12-14-18 A Citizen’s View Of The Two Alaska Gasline-LNG Projects

AK-LNG & ASAP: A Citizen Considers the Risks of Continuing Government Ownership

by

Dave Harbour

How would you cope with the smorgasbord of problems/challenges Mike Dunleavy, assumed upon being sworn in as Alaska’s Governor in early December?

Alaska Governor Mike Dunleavy

Some of the challenges blocking Alaska’s road to economic recovery — and obscuring its natural beauty — include: a fiscal crisis and annual budget deficits, billions in state employee unfunded pension liability, the highest unemployment rate in the nation, growing crime, an amazingly burdensome array of “entitlement” programs, high utility rates and one of our country’s most ineffective state educational systems.

The cycle of excess spending and decreasing revenue flowing from the nearly 50-year-old Trans Alaska Pipeline (TAPS) has produced a crisis anticipated but ignored by elected officials for decades.

On Governor Dunleavy’s list of challenges, is the question of what to do with a government owned, Alaska North Slope (ANS) natural gas monetization project costing some $40-60 billion.  Should he let it quietly slip into the night and allow its current funding to lapse?  Should he try to terminate the project as soon as possible and reclaim remaining dollars? Or, should he support continued public funding of the effort to create a profitable, government-run natural gas/LNG hybrid transportation project for export and for intrastate use?

We believe Governor Dunleavy will seriously consider the opinion of citizens when making such critical decisions. Here, we have tried to review the risks involved in continued government ownership of this project, which has not yet been proven to be economically feasible.  After fully considering these and other matters, citizens might feel more qualified to offer their legislators and the Governor useful counsel.

*     *     *

The previous Alaska administration led the effort to expropriate the ANS gas transportation projects from private parties when those parties, the three major ANS producers, concluded that it was not time to move such a project forward.

While the administration expropriated[1, Scroll down for end notes] the project, the three producers did not object.  After all, from that point forward, they would be “off the hook” should an apparently uneconomic project fail to attract either/or gas purchasers and financing.  In short, the administration led the citizens of Alaska into an uneconomic, risky, tens of billions of dollars energy project in the midst of a state fiscal crisis because the past governor was proclaiming it would be Alaska’s financial “get-well card”.   At the time, we tried for our local and international readers to inventory the risks of such a venture.

*     *     *

The Alaska Gasline Development Corporation (i.e. AGDC[2]) now leads the state’s effort to transport and market Alaska North Slope (i.e. ANS) gas reserves.  AGDC is a state agency that manages two, large gas pipeline project concepts.  The first is AK-LNG[3], an 800 mile, high pressure 42” pipeline that could move gas from the ANS, after treatment for pipeline transportation, to the Kenai Peninsula where it would be liquefied, loaded onto cryogenic tankers and transported, presumably to Asian markets. It is promoted as an export project that can also serve Alaska markets.

The second, is a backup plan that also requires ANS gas treatment and movement via a smaller, 735 mile, 36” pipeline to a utility connection point near Big Lake Alaska.  Nicknamed the ASAP[4] project, this one is kept active in case the more expensive export line is unavailable.  At some undefined price, the smaller line could serve Alaska markets and export some LNG as well.  If it served only local needs, ratepayers would pay more since international customers would not be paying part of the tariff in a line designed to serve both.

The environmental impact statement on the smaller line is in hand and the FERC issued EIS for the larger line is expected sometime in the coming year.  Citizens will note that having EIS approval does not create an economically viable project; it merely satisfies a preliminary regulatory requirement.

We offer this quick exercise in logic: Neither line should be designed for Alaska use.  Only half of the smaller line’s capacity will accommodate Alaska needs but gas and electric utilities already have a variety of gas supply contracts — both for electric power generation and residential/commercial use — of varying lengths.  Someone (i.e. state subsidies or consumers?) may have to either pay a penalty to exit contracts early to fulfill pipeline throughput agreements or to finish contracts and pay for  reserved capacity in the pipeline.  If half of the small line and most of the big inch pipe is devoted to exports, policy makers should be aware of economies of scale.  That is, the gas/LNG will be cheaper to transporters/export markets (i.e. more competitive) if the volumes are greater; so the best case for project economics is to eliminate capacity for local use.  Either project is a dangerous alternative for Alaska consumers because of the expense in tapping into the high pressure line.  More on that below.  Finally, when ENSTAR Natural Gas is asked, “Would you use North Slope gas,” we believe its management can only nod agreeably, for the likeliest answer is, “Conceptually yes, but it depends on price and other factors.”  Another truth: if importing LNG from British Columbia to Cook Inlet is cheaper for utility ratepayers than moving it via a horrendously expensive, 800 mile Arctic pipeline, why not import?  Having ANS gas molecules in an Arctic reservoir doesn’t mean those very molecules must be used in Alaska if greater value lies in exporting them while importing cheaper LNG for local use.

