January 2011 Vol. 238 No. 1


Persily Optimistic About Alaskan Gasline Project

Jeff Share, Editor

There is an office in Washington DC whose work will not be apparent to many in the United States for several years; yet without the effort of the Office of Federal Coordinator for Alaska Natural Gas Transportation Projects it is highly doubtful this mother of all pipeline projects will ever come to fruition.

It is very possible that if and when that valve is finally turned in 2020 or so, signaling that long-awaited historic start of transmission of Alaskan North Slope natural gas into Canada and throughout the U.S., most of the members who now staff that office will have either gone into retirement or other jobs. But even after 30 years of negotiating and planning and talking, there is still so much work to be done.

Today, the Federal Coordinator is Larry Persily, a former Alaskan journalist and government official for the State of Alaska. Persily was nominated by President Obama to the post a year ago, replacing Drue Pearce, who was the first to hold the job beginning in 2006.

While politics inevitably does play a role in who heads the office, it is clear that each coordinator is deeply committed to ensuring that the Alaskan gas pipeline does become part of the national energy landscape.
Before this appointment, Persily, a 1972 graduate of Purdue University who holds a BA in journalism, was an associate director of the Alaska Governor’s Washington, DC Office, handling oil and gas, arctic, commerce, transportation and tax issues; he was also an aide to Alaska State House Finance Committee Co-Chair Mike Hawker, assigned to oil and gas issues. He previously worked for the Alaska Department of Revenue twice, returning in 2004 to help the state in negotiating a contract with North Slope oil and gas producers in an effort to move the gas pipeline development forward.

Though it may seem like a job without an end, perhaps it is the size and scope of a project beyond anyone’s imagination that draws one’s attention and willingness to accept a serious challenge.

In an interview with P&GJ, Persily, 59, tells why he accepted the job and what his plans are.

“I’ve been working on and following the natural gas pipeline for many years. I think I’ve seen what hasn’t worked so I’d like to take a chance and see if I could come up with something that could work and help this finally get built,” he said.

“When I started at the state revenue commissioner’s office in 1997, I began immersing myself in oil and gas issues,” Persily continued. “I took on several other governmental assignments including working for the state Legislature and governor and became fairly well-versed in the history of the project, the issues and problems confronting it, the players and legislation both on the state and federal levels. I felt that I was qualified to accept the appointment when the call came.”

Persily has worked under former governors Tony Knowles, Frank Murkowski and Sarah Palin: a Democrat and two Republicans. He knows how dedicated each has been – regardless of political affiliation and negotiation strategies – in getting the pipeline built. They, like most Alaskans, know they need the pipeline for many economic and social reasons, but that doesn’t mean they are ready to give away the store to the producers.

That desire – along with the work of former deputy coordinator Tom Barrett – helped smooth the transition from Pearce to Persily.

“I’ll work for anyone – a Democrat or Republican – I don’t care,” Persily said, noting that the pipeline is not a Democrat vs. Republican issue.

“It’s more of a philosophical belief of how much you trust the oil industry, how much you want to tax the oil industry, but everyone supports and wants the project. Everyone wants the income from the gas project. It’s just how you get there. There are some Republicans and Democrats who might be unified on gasline issues and on nothing else,” he said.

Both development teams – The Alaska Pipeline Project (APP), a partnership of TransCanada and ExxonMobil, and Denali-The Alaska Gas Pipeline (Denali), a joint venture of BP and ConocoPhillips have completed their initial open seasons. Though both have expressed cautious optimism, any agreements that may have actually been made will remain confidential until they reach precedent agreements with the shippers which are then filed at the Federal Energy Regulatory Commission (FERC) at which time the terms are released to the public.

“No one will know too much until they strike some deals and say what the terms are. Hopefully, that will be early in 2011,” Persily said. The terms under a precedent agreement include how much gas the producers are going to ship from Point A to Point B, the length of the contract and what they’re going to pay.

Why are the precedent agreements so important to the future of this pipeline in particular? Because it generally makes shippers responsible for a share of the development costs that the operator will incur after agreeing to move on to the next phase. Then, even if the project gets canceled, those prospective shippers could be obligated to pay for some of the development costs. This is all part of what is being negotiated between the developers and shippers.

At some point, most observers agree, the two project proposals will meld into one business decision. TransCanada has taken advantage of the Alaska Gasline Inducement Act signed into law by Gov. Palin, qualifying it for up to $500 million from the State of Alaska to reimburse it for upfront costs. Denali has proceeded without the incentive. The large number of federal agencies that will have to review and approve the plan would obviously prefer to deal with a single pipeline project, Persily said.

