Saturday, April 13, 2013

HB4 is a bad idea and a slap in the voters' faces

HB4 creating the Alaska Gas Development Corporation was passed by the Alaska House on 2 April, 2013 by a vote of 30-9. This bill is the culmination of over 10 years of effort on the part of the Legislature and the Governor to end the Alaska Natural Gas Development Authority created by 138,000 votes for Proposition 3 in 2002. HB4 is now before the Alaska Senate, where it will probably pass, given the list of sponsors in the Senate: Senators Dyson, Huggins, Giessel, McGuire, and Micciche. There are only 20 members of the Alaska Senate. Senator Charlie Huggins is the Senate President. Therefore, the likelihood of this legislation failing to pass is nil.

Alaska’s history of attempting to get a natural gas pipeline built to move natural gas from the North Slope to market has been convoluted. HB4 further complicates this confusing and contradictory history.

Prop 3 passed in 2002 mandated the State to create a natural gas development authority (AS 41.41) to build the all-Alaska natural gas pipeline from Prudhoe to Valdez, with a 250 mmcf spur to south central. The capacity of the all-Alaska natural gas pipeline (AANGPV) to be built was approximately 2.5-3.0 bcf/da with most of the gas converted to LNG and then shipped to market in the U.S. or to foreign markets. Proposition 3 created the Alaska Natural Gas Development Authority (ANGDA), which was to be have been the vehicle that would oversea the natural gas development potential for Alaska. From the very start, ANGDA was vehemently opposed, disrespected, and diminished by Governor Frank Murkowski, Governor Sarah Palin, Governor Sean Parnell and the Legislature from 2002 forward. With their opposition to ANGDA, the aforementioned belied any intention of respecting the peoples’ will where building a natural gas pipeline was concerned. This disrespect has been amplified in the creation of the Alaska Gas Development Corporation (AGDC) and the Alaska Stand Alone Pipeline (ASAP).

Governor Frank Murkowski rejected the will of the voters with his churlish opposition to ANGDA and the all-Alaska natural gas pipeline (AANGPV). Murkowski funded ANGDA with an initial appropriation of $50,000 and the Legislature gave more money later in 2003. ANGDA’s yearly budgets then and since barely covered the cost of the few positions created. Compare this situation with the $400 million that will be shoveled into the AGDC’s Alaska Stand Alone Pipeline (ASAP) by the Legislature under HB4 and the $214 million previously appropriated for the various iterations of the ASAP line. Today, ANGDA’s website lists four on the ANGDA Board and one employee as Executive Director. Harold Heinze, a former CEO of ARCO, was the previous Chief Executive Director until he stepped down on December 8, 2011.

ANGDA accomplished much during its colored history. ANGDA explored moving gas south by truck to Fairbanks, permitting of the 250 mmcf spur line from Glennallen to Palmer’s Enstar natural gas hub, and building a natural gas pipeline from the Kenai Penninsula north to communities along the Parks Highway, which would have provided an incentive for further exploration and development of the Cook Inlet oil and gas fields. Given the dearth of resources and the failure by the Legislature and the Governors, and their opposition to ANGDA, to provide for bonding capacity, as has been done for the AGDC through Alaska Housing Finance Corporation and the Alaska Rail Road, ANGDA’s accomplishments were not insignificant. Under Harold Heinze and Scott Heyworth, ANGDA moved to meet its statutory mandate as was allowed by hostile administrations and an indifferent and, since the 2009, an increasingly hostile Legislature.

During his term, Governor Frank Murkowski had promised a natural gas pipeline and worked diligently on a 4.0 bcf/da pipeline proposal to make his promise reality. His efforts allegedly culminated in a contract with Exxon, Conoco and British Petroleum Alaska to build his pipe dream. The Palin campaign was able to successfully promote the all-Alaska natural gas pipeline in opposition to Murkowski’s efforts. It was revealed that what Murkowski called a contract was nothing more than an intent on the part of the oil companies to study the viability of building a 4.0 bcf natural gas pipeline to Alberta.

The size of any pipeline has also been an interesting side issue, and one often overlooked in any debate. The natural gas pipeline strategy effected under Murkowski, Palin and Parnell has been for a 4.0 bcf/day natural gas pipeline from the North Slope to Alberta. The theory being that there must be sufficient volume to replace declining revenues produced by the North Slope’s declining oil production. The all-Alaska natural gas pipeline proposed in 2002 was to be a 2.5 bcf with Bill Walker expanding that to 3.0 bcf under his campaign proposal. The AANGPV would terminate at an LNG train to convert the methane to Liquid Natural Gas (LNG).

