For months now – off and on – I have been trying to wrap my head around the controversy over the proposed gas pipeline for Alaska. As a shareholder and former employee of ConocoPhillips – one of the involved parties – I have a vested interest. However, that’s also one of the reasons I haven’t written about this before, as I wanted to better understand the issue before writing about it.
I saw that the headline story in yesterday’s Drumbeat at The Oil Drum was a story from Newsweek dealing with the controversy, and that prompted me to go ahead and write something:
I am going to post some excerpts from the story in an attempt to summarize the key issues:
Beginning this week, the Alaska State Legislature will debate how to usher in a natural-gas boom. Two pipeline proposals are on the table. One hails from a Canadian pipeline builder and is endorsed by Alaska Gov. Sarah Palin, a Republican who has drawn surprising comparisons with Venezuelan President Hugo Chávez for her tough stance against Big Oil. The other proposal comes from BP and ConocoPhillips, two oil behemoths that hold leases on much of the state’s natural gas.
But only one giant pipeline is needed, and Palin has set the stage so that only the Canadian proposal will be considered. State lawmakers must decide whether or not to give a $500 million state subsidy to TransCanada Corp. to lay a $26 billion, 1,700-mile-long pipeline from the Alaskan Arctic to Alberta, Canada, where other lines would transport the natural gas to American markets.
At the same time, BP and ConocoPhillips recently announced that they are embarking on their own $30 billion project to pump Alaska’s gas reserves through a 2,000-mile-long pipeline. They say they don’t need the state’s $500 million and will proceed regardless if the state throws its support behind TransCanada.
The TransCanada proposal is born out of an attempt by Palin to force the hand of the big oil companies—BP, ConocoPhillips and ExxonMobil Corp.—to execute their gas leases, from which the state hopes to raise tens of billions in tax revenue. Uncertainties over natural-gas prices and state taxes have long left the companies skittish about committing to a project.
Alaska owns the natural gas; BP and Conoco, along with Exxon, hold most of the leases to develop it. The companies have long talked of tapping the reserves, but have consistently deemed the pipeline too financially risky without the state first agreeing to favorable terms on gas production taxes. Unlike Palin’s predecessor, Gov. Frank Murkowski, who wanted to give the companies generous tax breaks, she has refused to budge.
As I understand it – and everything I have read seems to confirm this – the real sticking point seems to be that Governor Palin refuses to make a long-term commitment on the tax rates for the project. For a $30 billion project, it is pretty important to understand the economics of the project pretty far in advance. What I don’t know are specific details of what is being proposed – nor whether the tax rates being asked for are in some way unreasonable. But I do think it should be reasonable to at least agree in advance not to change the rules during the game. That is, after all, what Hugo Chavez has become famous for. And Palin’s threats to tear up existing contracts with XOM do provide a cause for concern.
TransCanada would route the gas pipeline through Canada, while the COP/BP pipeline would be an all-Alaska pipeline. The risk for TransCanada, of course, is that they don’t own any gas. I think you have to presume that if they build the line, COP and BP are going to put their gas in. But they will only do so under favorable terms. The risk for COP and BP is that gas prices come back down and their $30 billion investment suddenly doesn’t look so good. That’s why they need certainty on the tax rates.
A lot of money is at stake. Per this article, there are 30 trillion cubic feet of natural gas reserves that the pipeline would tap into. There is also a blog devoted specifically to discussing this issue. I recently read through a number of articles there in order to gain a better understanding of the issues involved. That blog is called The Alaska Gas Pipeline, and the author generally opposes the approach Palin has taken.
Finally, Happy Anniversary to my wife (and me) today. For the first time in 19 years, I almost forgot. When I changed jobs I lost the security blanket of having the date on my Outlook calendar. Of course it doesn’t help that I am spending it alone in the Netherlands.
30 trillion cubic feet is hardly a mother lode when the U.S. has over 200,000 trillion cubic feet of reserves. Anwar has 10 billion barrels of oil,compared to 20 billion barrels scattered elsewhere in the U.S.. THAT’s worth building a pipeline for.
My bad. NG reserves are more like 1000 TCF in the U.S. Never trust the Dept. of Energy…LOL.
http://tinyurl.com/nsa77
“TransCanada would route the gas pipeline through Canada, while the COP/BP pipeline would be an all-Alaska pipeline.”
