Alaska Gas Pipeline: Will the Alaska Gasline Inducement Act Get Construction Started?

Michael Giberson

Last Friday, the State of Alaska received five proposals in response to a Alaska Gasline Inducement Act deadline to build a natural gas pipeline from the North Slope into Canadian and American markets. The applicants are Alaska Gasline Port Authority, AEnergia LLC, TransCanada, Sinopec ZPEB and Alaska Natural Gasline Development Authority.

If the past is any guide, there is little or no reason to expect that this time the project will finally get started. There are plenty of signs of trouble. ConocoPhillips submitted a proposal last week outside of the AGIA process, indicating a willingness to forego a half billion dollars in state matching funds, presumably to avoid the strings that would come with the state money. BG Group reported it was not filing a proposal now, but industry observers say it may submit one later, also outside of the AGIA requirements.

MidAmerican was expected to submit offers, but opted out citing “ongoing corruption investigations coupled with previous indictments, guilty pleas and convictions [that] draw into question virtually every major Alaskan project participant and governmental levels from State to Federal.” As they made clear in a letter to the state, it wasn’t the current administration that troubled them, so much as the rather troubled past of gas pipeline politics in the state.

(See this story about an FBI investigation launched last year: “warrant called for seizure of documents concerning any payment made to lawmakers by Bill Allen and Richard Smith, executives of oil field services giant VECO Corp. … items named in the [search warrant] include hats or other garments bearing the phrases “CBC,” “Corrupt Bastards Club” or “Corrupt Bastards Caucus.” What the names referred to was unclear, and authorities would not comment.”)

Two major oil producers (and owners of vast gas resources) in the state, ExxonMobil and BP, also did not submit bids. The five parties actually submitting bids in the process include Sinopec, the second-largest energy company in China; TransCanada, a Canadian gas pipeline company, two Alaskan government development agencies, and AEnergia, a company about which little is known.

As the Houston Chronicle reports, the idea to build a gas pipeline bring the gas to market has been seriously considered since 1977.

The North Slope has proven gas reserves of 35 trillion cubic feet, or about 13 percent of known U.S. reserves, according to Department of Energy data. But geologists say there could be as much as 200 trillion cubic feet of undiscovered gas in Alaska.

Last year the three largest Alaska producers — ConocoPhillips, Exxon Mobil Corp. and BP — negotiated a pipeline deal with former Alaska Gov. Frank Murkowski in private, but the deal was thrown out after his defeat in the November 2006 election.

His successor, Gov. Sarah Palin, created an open bidding process for companies to receive state-backed incentives — the Alaska Gasline Inducement Act. Bidding closed Friday. The winning bid will receive $500 million in state money for the project and a promise of fixed tax rates for 10 years.

The AGIA is the latest in a series of Alaskan state government attempts to spur development of gas resources in the state. The federal government has been trying to help, too. The fundamental problem parties face will be immediately recognizable to any economic student who has read, for example, Oliver Williamson’s The Economic Institutions of Capitalism. The pipeline, once built, will be a huge sunk cost into relationship-specific capital. A great deal of potential economic surplus will become available, once the pipeline is operating. All of the fighting over division of the surplus is happening up front, and no matter how much deal making happens up front, there is always worry of ex post hold up by parties to the deal or by government authorities.

In some experimental economics research (to which I contributed in a small way), Vernon Smith and Mark Olson have sought to devise innovative economic institutions that fit the Alaska gas pipeline conditions. From a paper summarizing the current status of the project:

The problem we investigate is the construction of a gas pipeline that is to be shared initially by any number of incumbent firms. The current method of allocation is based on a adversarial regulatory process in which the price of access to any user is derived from historical costs. Our goal is to use experimental test bedding to explore more flexible solutions to the problem of access that is responsive to changing economic and technological conditions.


The idea to be developed here is for the state to adopt a new role: To define, and enforce pre-specified sharing rights rules that would allow markets to govern the actions of each joint venture co-tenant in the supply chain, and assist in scheduling auctions as needed for transferring ownership, leased or rented capacity rights among the co-tenants and new entrants in each venture and across ventures. Access prices emerge from these auctions, not from regulation based on historical cost.

Regulators legitimately desire to achieve open access, under “fair” rules and want to avoid having some entity ensconced in a dominant bargaining position. These objectives are highly desirable, but it is problematic to achieve them through any historical-cost based price regulation, which, has offered hopes that have been hard to realize in a manner that is satisfactory to all parties.