November 2017, Vol. 244, No. 11

Features

Thank Our Lucky Stars Uneconomic Alaska Gas Projects Weren’t Built

Man, did investors and ratepayers dodge a big bullet had an Alaska gas transportation project been built in the 1980s or the early 2000s!

We now know that had several thousand miles of new, 48- or 42-inch, high-pressure gas pipelines been constructed to move Alaska North Slope Mackenzie Delta gas following passage of either the 1976 or 2004 Alaska gas pipeline expediting acts, investors might well have lost their shirts. Taxing governments like Alaska could have committed their 12.5% share of royalty gas for a pittance price, not to mention abysmally low severance and income taxes.

Utility customers of Alaska gas from San Francisco and Chicago to New York might have been stuck with costly “take-or-pay” contracts as their neighbors benefitted from other low-priced sources.

After passage of the 1976 act, the 1978 Natural Gas Policy Act began a slow deregulation of the gas industry. At first, gas prices increased, but by the mid-’80s increasing production had created lower and lower prices for consumers. Prices in the North American market, one easily computes, could have been even lower had Alaska gas stormed the market. Those lower gas prices could have fatally wounded many parties financially connected to an Alaska gas project – directly or indirectly.

In particular, the several Alaska gas transportation projects competing for certification before the Federal Power Commission (now, Federal Energy Regulatory Commission) and Canada’s National Energy Board (NEB) could have faced financial devastation.

The up/down price and production cycles continued until approach of the new century. Alaska gas projects again competed for rebirth until 2010, bolstered by higher prices and passage of the 2004 Alaska Natural Gas Transportation Act. But again, natural gas prices tumbled. The incredibly inventive oil and gas industry had evolved a new game-changer. The new gas supply, this new price disrupter, arose from decades-old gas-recovery techniques into a truly productive, technological phenomenon: modern fracking.

Furthermore, had the Alaska North Slope (ANS) gas been committed at high prices, but harvested and virtually given away later at fire-sale prices, it would have been unavailable to continue supporting various tertiary oil-recovery techniques that resulted in an extremely productive era of ANS oil production from 1980 to the early 2000s. That increased oil production, even as Trans Alaska Pipeline System (TAPS) throughput decreased, enabled Alaska to continue growing the size of government and prosper.

In fact, the TAPS financing plan was based on proven reserves of 9.6 billion barrels. Thanks to enhanced oil recovery, made possible by “surplus” gas at Prudhoe Bay, and robust production, the 40-year-old TAPS has now transported over 17 billion barrels of crude.

Here we are today in Alaska, sitting on 35 Tcf of North Slope natural gas without a North American market – without justification for pipeline transportation through Canada into the Lower 48.

So, Alaskan eyes now turn to Asia, a market that has traditionally paid high prices for liquefied natural gas (LNG) – gas pressurized and maintained at a temperature of -260 degrees. Historically, those prices have been calibrated to a “basket” of crude oil market prices.

Today’s worldwide LNG industry is changing the way the product is priced. Like oil, gas is now becoming more fungible as LNG demand grows and worldwide cryogenic tanker transport capability increases. Indeed, LNG now is more of a world commodity and not restricted to North American consumers.

In recent years, due in part to two phenomena, Asian buyers are bargaining to reduce the price of existing and new LNG contracts. First, Japanese and Korean negotiators, for example, are renegotiating long-term, “take-or-pay” gas supply contracts, making fewer long-term arrangements – upon which expensive LNG projects are financed. Second, gas importers are increasing the number of short-term purchases of LNG at what are known as “spot prices.” A spot price is the amount that LNG can be bought or sold at a specific time and place. One does not finance an expensive LNG project on spot prices.

The two phenomena resulting in low LNG prices, noted above, are: a still-thriving shale gas industry resulting in more supply, and a huge backlog of new LNG transportation projects largely conceived when LNG prices were higher and long-term contracts were more the norm. That backlog of projects includes several in Canada and a number in the Lower 48, not to mention Australia, the Russian Far East, Indonesia and the Middle East. Many of the LNG projects that are operating are striving desperately to be more efficient in this low-price environment. Investors have abandoned or put into cold storage many other LNG projects.

Alaska’s current ANS gas transportation project is still ‘alive’ but only with government subsidies and is corrupted by economics and politics. It involves an enormous gas treatment plant, an 800-mile pipeline, coastal liquefaction facilities and cryogenic ocean tanker transport.

Some of the most successful oil and gas producers on the globe, BP, ExxonMobil and ConocoPhillips, have withdrawn from active participation in this North Slope gas monetization project, proclaiming that, “the time is not right.” We, too, have concluded that, “the time may not be right” for a generation or more, until a new, more economic scheme is identified.

The economic corruption in the Alaskan-owned project arises from the fact that even a third-grade math student can understand, particularly in a low-price environment, Alaska LNG – when burdened with an 800-mile pipeline cost – cannot compete on even ground with tidewater projects found in more friendly climates that mostly offer lower labor costs and more efficient logistical support.

The political corruption flows from Alaska’s socialist-leaning administration that is bent on following in Venezuela’s footsteps: Owning the means of production (and/or transportation). Alaska’s administration, headed by Gov. Bill Walker, continues to support the spending of hundreds of millions of dollars on this quixotic, Alaska dream of a socialized pipe/LNG scheme – promising a number of Solyndra-like results.

In conclusion, Alaska and gas investors ultimately benefited by not seeing construction of gas pipelines in the 1980s and the early 2000s. The 49th state prospered by using gas resources to produce more oil.

An Alaska LNG project has been studied to death and never yet proven to be feasible. Alaska’s residents will likely benefit by seeing its state leaders bidding adieu to the latest LNG pipedream as soon as possible, until the time may someday be “right.” Private enterprise projects taken over by temporarily elected officials and temporarily appointed bureaucrats are destined for failure.

Even now, Alaskan politicians continue jousting at windmills. They are subsidizing wind-generation projects and creation of a local gas distribution facility in Fairbanks, as the state suffers from a fiscal crisis.

Alaska’s fiscal crisis stems from low oil prices, the taxes and royalties upon which the state depends to fund the highest per capita government in the U.S. The unsustainable state bureaucracy subsidizes itself from depleting savings to the tune of several billion dollars per year. Simultaneously, its unfunded state employee pension liability hovers around $7 billion and is growing while the national rating agencies are downgrading Alaska’s creditworthiness.

Amid this chaos, Walker is asking President Trump to put some portion, or all, of this uneconomic $45-60 billion Alaska gas pipeline/LNG project into an “infrastructure” bill, as state employees try to romance China, South Korea and Japan into ignoring economic realities and committing to future gas purchases.

We believe Asian gas purchasers, while hungry for LNG, are not ignorant of the better alternatives flooding the LNG/gas markets in today’s world of fracking and global LNG competition.

We respect  oil and gas pipelines and credit them with America’s economic strength…while thanking our lucky stars that none of the earlier, ill-fated Arctic gas projects were built.

We also side with those who urge patience as more competent, competitive private industry minds continue to consider a truly feasible way to monetize Alaska North Slope natural gas in an unpredictable, competitive and risky world market. P&GJ

Author: Dave Harbour is a retired Alaska regulatory commissioner. A former public/government affairs director for the Arctic Gas Consortium, ARCO and the Alaska Gasline Development Corporation, he is also a NARUC Commissioner Emeritus and Chairman Emeritus of the Alaska Oil & Gas Congress. He can be reached at Daveharbour@gmail.com.