Alaska editorial: Alaskans need to take a good look at gas pipeline risks

Posted: Thursday, June 08, 2006

This editorial appeared in the Anchorage Daily News:

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I t's true. If the proposed North Slope natural gas pipeline comes in on budget, or close to it, and if gas prices stay high, the state will profit handsomely from a 20 percent ownership in the project and the gas.

But before legislators buy off on the governor's plan to buy into the megaproject, Alaskans had better take a deep breath and look at both sides of the clouds - the silver lining and the dark side. Only then can legislators and the public make an informed decision.

Gov. Frank Murkowski and his advisers believe state investment in the gas line - a 20 percent share - would be good for the state and good for the project. They say it would allow the state to make a healthy return on its investment, would give it some input into project management decisions, and by sharing construction risks would help push North Slope producers into committing to the project.

The latest estimates put construction at about $25 billion, give or take. The state's 20 percent share would be $5 billion: likely some cash, perhaps from the Permanent Fund, and mostly borrowed money.

Before making such a huge financial commitment, however, Alaskans need to know all the risks. The answer may still be yes, but people should think hard about this one.

Don't believe in cost overruns? Just ask Royal Dutch Shell and Chevron. Shell is building a massive liquefied natural gas project at Russia's Sakhalin Island, originally estimated at $10 billion. But that has doubled to $20 billion, with completion still two years away. And Chevron, which is developing the Gorgon LNG project off the northwest coast of Australia, is looking at a possible two-year delay to a 2012 online date and construction estimates jumping from the original $11 billion to the latest report of $18 billion.

The governor needs to tell Alaskans exactly where he proposes to get not only the $5 billion but possibly billions more if there are major cost overruns. More cash from the state or more debt? And what would overruns do to the project's long-term profits? It may be easy for Exxon Mobil or BP to write checks for a few billion dollars in cost overruns, but how would the state handle it?

Another risky element in the governor's proposal is taking the state's royalty and production tax in gas instead of cash. Instead of going to the bank with tax and royalty checks from the producers, the plan is for the state to take ownership of 20 percent of the gas coming out of the ground. The state would then peddle its gas on the open market.

To do so, the state would need to guarantee - actually sign a binding contract - to ship its gas in the pipeline and pay the bills for maybe 20 years, no matter what the market price for the gas. The production and processing costs and "ship-or-pay" commitment for the state gas could cost the state $20 billion over 20 years, which is a significant, long-term promise based on the assumption that there would be a profit at the end of each day's sales.

Some Alaskans were starting to count wild profits from that 20 percent share of the gas back in December, when natural gas prices climbed past $15 per thousand cubic feet - more than triple the average price of the past five years. But that same commodity sold Wednesday for $5.98 on the New York Mercantile Exchange. Easy come, easy go.

The lesson is simple math: If construction stays close to budget and gas prices are above average and stable, state investment in the line and state ownership of the gas could be a good deal. But if one of those variables goes in the wrong direction, or if both go sour, Alaska will learn very quickly the roller-coaster life of the commodity business.

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