Bill Walker’s AANGPV proposal would have provided for use of the gas liquids in-state to grow Alaska’s private sector, whereas Palin/Parnell’s AGIA, both the Canadian route and the LNG proposal under consideration to Valdez, and Murkowski’s proposal intended that the gas and gas liquids be shipped out of state for consumption and use elsewhere with little benefit to Alaskans beyond the in-state pipeline and LNG train construction and a direct infusion of cash at the State level.

The Alaska Oil Gas Conservation Commission (AOGCC) has set a limit on the amount of natural gas that is available for sale in order to maintain sufficient pressure on North Slope legacy fields to allow production of remaining oil reserves. AOGCC has set a limit of 2.5-3.0 bcf available per day to deliver to a pipeline. Over 8 bcf per day is now reinjected back into the oil fields on the North Slope in order to maintain pressurization of the fields to make oil production feasible. AOGCC has been pretty consistent in its requirement that at least 5 bcf of the 8 bcf of gas produced per day be reinjected. The priority is in maintaining the State’s oil revenues.

During her 2006 campaign, Sarah Palin supported the mandate imposed by Proposition 3 and the construction of the AANGPV. Upon taking her oath of office, then Governor Sarah Palin turned her back on her support for that mandate and project, and moved forward with her Alaska Gas Inducement Act, which, to date, has produced nothing. AGIA was almost a mirror of Murkowski’s proposed pipeline plan. Instead of relying upon the Producers (Exxon, BP and Conoco), AGIA granted an exclusive to the winner of the competition promoted by the Palin Administration. Unfortunately, there was only one competitor, and that was TransCanada. Her successor, Governor Sean Parnell has not been able to move the proverbial natural gas pipeline football forward one inch towards a commitment for construction, a timeline to do anything, or even claim a successful open season.

During the 2010 campaign for governor in the Republican Primary, Bill Walker championed the AANGPV in his bid for the Republican nomination for Governor. Walker added a new dimension to the pipeline conversation that has been ignored since Parnell’s victory in the Republican Primary. That new dimension was the idea of value added resource development in the use of some of the gas to provide cheaper energy for the agriculture, timber, and mineral industries. Walker’s proposal would have seen take offs to communities down the Richardson Highway and at Glennallen. There was discussion regarding another spur across the Denali Highway to Cantwell. Fairbanks would have benefitted from the pipeline as the pipeline would have gone through with the gas liquids stripped at Fairbanks. The propane and butane would have been used as alternative fuels, with the ethane, hexane and other components being used to provide the building blocks for a plastics and petrochemical industry, giving a benefit to Alaska’s economy well beyond just the construction of the AANGPV. Walker’s proposal was the only proposal for a natural gas pipeline that went beyond just exporting Alaska’s gas to a foreign or domestic market.

The ASAP proposal was previously known as Harry Noah’s pipeline under Sarah Palin/Sean Parnell. The economics were never viable, but $14 million in State funding was appropriated to Noah’s pipeline study group for what was then known as the Bullet Line. Rep. Mike Hawker and Rep. Mike Chennault brokered deals to create the Alaska Gas Development Corporation by creating a frankenmonster of an entity to end the public’s mandate represented by ANGDA, but doing what the Legislature never did for ANGDA: providing for the ability to bond to finance any gasline projects using the resources of the Alaska Rail Road and the Alaska Housing Finance Corporation.

The Republican Primary in 2010 saw three competing natural gas pipeline projects: former Rep. Ralph Samuels promoted the ‘Bullet Line’ (ASAP), Governor Sean Parnell promoted AGIA, and former Mayor of Valdez Bill Walker promoted the AANGPV.

For some reason, it was fine by the Republican legislative majority and voters to support the Bullet Line, even though it was to be 100% state financed, and limited to a maximum volume of 500 mmcf/da under AGIA, but having the State of Alaska buy into the AANGPV for a 20% interest in order to control the timeline for construction was ‘socialist’ and a subject of great controversy. The estimated cost of the Bullet Line was $4B-$7B at that time, and the estimated cost of the AANGPV was $20B-$24B. Since, the ‘Bullet Line’ cost estimates have grown to almost $8B, but the AGIA version of the AANGPV costs have increased from the 2010 AANGPV estimates to $45B-$65B according to the October 1, 2012 letter to Governor Sean Parnell from Exxon, BP and Conoco.