Both Denali and APP have entered the FERC pre-file process and could conceivably submit two complete applications asking for a FERC Certificate of Public Convenience and Necessity for the same project. However, that would not be unique as FERC has often gotten applications for projects that ultimately never get built because of prevailing market conditions.

The Federal Coordinator’s office has the authority to ensure that federal agencies do not put any undue conditions that would unnecessarily delay or impede the project – in other words, not making a complex project any more difficult.

“But even before that we want to try and coordinate the work of federal agencies and the project sponsors to avoid duplication; to get people to use the same baseline data; to anticipate problems and try to confront them early; and to be a repository of knowledge for everything project-related for the agency, for project sponsors, for the public,” he said.

At the same time, the Federal Coordinator will also be coordinating activities with the Canadian government to speed the bureaucratic processes along.

“We need to take the lead in pointing out the facts to people. What are the risks? What are the problems so that people in Juneau, Washington, Ottawa and Calgary can make the best public policy decisions,” Persily added.

Dozens of government agencies in Alaska, Canada and Washington, DC are now actively involved – whether it be deciding what permits are required or becoming more acquainted with project sponsors. One over-arching concern on everyone’s mind is the current apparent oversupply in the natural gas market in North America and where that may be headed 10 years from now when the pipeline is expected to begin commercial operation. Will perception trump reality?

“It really doesn’t matter for the Alaska gasline what the price of natural gas is today, how much shale gas is out there today or how much utilities use today,” Persily said.

“What matters is what people think the world will look like 10, 20 or 30 years from now. That actually works to the project’s benefit because the pipeline would conceivably be in operation when many of those unconventional supply sources begin to slow down,” he said.

But there still must be increased demand for natural gas if the pipeline project is to be economically viable, he said. Easing the historic volatility of natural gas could mean that everyone comes up a winner.

“Volatility scares utilities; coal may have its problems but it is pretty stable compared to natural gas if you look at past decades. You’ve got to solve price volatility or natural gas is always at a price disadvantage.

“Much of that demand must come from electric utilities. The proliferation of shale gas production should provide a long-term cap on prices, so my hope is that utilities will look at it and realize they don’t have to worry about $12-14 gas price spikes anymore because shale gas is going to lop the top of that spike right off.

“So, as a utility I’m now more comfortable going for the long-term supply contracts and building gas plants. If they do that on a significant enough scale, it creates enough demand that the Alaska project can compete on price because there would be a market. But competing on price is going to be a key,” Persily said.

Now the question is shifting to whether an Alaskan pipeline can be built on time, on budget, compete on price, and are the producers who face a hundred billion dollars worth of shipping contracts, confident enough in their projections to move ahead?

Assuming there are some precedent agreements and that there is some indication this is a viable project, at some point the producers who pay all the royalty and taxes will have to meet with state officials and decide what they think it will take while the state tries to decide how much it is worth to them. These talks could start in the near future, providing producers want to continue forward with the project, Persily said.

Some Alaskans, weary of the seemingly endless talk about the gasline, would settle for an intrastate line that would at least guarantee them their own assured supply of natural gas like everyone else in the country.

Last year the Legislature appropriated money to a newly created entity, Alaska Gasline Development Corporation, a wholly owned subsidiary of the Alaska Housing Finance Corporation, and charged it with developing a plan for an intrastate line by 2011.

Though he acknowledged that is a decision left to the governor and state Legislature, Persily said that such a commitment could jeopardize the chances of ever getting a bigger line built.

One confusing aspect of the Obama administration’s stance on energy has been its reluctance to embrace fossil fuels, even though the president did acknowledge the day after the November elections that natural gas is an area of potential cooperation between the two political parties. But Obama came out early in support of the Alaskan gasline and has never wavered, Persily said. The government is spending more than $4 million annually to fund the office of 11 full-time employees; it supports loan guarantees for the project of $18 billion plus an inflation index.

One commitment that Washington is unlikely to make is taking an equity ownership of the project.

“I have not seen anything where the federal government wants to start owning any of the steel pipe. Owning the pipe is not the risk; it’s promising to use the pipe no matter what the market conditions are for the next quarter century. There is an immense risk involved because it will require $100 billion worth of shipping commitments,” Persily said.

“That is a strong indication that everyone is serious about this,” he concluded.

(Editor’s Note: Larry Persily will be a guest speaker at the 7th Annual Pipeline Opportunities Conference on April 19 at the Intercontinental Hotel in Houston. He will be on a panel providing the latest information on the Alaska gasline project. To learn more about the Alaska gas pipeline project and the Office of the Federal Coordinator, what they do and the staff, visit the coordinator’s website: www.arcticgas.gov.)

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