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Trump’s gasline

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President Donald Trump with Chinese President Xi Jinping in Beijing, China, in November/White House photo

President Donald Trump may do more to make an Alaska gasline a reality than Gov. Bill Walker could ever have dreamed if a columnist for the website Seeking Alpha is to be believed.

Seeking Alpha columnist “Tokyo picker” – non-de-plumes are common on the site – pegs the gasline as a slam dunk if Trump truly hopes to reduce the U.S. balance of trade with China.

Seeking Alpha is a popular, crowd-sourced, financial news and information website with almost 7 million registered users and a history of some success with economic predictions.

“Researchers from City University of Hong Kong, Purdue University and Georgia Institute of Technology found that the tone of stock market opinion blogs published on investor forum SeekingAlpha.com predicted stock returns, as well as earnings surprises, above and beyond what was evident from Wall Street analyst reports and financial news articles,” the Wall Street Journal reported in 2014.

The latest Seeking Alpha prediction from Tokyo Picker is a big one:

“In my view it is very unlikely that China and the US would have announced their trade deal, with specific mention of energy, and with the substantial personal and political commitments of both (U.S and China) Presidents and Secretary (of  Commerce) Wilbur Ross, without certainty that the Chinese parties are going to proceed with the Alaskan project.”

The author sites China’s need to reduce pollution caused by the heavy use of coal coupled with a large supply of clean-burning, Alaska gas just across the Pacific as a natural marriage just waiting to be blessed by a president who wants to reduce the country’s trade deficit.

How much credence to lend to the analysis is hard to say. Tokyo Picker claims to be an Oxford University-educated, investment banker now retired, but he or she makes a bold prediction based on the behavior of a president who has proven highly unpredictable.

“While Seeking Alpha editors greatly prefer that our authors use their real names, we recognize that is not always possible,” the website says. “Due to regulations at their workplace or other factors, some contributors are not able to reveal their real names. In addition, many well-known, veteran stock market bloggers (some of the finest, in fact) write under a pseudonym.”

The website adds that “Seeking Alpha holds our anonymous contributors to the same compliance and biographical standards as contributors who write under their own name. We insist on receiving the author’s real name and contact information (which we keep confidential) and maintain a correspondence with the author, forwarding the author any questions or concerns that may emerge about their articles. Stock positions held by anonymous authors must also be disclosed.”

Seeking Alpha headlined the column “”Likely Winners From The U.S./China Deal – In Alaska.”

The dream

Walker has been obsessed for decades with the dream of becoming the Alaskan who finally brought to fruition a gas pipeline from the Arctic coast on the North Slope of the Brooks Range to anywhere. He couldn’t have asked for more than a President willing to use Alaska liquified natural gas to balance foreign trade payments with an Asian nation.

Picker’s analysis, however, stands in sharp contrast to that of New York Times reporters Mark Lander and Ana Swanson, who today reported that “it was not clear the (China) talks set a path to success.”

The Times story mentioned neither energy nor gas. It focused heavily on administration infighting over what exactly should get done and how Trump’s upcoming summit with North Korea might affect any discussions of trade deficits with China.

The Tokyo Picker focused on the ongoing pollution and energy problems facing China, a country trying to maintain economic growth for fear of social upheaval. China could use some cheap U.S. gas to help on both fronts.

Chinese officials themselves have stressed the need for social stability and couched it as built on economic progress.

“Forty years on, China’s market-oriented reform has come to a new stage, during which our goal is to deepen the reform so that the market can play a decisive role in resource allocation,” state-controlled China Today reported in December. “Today no one in China disputes the market-oriented direction of the reform, a tour de force of the nation. Moving steadfastly towards this direction, China’s reform will yield more fruits.”

There is considerable evidence to support the Toyko Pickers conclusion that China would like to buy Alaska gas.

Don’t buy it yet

But at the end of the column, Picker did add this: “Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BP, COP, XOM over the next 72 hours.”

In other words, the Picker thinks the China deal is a good bet for Alaska, but he isn’t willing to put skin in the game just yet.

BP, COP and XOM are stock market abbreviations for oil companies. The first is obvious. COP is Conoco Phillips, and XOM is Exxon Mobil. All hold leases on North Slope gas and have indicated a willingness to sell it to an Alaska, state-run gasline if the price is reasonable.

The Alaska Gasline Development Corporation (AGDC) is still trying to arrange financing for at least $43 billion, which is what pipeline construction is expected to cost short of overruns. The oil pipeline was estimated to cost $900 million, but ended up costing $8 billion.