*     *     *

We always appreciate former Alaska Gas Pipeline Federal Coordinator Larry Persily’s commentaries about the Alaska Gasline Development Corporation and its employees’ work.  His critical thinking is extremely valuable and objective.  We would add that, while AGDC employees have generated a great deal of Alaska political and technical support for the project, we caution fellow citizens that we see too little critical analysis of the project’s legitimacy and its promotional work.

For example:

  • Nicolas Maduro, Venezuela

    Citizens could question whether they wish to have their government own private industry projects. That approach is Nicolás Maduro’s Venezuela[5] model and it was Argentina’s[6].  But if Alaskans decide to move in that direction in spite of the State’s failed ownership attempts in the past[7] – should they be doing it during a time of fiscal crisis and deficit spending?  And if they decide that ownership is acceptable, would they also conclude that project ownership is prudent in light of withdrawal from the project by three of the most knowledgeable oil and gas companies in the world?  Lastly, one would ask: Are Alaskan citizens wise to empower temporarily elected and appointed politicians and bureaucrats to own and manage a $40-$60 billion gas export project on their behalf?

  • Regularly, private sector oil & gas companies find that risky exploration efforts produce nothing or that carefully engineered, financed projects are hit by negative world markets[8], politics[9], contract disputes[10], terrorism, expropriation-following-investment, force majeure, etc. Do Alaska citizens want to shoulder such risk?
  • Both the AK-LNG and ASAP projects understate the difficulty of providing “hybrid” transportation for both international markets and local gas utilities. International buyers want gas/LNG that is rich in natural gas liquids (NGL), held and transported in suspension by a high pressure gas pipeline.  Local markets must pay for a hugely expensive valve and procedure to process the gas: to remove liquids, reinsert them into the mainline and then to depressurize and “odorize” the gas intended for utility distribution to commercial, business, military and residential consumers.
  • The smaller ASAP project, by transporting smaller volumes of gas, increases the cost of gas to Alaskans and to export customers. In either project, we note that removing gas – say in Fairbanks – creates spare capacity downstream for which someone must pay and wastes existing ratepayer investment in Fairbanks’ Cook Inlet LNG and cryogenic surface transportation infrastructure.
  • If the smaller line were to also export in the 50% spare capacity portion of the line not used for local use, that gas would have to be transported at some additional cost to Nikiski or another tidewater destination.
  • The government employees working for AGDC have a vested interest in protecting some of the most highly paid government jobs + benefits in the state. Your author worked for the project a short time and believes that they may all be well intended professionals focused on the public interest.  However, their incentive is also to protect their benefits.  An oil company’s similarly situated employees would know they would likely be given generous severance packages were a project to fold, or would be transferred to another duty station—thus incentivizing them to focus maximum effort on project excellence rather than extended, personal employment.  Likewise, we find it completely understandable that a government pipeline’s personnel:
    • Could convince Alaska support companies – including Native corporations — to whom AGDC has given work or hinted at future work to sign resolutions of support.
    • Could get producers to agree to help “market” or to execute conditional “gas sales agreements”, if the project is ever financed and built! Why not?  Especially considering that AGDC represents a government with the power to tax and regulate said producers!
    • Could easily arrange for labor union support, if there is an agreeable “project labor agreement” and the project is ever financed and built!
    • Could easily arrange for businesses and other non-profits, of which they are paying members or supportive in other ways, to sign general resolutions of support.
    • Could easily arrange for Japan and Korea to sign letters of intent to consider purchase of Alaska gas someday … when and if a competitive transportation system becomes available and when further conditions might be successfully negotiated.
    • Alaska ? China

      Could easily arrange for Communist China to express support for the project since it conveniently fits within President for Life Xi Jinping’s Belt and Road initiative (BRI) to achieve worldwide political, military and financial leverage[11].  Alaska should study the case histories of some naive and some corrupt Third World politicians whom China has seduced into its web of influence with projects that may or may not be commercially viable at the time. China’s strategy, to the free world, is a hegemonic and chilling reality.