How would this work? Would they be liquefying the gas and shipping it to the lower 48? Or is there an annexation plan in the works that I haven’t heard of yet? I’ve always thought that the BC coast would be a nice addition to the US of A…
There are millions of businesses all across America who are making decisions whether or not to invest in new factories or hire new workers every day and none of them have certainty in tax rates.
There are millions of businesses all across America who are making decisions whether or not to invest in new factories or hire new workers every day and none of them have certainty in tax rates.
They aren’t investing $30 billion in a situation in which governments have shown real inconsistency in their tax policies. After the Chavez situation, I can certainly understand the desire to have some certainty before committing that much money.
RR
Factories can always pack up their equipment and move to a lower taxing authority. It is very difficult for a buried pipeline to relocate.
This is the kind of thing that concerns pipeline companies: Bolivia nationalizes gas pipeline
Whether it is done through outright exprorpiation or through creeping nationalization through higher and higher taxes, some certainty around the fiscal regimes is required before making major investments.
“TransCanada would route the gas pipeline through Canada, while the COP/BP pipeline would be an all-Alaska pipeline.”
The proposed line would go south to Fairbanks and then proceed southeast into Canada. The other alternative is the so called “over the top” solution which has the line running offshore directly east before going south into Canada.
For more information go here: Denali – The Alaska Gas Pipeline
There should be a big market for natural gas just for upgrading bitumen, so I personally wouldn’t worry about people not drilling. Especially given the poor state of natural gas reserves in Alberta itself.
I’ve always thought that the BC coast would be a nice addition to the US of A…
Hehe: Western Canada is just waiting for the US economy to tank completely and the lower 48 to split up like the USSR, and then Alberta is going to buy Alaska for the original purchase price of $0.02/acre or $7.2 million
Sarah Palin is in on the conspiracy, and that’s why she wants TCPL running a pipe down to Edmonton, which is going to become the new capital of the western half of North America after the collapse.
This is all true, I read it on the Internet. Wait.. I posted it on the Internet, you read it. Whatever.. it’s all true.
“The deal’s been altered” – Darth Vader
They want an ironclad deal with the State which is completely 100% contractually binding until the State changes its mind. Good luck with that.
Everyone wants sane and rational governance. It doesn’t exist.
“TransCanada would route the gas pipeline through Canada, while the COP/BP pipeline would be an all-Alaska pipeline.”
The proposed line would go south to Fairbanks and then proceed southeast into Canada. The other alternative is the so called “over the top” solution which has the line running offshore directly east before going south into Canada.
For more information go here: Denali – The Alaska Gas Pipeline
I think Robert is still has jet lag
;). He may be thinking thinking about this third plan:
http://www.allalaskagasline.com/pages/the_project.php
Basically, the pipeline would go to a LNG facility in Valdez.
Proponents of this plan in Anchorage can be identified by their “Canada my ass, it’s our gas!” bumper stickers.
Backers of this plan also like the flexibility. LNG cannot be sold only to the Lower 48, but to Asia as well. http://www.adn.com/opinion/story/416381.html
The reason for the lack of firm tax rates by the Palin administration seems to have been brought on to a certain degree from the former governor. The former Murkowski administration met behind closed doors with the oil companies to hammer out a pipeline deal, which supposedly favored the oil companies heavily. When Palin took office, she scrapped the deal because of the controversy surrounding the Murkowski plan.
As far as the largest gas lease holder Exxon, they have held the leases since the late 70’s, and the state is getting fed up with with 30 years of inaction on Exxon’s part. They want to pull the leases from Exxon and rebid them in an effort to spur development.
OT, but…
Boy, have the oil winds suddenly changed?
Suddenly, the “pundits” have noticed global demand is waning, and lots of new developments and refineries are coming online…
..I wonder if the pendulem will again swing too far…..
Anyone else having a problem getting onto theoildrum.com lately?
As I recall from the debate during the Murkowski administration, the problem with the tax rate adjustment that they wanted is that it was illegal under the Alaska state constitution. That’s not surprising, as Murkowski got up to all kinds of shady garbage, like trying to sign off on that oil deal in the final days of office without the legally required legislative consent.
You can probably find that information online in juneauempire.com