Sunday, September 22, 2013

Buy out TransCanada

That's what former Alaska Governor Frank Murkowski says.  (JUNEAU EMPIRE LINK). Murkowski's quote:

“I think we should take TransCanada out of the equity stream for this project,” Murkowski said. “This is an equity interest, which in my opinion, belongs solely to the State of Alaska.”
TransCanada's role in the Alaska Gas Pipeline dates back to the pre-shale gas days of Sarah Palin, AGIA, and much higher gas prices:

Murkowski's logic is sound.   TransCanada has performed the requested task, they have done a good job, but the market place changed and their involvement in the Alaska Gas Pipeline no longer serves a need.

This chart shows the ratio of oil prices to natural gas prices over the same time range - Alaskans, heating their homes with oil are especially hard hit by this market shift:

The world has changed in other ways since Palin and AGIA. The Fukushima disaster has led Japan to shut down all their nuclear power generation.  Tensions in the Middle East have flared adding risk to buyers that rely on LNG from that region.  

Japan can become a true equity partner in the Gasline / LNG project whereas TransCanada is along for the ride and a healthy chunk of regulated monopoly profits.

There's that word - Profit, Return on Capital Employed (ROCE).  I hate to break this to you but an Alaskan Gasline / LNG project is not going to be wildly profitable. This project is all about managing risk.  The project risk can be mitigated with low interest rates (SEE JBIC RATES on page 97 of this link), managing tax rates, and controlling cost.  One cost control opportunity is to take TransCanada out of the equation.

Pipelines are regulated monopolies and they typically enjoy high returns. High rates paid to TransCanada are a cost that can be avoided or mitigated if the pipeline is built and operated by the true equity partners which include the North Slope producers, the people of Alaska and the overseas buyers.

I think Frank Murkowski is on to something here - let's see if it gains traction.

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