Continuing government ownership and public funds managed by politicians and bureaucrats presents other challenges to “good government” as well:

  • Whereas a private company can encounter emergencies and react rapidly with management approval or quickly convened board approval, how well can a government LNG agency react to emergencies like: major organizational discord, events requiring a supplemental budget, force majeure exigencies, etc?
  • What would a government pipeline manager say to Alaska’s Senators or Congressman or state legislators or Governor should they call and recommend employees or contractors for hire? Would such influence interfere in fair employment practices?
  • Is a government agency board truly “independent” as its enabling legislation might suggest? If a governor uses his AG or others to direct policy, is the agency actually “independent”?
  • Could administration interference in operation of an “independent” agency of the state (i.e. like AGDC or the Alaska Industrial Development and Export Authority {AIDEA}), convince a court that the “full faith and credit” of the state (i.e. and Alaska Permanent Fund) must backstop any loans or revenue bonds?
  • Should a government energy agency give gifts of sponsorships, meals, travel or logo items etc. to citizens who provide some form of political support for decisions impacting public money — as opposed to private enterprise companies promoting projects with private capital?
  • Should a public energy agency open costly marketing offices in Houston and Tokyo early in the project’s regulatory and Stage Gate process[12]? We can only hope offices and employees in those destinations would provide tangible returns of and on Alaska’s investments in them.

*     *     *

We personally conclude, after witnessing decades of Alaska trying to imitate the private sector, that such posing fails to serve the public interest.

We conclude that if wealth-producing projects in Alaska are economically attractive, the private sector will finance and create them…passing on (mostly) risk-free royalties and taxes to the state government.

We conclude that the best policy Alaska politicians should consistently follow, is a policy of supporting project investors with: stable (i.e. hopefully, constitutionally protected) tax and regulatory policies and shouts of encouragement from many bully pulpits, press conferences and Op-Ed commentaries.

Do you agree…or have other perspectives?  Please comment below!  If you correct a statement of fact, we’ll make the change right away.  Remember, our goal is accuracy, commenting logically and preserving a valuable archive reflecting many decades of northern gas pipelines endeavors.  So far, all major ANS gas transportation efforts have failed: Thank God!  For if any had been funded and built, history now verifies that all would have failed and private sector investors would have found that taking the risk was devastating.  We want an ANS gas transportation project– a successful one.  But we will also continue attempting to serve the public interest by surfacing project risks — especially when the future of Alaska may be threatened.

Conclusion

For whatever it is worth to our patient readers, we finally opine that AGDC should wind down its organization in 2019.  It should do so after having secured basic federal permits now underway, professionally organized all corporate documents and work products for future project work  (under supervision of OMB experts[13] ) and after having spent no further time or money marketing the project.  AGDC’s board should assure from this point on that modest spending – including minimal international and local travel — allows return to the treasury of as much of AGDC’s appropriated funding as possible. State AGDC employees and contract employees should be laid off as soon as may be practical.  State employees might be given 1-6 month severance packages, depending on rank and duration of employment, should they serve faithfully until their planned layoff date.  OMB should conduct an independent, final audit of funds and assets to both assure accuracy and to provide any new owner of AGDC’s assets reliable records for transition and operational purposes.  All AGDC records should be professional archived and maintained by the appropriate state department.

Alaskan leaders should then encourage the private sector to resume progress on the project, with all of the help the state can prudently provide.

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(The author grants permission for general circulation magazines, newspapers and online publications to reproduce this commentary, partially or wholly, by including attribution and a live link to this original page.  -dh)

____________________________________________________________________

Dave Harbour is publisher of the Northern Gas Pipelines archives and is a retired member and past Chairman of the Regulatory Commission of Alaska.  Harbour is a NARUC Commissioner Emeritus and Chairman Emeritus of the Alaska Oil & Gas Congress.  Harbour served as public, government or external affairs director of four major oil and gas producing and transportation companies.  He is former Chairman of the Alaska Council on Economic Education, the Anchorage Chamber of Commerce, Export Council of Alaska and the Hugh O’Brian Youth Foundation.  He also served as president of the American Bald Eagle Foundation, Common Sense for Alaska and Consumer Energy Alliance-AK and assisted in the founding of Anchorage’s Saturday Market, the Alaska Support Industry Alliance and the UAS-Southeast American Bald Eagle Foundation.

