ADN Editorial: Ownership means risk -- Alaska needs to understand what it may cost to own part of gas line
adn.com
Published: February 14, 2006
Last Modified: February 14, 2006 at 01:24 AM
The governor says the state should spend $4 billion to own 20 percent of the proposed North Slope natural gas pipeline, based on a 2001 construction estimate of $20 billion. His administration is looking at possibly tapping the Permanent Fund for some of the cash, and already many Alaskans are dreaming of the riches they believe will fall into the state's lap from owning a piece of the pipe.
But Alaskans need to be realistic. The North Slope producers acknowledge the construction estimate is years old. Meanwhile, steel prices have nearly doubled. Some company officials are talking of $25 billion to $30 billion as a more realistic price before the last section of pipe is welded into place in the next decade. Even the state's own international consultant -- hired last fall to present a two-day seminar titled Successful Megaprojects -- mentioned $30 billion.
Legislators and the public need to understand, as the saying goes, in for $20 billion, in for whatever it takes. As a partner, the state would be called on to keep writing checks for its 20 percent of the construction bills -- and the state had better be prepared for wherever the final number lands. The companies understand that risk, but do Alaskans?
There is no such thing as a price guarantee for a project that will consume five million tons of steel; that will cross more than 2,000 miles from the Arctic coast and go over mountains and rivers; that will need multiple permits in two countries; and that will not even start construction until after 2010.
Don't take our word for it. Just look at the oil-and-gas history of painful cost overruns:
• Royal Dutch Shell swallowed a big overrun at its giant oil and gas development at Russia's Sakhalin Island. The company last year reported the $10 billion estimate had doubled to $20 billion. Gas shipments are scheduled to start in 2008.
• Shell's gas-to-liquids plant at Qatar, scheduled to open in 2009, was estimated at $5 billion in 2003, but the company last year upped that to at least $6 billion. A recent Citigroup report estimates the final price at closer to $8 billion.
• There is the cousin to the Alaska gas line -- the Mac-kenzie gas line from Canada's Arctic North. The 2002 estimate of close to $4 billion for the pipeline and field development costs was far short. The latest projection is more than $6 billion, and construction is at least a couple years away.
• Closer to home, BP's Northstar field on the North Slope went online in 2001 after a three-year delay and $300 million over budget. The final price: $700 million.
• Alyeska Pipeline Service Co. expects to complete its modernization of the Alaska oil pipeline this fall, at a cost of $434 million -- almost double the original estimate of $250 million.
• Flint Hills Resources in 2004 said it would expand its North Pole refinery to start making low-sulfur fuel. It dropped the idea in late 2005, saying cost estimates had doubled.
And not even a simple Alaska parking garage is immune from costly overruns. Proponents of the rental car garage at the Anchorage airport a year ago said it was a $42 million project. As construction work is now under way toward a mid-2007 opening, the price is at $56 million.
Cost overruns are an unfortunate fact of life in big projects. Alaskans should think long and hard about the risks and be ready for the invoices that will come as an owner.
BOTTOM LINE: If the state is going to own a piece of the pipe, Alaska needs to have its checkbook wide open. |
