case the state, to reconfigure the project in the wake of market failure.
The Legislature is skeptical of this latest initiative, citing the state's poor financial condition.
However, let's step back and look at it again. We're in a partnership with questions as to whether all parties now want to move forward with world LNG markets in such lousy shape.
In this situation there's nothing wrong with one of the partners, in this case the state, stepping forward to advance the project if the others are reluctant.
We're not yet in that situation, of course. The preliminary engineering and a revised cost estimate for Alaska LNG won't be done for another six months and under their agreement the partners have some time following that to decide whether to take the next step.
That next step is expensive. It will be $1.5 billion to $2 billion or so for final engineering, which along with the federal permits are the remaining steps to a construction decision.
If all the partners don't want to advance – and the governor appears to have concluded this – he now wants to push forward anyway, hoping to bring one or more of the others along or to recruit new partners.
On the face of it, the state is better equipped for this than it was previously because there is a state gas corporation, the AGDC, that is staffed up with a ready-to- go project for a 36-inch, 800-mile pipeline to Southcentral.
The state's pipeline was developed as a backup plan in case the big project stumbles. Unlike Alaska LNG it has its final engineering done and is close to getting its final permits.
A big drawback, however, is there is no liquefied natural gas plant at the southern end of the pipe, at least not yet. The state pipeline could carry far more gas than can be used in-state, so some way of exporting the gas is needed.
We have not yet heard what Alaska LNG partners' response to the governor's plan has been.
Not surprisingly, there are some problems, mainly the state is in no financial shape to bankroll anything. The governor's idea, to offset this, is to bring in third-party investors like LNG customers, presumably Japanese, Korean or Chinese companies, or perhaps private equity firms.
This will be a tough sell given the lousy shape of energy markets and the utter unpredictability of future LNG prices. One would think they will rise, but after the fundamental market upset caused by U.S. shale gas drillers, a development few saw coming, who can be comfortable making predictions?
Financing the project with 100 percent borrowed, as some have suggested, seems unlikely. Lenders will insist on seeing substantial equity investment by someone in a big, risky project like this. We also have to recognize an inherent conflict in that the investor for the project infrastructure wants a high return, which means transportation charges and profits will be pushed up as much as possible.
The high transportation price will push down the price paid to the gas producers and owners on the Slope, which includes the state, for its royalty gas. BP, ConocoPhillips and ExxonMobil, as well as the state, all need to be paid a fair price for their gas. In fact, our state Constitution requires "maximum return" for the sale of state resources.
The tension in this deal – between the transportation system owners and the "upstream" gas owners – is essentially solved by the proposed structure of the Alaska LNG partnership because the gas producers, including the state, would own roughly the same share of the project infrastructure as they do gas, about one-fourth each.
Under this arrangement, each partner would ship its own gas through its share of the project. Think of it like four pipelines bundled into one (this is the way the trans-Alaska oil pipeline ownership is structured). If there are lower profits from gas production, each producer's share of the infrastructure profits offset that.
In the converse, if the project is built as efficiently as possible so the transportation cost is lower, the "upstream" profits (including the state's) rises.
Under other arrangements, having one owner of the project or a set of different owners than the producing companies creates a tension, and an imbalance, between the goals of the groups.
The only way a state-led project could work is if the state can develop a lower-cost project and owns it all, like a state-owned railroad or a state toll road.
The question, of course, is whether the state could really develop a lower-cost project. This is not a road or railroad, after all.
However, since we can't finance it all, we bring in partners desiring a healthy return on their investment. As soon as that happens we no longer have a low-cost project, so there is misalignment once again.
This is complicated. But it's important, too, because we really do need this gas project producing real revenues for the state as oil income winds down.
Give the governor credit for wanting to keep pushing the project forward despite the lousy market. He should be given a chance to make his idea work. If Alaska LNG is truly headed for a pause, let the governor try.
But let's be realistic, too. Our best chance of really achieving this may lie with partners who know how to do these things, and aligning our goals with them. We should give the governor a chance, but let's keep the Alaska LNG partnership intact.
To do something stupid and blow the partnership apart would be a tragic mistake.
Tim Bradner is co-editor of Alaska Inc., a quarterly business magazine