Note the disparity in cost increases between the two pipelines. Does it make sense that the estimated costs of the AANGPV should increase by three times over the cost factors of the ‘Bullet Line’/ASAP pipeline? Is this a case of TransCanada/Exxon, BP and Conoco inflating the AANGPV to reinforce their reluctance towards moving North Slope natural gas to market?

The upswing in shale gas production has eliminated the domestic U.S. natural gas. A projected 200 trillion cubic feet of natural gas reserves in continental U.S. shale deposits made the idea of shipping Alaska natural gas to a U.S. market moot. Now, Alaska natural gas will have to compete with domestically produced U.S. shale gas on the world market, given the export permits applied for to move shale gas as LNG to Asian markets.

One of the greatest errors on the part of the Parnell Administration was ignoring the needs of Japan after the 2011 earth quake. A delegation came to Alaska seeking an audience with our governor. They did not meet with him. Another delegation came last year in June and met with DNR Commissioner Dan Sullivan. After leaving Alaska, the delegation comprising four Japanese companies, including Mitsubishi, travelled to British Columbia and Louisiana where they invested almost $4 billion between Cheniere Energy’s Sabine Pass LNG export expansion project and in Shell’s LNG export facility at Kitimat, B.C.

Alaska has a long term (43 years) relationship with Japan with respect to LNG exports. Conoco’s LNG train at Nikiski has been producing LNG for export to Japan since before the completion of the TAPS.

It certainly appears that AGIA has cost Alaska in lost business opportunities.

The ASAP’s primary purpose is no longer just the idea of supplementing Cook Inlet/Kenai gas production until storage and new exploration and development activities eliminate the specter of natural gas shortages that saw the closure of the Agrium ammonium nitrate fertilizer plant in Nikiski several years ago with the loss of 65 jobs. The ASAP will provide natural gas for Conoco’s LNG train at Nikiski for export to Asia. Given that the ASAP will be constructed at State of Alaska expense and its operation subsidized by the State, that is a very good deal for Conoco. At lease some of Alaska’s natural gas will make it Asia’s LNG market.

Cook Inlet has approximately 19 trillion cubic feet of estimated reserves remaining to be discovered. Exploration and development has picked up over the last two years, with more drilling planned this year. Unfortunately, there needs to be an upgrade in transportation infrastructure and storage to get the natural gas from the producing field to sufficient storage to carry south central’s demand through increasingly colder winters. It is not a declining production that is the issue, it is the lack of a suitable intra-field pipeline system to get the gas to the storage facility. As a result, Alaska may see the first importation of natural gas from Russia later this Spring.

With the 2014 gubernatorial elections looming, Governor Sean Parnell is in much the same situation as former Governor Frank Murkowski was at the time of his reelection bid against Sarah Palin. Under Parnell, the AGIA 4.0 bcf pipeline option to Canada is dead. The only viable option is the AGIA LNG option similar in size and scope to the AANGPV, excepting for no spur to Palmer and no in-state use of the gas liquids. Given the conflicts of interest on the part of Exxon, BP, Conoco and TransCanada, LNG from Alaska is unwelcome in the Asian market, because of competing developments on the part of the aforementioned.

Given that his administration cannot state any firm date for the construction of a pipeline, could it be that Governor Sean Parnell is exploring the possibility of running against Senator Mark Begich with the intent of bailing from the Governor’s office before the house of cards that is AGIA falls in on itself?

Such could be inferred from the remarks made by Lt. Gov. Mead Treadwell today. Treadwell commented on the recent upheavals in the Alaska Republican Party and its ability to promote and support the campaign against Democrate Senator Mark Begich. Treadwell stated that it may not be him running against Begich, but possibly Governor Sean Parnell. Treadwell had previously announced his intent to explore a run against Senator Mark Begich on November 30, 2012. If so, Treadwell will certainly run for governor in Parnell’s stead.

Bill Walker may have another shot at the Governor’s mansion if Parnell runs for the U.S. Senate. Under Parnell, Treadwell has not been terribly prominent in the public eye.

It should be noted that Governor Sean Parnell has not opposed theAGDC/ASAP proposal of Rep. Mike Hawker and Rep. Mike Chennault as demonstrated by HB4, nor did he oppose the previous iteration of that project proposed by Harry Noah under then Governor Sarah Palin. This lack of opposition leaves him in a position of being able to claim some degree of success with respect to moving Alaska’s North Slope natural gas to market. Ignoring of course, the fact that the ASAP project is limited to 500mmcf under AGIA, meaning the cost of transport to market will have to be subsidized by the State for the life of the pipeline. The cost of constructing the pipeline would also be borne by the State of Alaska.