ENDNOTES:

[1] https://en.wikipedia.org/wiki/Expropriation

[2] https://agdc.us/

[3] https://agdc.us/alaskas-lng-project/project-overview/

[4] https://agdc.us/about-us/alaska-stand-alone-pipeline-asap-project/

[5] https://northerngaspipelines.com/1-19-18-alaska-alberta-resist-socialism/

[6] https://northerngaspipelines.com/6-8-16-repsol-escapes-argentina-alaska-now-leaves-alaska/

[7] https://www.adn.com/features/article/dreaming-big-6-alaska-boondoggles/2011/10/10/

[8] https://energy.economictimes.indiatimes.com/news/oil-and-gas/australia-disappointed-woodside-shelved-mega-gas-project/51545417

[9] https://www.smh.com.au/politics/federal/federal-election-2016-australia-missing-out-on-wealth-boost-from-lng-boom-academic-claims-20160618-gpm88l.html

[10] https://www.abc.net.au/news/2016-06-14/ichthys-project-delays-and-disruptions/7510930

[11] https://www.vox.com/2018/4/6/17206230/china-trade-belt-road-economy

[12] https://www1.eere.energy.gov/manufacturing/financial/pdfs/itp_stage_gate_overview.pdf

[13] OMB should also supervise the proper disposition of all office furniture, fixtures and equipment and supplies in all of the agency’s office locations.

6 Comments

  1. John K. Norman December 14, 2018 at 5:02 pm - Reply

    PLEASE, before anything else happens, may we have an honest accounting of the total amount of STATE FUNDS expended to date chasing this elusive, but always about to happen, “ALASKA GASLINE PROJECT”.

  2. Gas for Alaskans December 17, 2018 at 8:57 am - Reply

    Correction for you Dave. The ASAP Project terminates at the Enstar Beluga Pipeline near Big Lake, not the Kenai Peninsula.

    • wpnorthern December 17, 2018 at 1:44 pm - Reply

      Dear Gas for Alaskans:

      Sad to say a writer who acts as his own editor sometimes proves he has a fool for a client. Your note led to a clarification as to terminus, for if ASAP is to be both an export and intrastate line perhaps half the volume would need to go the additional distance to the Kenai Peninsula or another tidewater terminus at Cook Inlet. Your contribution is valuable and appreciated. -dh

  3. Donald Bullock December 17, 2018 at 10:07 am - Reply

    You nailed it Dave! The project was doomed to fail when the lessees that have the exclusive right to produce natural gas saw no economical way to pursue the project at this time. I hope that, during the wind down, AGDC only pursues those certifications and licenses that have an extensive period of applicability.

  4. Paul Kalmen December 17, 2018 at 10:17 am - Reply

    This sounds like a very reasonable plan!

  5. […] AK-LNG & ASAP: A Citizen Considers the Risks of Continuing Government Ownership […]

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About the Author:

Dave Harbour, publisher of Northern Gas Pipelines, is a former Chairman of the Regulatory Commission of Alaska, a Commissioner Emeritus of NARUC, NARUC's Official Representative to IOGCC and Vice Chairman of NARUC's Gas Committee. He served as Gas Committee Chairman of the Western Conference of Public Service Commissioners. He also served as commissioner of the Anchorage Bicentennial Commission and the Anchorage Heritage Land Bank Commission.He earned a Bachelor of Arts Degree: English, at Colorado State University, a Master of Science Degree: Communications-Journalism at Murray State University and graduated from Utility Regulatory School for Commissioners at Michigan State University. He served as a Vice President for Communications and Public Affairs at Alaska Pacific University, taught bank marketing classes at the University of Alaska and was an English teacher at Los Alamos High School.Harbour served in ranks of Private - Captain during a 4-year assignment with the Army in Korea, Idaho, Georgia and Fort Meade and received the Meritorious Service Medal among other commendations.Harbour is also a past Chairman of the Alaska Council on Economic Education, the Alaska Oil & Gas Association Government Affairs Committee, the Anchorage Chamber of Commerce, the Export Council of Alaska and the Department of Commerce's District Export Council. He is a past President of the Alaska Press Club, American Bald Eagle Foundation, Consumer Energy Alliance-Alaska and Common Sense for Alaska.Harbour was instrumental in founding the American Bald Eagle Research Institute (UAS), the Alaska Support Industry Alliance, the Downtown Anchorage Business Partnership, and Arctic Power.He also served as CEO of several small Alaska organizations, including the Anchorage Parking Authority and Action Security, Inc. Harbour is also Chairman Emeritus of the Alaska Oil & Gas Congress.Harbour's wife, Nancy, is a professional, performing arts administrator and his three boys, Todd, Benjamin and William work in the fields of environmental management, energy marketing and medicine.