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.

Natural Gas Cheerleaders

Some say shale gas has ruined the chances of an Alaska Gas Pipeline. I'll agree that the flood of cheap shale gas in the lower 48 has been a great set back to the sure thing envisioned by Frank Murkowski back in 2006 (Link to Murkowski op-ed piece in the News-Miner). Murkowski's loss of the Governorship to Palin coincided with the growth of shale gas development. Palin's policy shift from Murkowski's plans was the wrong move at the wrong time. Shale gas development reset the pricing basis for natural gas in North America. The one-two punch of Palin+shale gas was the black swan event that may ultimately prove fatal to the Alaska Gas Pipeline.

Of course the resources and the demand haven't gone away. Businesses will adjust and invest in development projects in places with more favorable conditions. Just listen to ExxonMobil CEO Rex Tillerson gush about doing business in Qatar and the acquisition of shale gas producer XTO:



The producers, like ExxonMobil are in this business for the long haul, they'll continue to meet market demands and manage risk with or without Alaska gas. Closure of facilities like the Kenai LNG export terminal shows that market forces govern the sale of Alaska energy and wishing it otherwise won't help.

So who is optimistic about North American natural gas? The shale gas folks of course. ExxonMobil bought XTO and took the lead in shale gas followed by Chesapeake. ExxonMobil sees a bright future for natural gas and so does Chesapeake (Link to Chesapeake Presentations).

The April 2011 Chesapeake investor presentation explains why they are bullish on natural gas. They see a future with compressed natural gas vehicles (CNG), LNG export from the lower 48, and gas to liquids plants fed by cheap and abundant shale gas. They also envision replacement of coal power plants with natural gas power plants:

I agree with Chesapeake's reasoning and ExxonMobil's optimism for the future of natural gas. The demand is great and they have bought the resources at the low point in the cycle. I think Alaska, as a resource owner, should also be optimistic. The selling price of natural gas will be constrained by production cost and the cost of alternatives. The alternatives: coal, oil, and nuclear all have future cost problems, the end result is long term gas prices in the $6/MMBTU range and sufficient demand for a couple of Arctic pipelines.

More AGIA Perspective from Frank Murkowski

The Fairbanks News-Miner has this Op-Ed piece by Frank Murkowski

It's worth reading in these final hours before the Senate vote on AGIA