But it was built at a time when inflation was running wild in the U.S. The inflation cost was pegged at $3 billion with another $2 billion said to be attributable environmental costs.Eight billion dollars in 1976 adjusted for inflation pencils out to about $34 billion today.

“From the Chinese point of view, (the deal) is a simple and immediate commitment that they can make without reference to non-governmental players,” Tokyo Picker writes. “Their downside is probably limited – they may have to accept sub-par returns for their state-owned financial institutions – and there may be some upside – the new US supply will put downward pressure on prices from their other suppliers such as the Qataris and the Australians.”

Those are sound economic reasons on which to make a decision. The Pickers assessment of the U.S. position is way more political.

“From the US point of view,” he writes, “it will be a highly visible and tangible victory for the administration’s trade policy – expect to see campaign commercials filmed on the construction sites and interviews with the construction workers.”

The assessment appears to overlook the fickleness of the President involved and the required review by the Committee on Foreign Investment in the United States (CIFUS), which has become wary of China exerting financial control over U.S. businesses. CIFUS operates independent of the president.

The Walker administration was reportedly told last fall that the gasline project needed to get more U.S. investors involved if it was to satisfy CIFUS that the Chinese weren’t in control of the project.

AGDC announced in March it was bringing in Goldman Sachs to join the Bank of China in helping to raise funds for the megaproject. New York-based Goldman Sachs is one of the world’s largest investment banks.

Whether it can sell U.S. investors  on putting their money in an Alaska gasline estimated to cost $43 billion at a time when markets are in flux remains to be seen. Fears of a coming gas glut have appear to be lessening, but gas prices remain low.

LNG remains a buyer’s market, which makes a Chinese buy of Alaska gas wholly sensible from a Chinese standpoint. But to date the project remains hugely speculative.

As reporter Elwood Brehmer notes at the Alaska Journal of Commerce, what the state has so far is a nonbinding agreement with the Chinese and a “soft, May 31 deadline for the parties to have better defined the roles of each before finalizing those roles with binding deals later this year.”

 

 

 

 

 

 

 

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7 replies »

  1. TAPS was a first and because of that it received some special treatment, namely a rate of return guarantee even for borrowed money. Thus, the stories of busloads of workers heading out to work and never getting off the bus full of gamblers and hookers, were commonplace. Anyway, many of those cost overruns were later disallowed but the main thing that came out was that FERC determined that the gas line would not be financed that way. They will be given a rate of return based (on equity) of a certain determined cost and this rate will be reduced as costs go over that amount. Similarly, this rate of return will be increased for coming in under that determined cost.
    Of course, this is for the actual gas line and may be interpreted differently for the LNG plant itself.

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  2. TAPS was built by the private sector where money matters. Yet the end cost was 8 times the estimated cost. Walker’s gas line will be built by the State of Alaska, of which money maters very little. Any guesses how many times more than the original estimate the final cost will be? Likely it will be much more than 8 times.

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    • FERC’s position is relative to the rate of return that can be charged on the gas being delivered and they wouldn’t particularly care who did the building. I believe their position will involve whomever is on the hook for earning a rate on the investment and then on the rate of return on gas moving down the line.
      A predetermined rate of return on investment (with reductions for cost overruns) is pretty good leverage to control costs IMO.

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      • Whatever the SOA’s share of the fabled LNG pipeline will be, will end up burning thru the corpus of the Permanent Fund pretty quickly at multiples of its cost.

        For instance, if Alaska has a 20% responsibility for a $60 billion pipeline, that is $12 billion. Eight times that is a tidy little sum of $96 billion. Bill Walker will finally realize his dream of shutting down the PFD completely, for if the corpus disappears into an in-state pipeline, so will the PFD. And we haven’t gotten into the discussion whether there will be a market for the product or not. Cheers –

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      • agimarc, you evidently didn’t read what my comment was about. I don’t remember the hits the rate of return would take for any cost overruns but I can say that the rate would be zero at anything like an 8 times multiplier. Of course there is always the risk that the pipeline would be abandoned before completion and recovery costs would then be zero.
        An example of such an occurrence may have been an ALCAN pipeline that would have taken gas to lower 48 where the market had collapsed. Good chance such a pipeline would have been abandoned midstream and all investment lost.
        TAPS got its favorable treatment by being a first but this program no longer fits that situation IMO. And FERC has already determined that it would not be built and financed like TAPS. The risk of noncompletion would make this project require the gas be presold IMO. Hence Walker’s working towards getting big Oil to sell its gas. Whomever buys the LNG would be required to take it or pay thus making that risk minimal.
        The discussion, on these pages, about whether/not a market will exist won’t matter in the slightest IMO.

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