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GAS LINE ECONOMICS:
LNG VS. HIGHWAY ROUTE

Bill Walker
Submitted by Scott Heyworth
Anchorage, AK
Aug. 2, 2006

Comparing the economics of the All-Alaska Gas/Y Line with the producers’ Highway project is like sword fighting with a ghost. The producers’ project is not a project. It is a possible commitment to conduct another study with no obligation to build a gasline while exacting substantial oil tax concessions immediately.

Growing evidence indicates the producers’ project will never materialize. TransCanada Pipelines recently reminded Governor Frank Murkowski that it holds the permits and will vigorously defend its right to build and own any line through the Yukon, B.C. and Alberta. Yukon Premier Dennis Fentie said Murkowski has no authority over what happens in Canada and a project there would not be permitted without some Canadian ownership. Fentie stated, "That’s his [Murkowski’s] government and his position and that certainly won’t be something Canadians would entertain, and more importantly, wouldn’t be something Yukoners would entertain, period." Brian Love, head of Yukon’s pipeline division, reiterated that decisions as to who builds and owns the Canadian portion of the gasline will be decided by Canada. Love warned that TransCanada’s lawsuit threats should be taken seriously. The U.S. Federal Energy Regulatory Commission is doubts the producers' line can be completed before their competing foreign LNG projects supply foreseeable demands.

Over the last decade, the Alaska Gasline Port Authority (AGPA) has methodically developed a viable LNG project. Issues regarding permits, tax exempt status, Jones Act compliant tankers and financing have been resolved. A 2012 completion date is possible. If the producers continue to refuse to sell gas, the first phase of the LNG project could be supplied from royalty gas and the Point Thomson field which is currently in default due to Exxon’s 25 years of non development. The producers could later complete the Y Line to Canada while continuing to explore for the additional 35 trillion feet of gas their project requires.

Critics claim that multiple studies assessed the LNG project as uneconomic. The reports actually agree that the competing projects are economic and feasible. The issue is which is most profitable. While the leases require development upon a "reasonable expectation of profit", our state constitution requires "maximum benefits" for Alaskans. The All Alaska Gasline satisfies both mandates. AGPA presented a bona fide offer to the producers to purchase gas at a reasonable, if not generous, profit. The offer was rejected. In maximizing benefits for Alaskans, revenues, in-state gas access, short and long term jobs, additional infrastructure benefits, and byproduct petrochemical opportunities factor in. In AGPA’s assessment, profitability issues resolve resoundingly on the LNG side.

Opponents charge that moving gas through one long pipeline is cheaper than moving it from pipeline to tanker to terminal to pipeline. Justifying the producers' competing LNG projects because gas is closer to tidewater ignores that tanker transport time from these foreign locales to western shores is significant. Twenty six days from Quatar compared with AAGPA's projected 4.5 days to Costa Azul, Mexico is notable. More links in the transportation chain do not necessarily make a project less economical according to AGPA's energy finance advisor, GreenGateLLC, which has global LNG experience. GreenGate has described the LNG project’s economics as "robust" and "extremely viable".

Confirmation of the LNG project's robust economics occurred in 2005, when Sempra Energy, the nation’s third largest natural gas distributor (closely behind ConocoPhillips) considered investing $4.5 billion. After a thorough evaluation, Sempra's interest heightened. It became critical to determine if there was interest and support from the administration. When exhaustive efforts finally resulted in a brief audience with Governor Murkowski, he showed Sempra the door. Sempra continued to partner with AGPA until efforts to resolve issues with the administration and producers proved futile.

As a lifelong Alaskan, 30 year business owner, and father of four for whom I am striving to secure a future, I don’t want to wake up years from now encountering ghosts of gas lines past. So I will remain in the ranks of the sword fighters and Alaska flag wavers who grasp the magnitude of the battle and the longevity of the consequences should we fail to act now in Alaska’s best interests.


Bill Walker is general counsel and project manager for AGPA.

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