Bill Walker’s AANGPV was the best option to date, as his plan provided for instate use of the gas liquids and natural gas to provide for cheap energy for agriculture and industry, alternative fuels for the Bush, and a petrochemical industry for Alaska. TransCanada and Exxon will send the gas and the gas liquids to Asia, if they bother to build a pipeline at all. Further, the AANGPV provided for a 250 mmcf/da spur into the Enstar Hub at Palmer to help mitigate the anticipated storage shortfalls from Cook Inlet natural gas production. A spur from Paxon west to Cantwell was also anticipated providing for a spur feeding to Nenana and connecting to any ANGDA pipeline from Nikiski north to Cantwell.

Competing with any potential Alaska LNG exports, Exxon has several large scale natural gas development LNG projects in the Pacific (Australia, Indonesia, New Guinea), and also needs a market for its portion of Qatar gas with the loss of the U.S. domestic natural gas market to domestically produced shale gas.

TransCanada is part of the Foothills Pipeline Company, which is involved in the Kitimat LNG port project. TransCanada was recently awarded a contract by Shell for a 2.4bcf pipeline to Kitimat, B.C.

Conoco has its portion of Qatar natural gas to move to market, now in Asia, because of the loss of the domestic U.S. market to shale gas. Conoco also has two Australia LNG projects that will compete with Alaska LNG for the Asian market.

Given the conflicts of interest on the part of Exxon Mobil, Conoco Phillips and TransCanada, is it any wonder why there has been no forward movement on AGIA?

Given the conflicts of interest on the part of Exxon and TransCanada, Governor Parnell has to be either totally brain dead, or simply ignoring reality, given his insistence on pursuing AGIA in the face of competing projects on the part of the TransCanada, Exxon, Conoco and BP. There is no provision under AGIA to declare breach of contract based upon a conflict of interest.

Given the increasing availability of natural gas in the world market, it may be better for the State to pay $500 million to $1.5 billion in penalties get out of AGIA. The lost opportunities will cost the state several orders of magnitude of any penalty under AGIA.

What are the differences between the ASAP natural gas pipeline and the all-Alaska natural gas pipeline option to Valdez?

Cost of construction is borne by the State: ASAP–100%; AANGPV–20% State ownership interest

Capacity: ASAP–500 mmcf/da; AANGPV–2.5-3.0 bcf/da

Benefits: ASAP will increase south central consumer gas costs by up to 13%; AANGVP will reduce or maintain present consumer costs, provide for growth in the private sector, because of in-state use of gas liquids, benefit beyond Alaska for growth in Asian customer’s economies

Cost of construction: ASAP–$8B; AANGPV–up to $45B-$65B (oil companies’ estimate) with LNG train and harbor improvements

Route: ASAP–North Slope to Nikiski across several salmon streams, Denali National Park and Denali State Park, but will not go through Fairbanks with no spur for consumers down the Richardson Highway south to Valdez; AANGVP–TAPS corridor from Prudhoe to Valdez covering all communities along the route through Fairbanks, with a 250 mmcf/da spur from Glennallen to Palmer and passing through Fairbanks down the Richardson Highway with a potential spur across the Denali Highway, LNG route--Valdez to Asia

Permitting status: ASAP–no permits issued; AANGVP–existing permits from Yukon Pacific Corp.

Estimated completion: ASAP–2019; AANGVP–two-three years from funding

Cost of gas to delivery per million cubic feet: ASAP–$9-$11.25/mmcf for Anchorage consumers (p13 of ASAP Project Plan); AANGVP–<$10/mmcf from the North Slope to Japan, including TAPS, LNG conversion costs, and LNG tanker costs (p15 of Wood-Mac study)

Gas liquids: ASAP–stripped at North Slope and reinjected; AANGVP–stripped at Fairbanks for use in Alaska

Testimony on HB4 was heard before the Senate Finance Committee today. HB4 is expected to pass out of the committee.

For more information:

ASAP Project Plan, Dec. 20, 2011–Joint In-state Gas Caucus

Wood MacKenzie Alaskan LNG Exports Competitiveness Study

Exxon Mobil LNG:

Conoco Phillips LNG:

British Petroleum LNG:


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