A few months ago, my friend, Harry Noah, a former commissioner of DNR wrote an op-ed that caught my attention. It detailed some of the efforts of the Legislature and administration to come up with a long term solution for a Railbelt gas supply.
The op-ed highlighted several important facts:
While these funds are not all appropriated, they appear to be authorized to the tune of $1.3 billion, a good portion which has already been spent.
We still have the obligation to pay $500 million to TransCanada, of which approximately $260 million has been paid and another $240 million is still owed. So if we add that $500 million to our list, we are up to $1.8 billion.
Being an old banker, I look for the worst case basis: If the ACES tax cut is approved by the voters. If, as I hope, the tax cut correcting ACES survives the referendum by the voters, state revenues would be reduced by about $750 million at current oil prices. Add THAT to our $1.8 billion in past, current, and committed energy project expenditures, and the collective impact approaches $2.6 billion. Coincidently, this $2.6 billion is close to the amount that Alaska's largest taxpayer pays to the state. Conoco Phillips paid $2.6 billion in taxes to the state and $1.13 billion in federal taxes, plus $1.17 billion in royalties, primarily to the state.
It is not my intent to defend worst-case scenarios on the accuracy of my arithmetic, but to make the point that we're talking big dollars these days.
Alaska's Railbelt area must have a sustainable supply of natural gas. It is critical to the growth of major resource developers and the stability of individual households. Some folks in my hometown of Fairbanks cannot afford to live there at the current electric rates.
Hard-core economics are the drivers of development. Only by knowing the cost of gas, plus its transportation cost can you know how to price it, or you may have to subsidize it to cover the costs.
Right now there are no commercial investors in the in-state bullet line. The producers which hold the gas leases have not indicated a willingness to build the Instate line. The reason is that the risks are too high and the unknowns are too many.
For example, the Alaska Gasline Inducement Act (AGIA) limits the volume of gas in an in-state line to 500 million cubic feet (mmcf) per day. Given the costs of construction and operations, can the in-state line economically transport such a limited quantity of gas?
Assuming the answer is yea, who are the customers? The Fairbanks-Southcentral-Kenai household consumer market is approximately 200 mmcf per day. Who will buy the remaining 300 mmcf per day? Will ConocoPhillips reopen its LNG facility for export as acting DNR Commissioner Joe Balash has recently requested the company to do? Will Agrium consider reopening its urea and ammonia plant? What happens if the in-state line is built and a major gas discovery is made in the Cook Inlet? The economics could be out the window. Will the state simply build the line without commercial customers in the hope that they will later be found?
The ideal alternative is to have the producers build a line from the North Slope to tidewater and export the gas to Asia. But how long will Japan and Korea pay the current premium for LNG? Can the producers amortize an 800-mile pipeline and successfully compete with projects that have gas within reach of an export terminal?
In February of 2006, during my administration, we negotiated a contract to build a gasline to Alberta with BP, Exxon, and ConocoPhillips. Gas was then selling at prices slightly over $6 per thousand cubic feet (mcf), and now the price is running about $3.50 per mcf.
The development of shale gas changed the economic picture and we lost that market.
The producers, ConocoPhillips, BP and ExxonMobil, are currently working with the state on the main Alaska Southcentral LNG project. This is estimate to cost $45-65 billion in 2011 dollars (800 miles with 42-inch pipe and an LNG plant design of 15-18 million tons per annum.) This would provide the Railbelt with takeoff points to secure Alaska's Railbelt's commercial and residential needs. But only favorable economics and stable LNG prices in Asia will make this project happen.
And, we would still have many rural areas of the state to consider, including Southeast Alaska, in lowering Alaska's energy costs. Perhaps Southeast Alaska will be served with barged LNG from Prince Rupert someday.
The state should continue to look at proposals such as REI (Resource Energy Inc), a Japanese consortium of LNG users which have a memorandum of understanding with the state in a marketing arrangement to acquire state royalty gas. This proposal unlike all the other requires NO funding from the state. The Japanese have expended over $200 million and done their own feasibility evaluation.
The state, along with the producers as well as those exploring in Cook Inlet such as Hilcorp, and Apache, might find some common ground to advance the export of gas to Japan with the reopening of ConocoPhillips LNG and the Agrium facilities.
What do we do about the problem of so many Railbelt energy projects?
I recommend two things:
We should not appropriate any more money on any project except on the main Alaska, SouthCentral LNG project until we decide whether or not to construct it. Let me be clear: I am not suggesting stopping projects using money that has already been appropriated. They should proceed with money already appropriated to them.
But, no new money should be appropriated to them until the state and the producers decide whether or not to proceed with the main Alaska, Southcentral LNG project.
If we are going to deny new money to these projects we should put a flexible timeline on the main Alaska, Southcentral LNG project negotiations -- say 18 months.
The state and producers have the data to move forward. We should pull together whatever marketing, engineering, permitting and other disciplines needed to set out the steps, the schedule, and the budget it will take to build the main Alaska, Southcentral LNG project.
Since the in-state line already has its right of way, an EIS, and a new board of directors, it should participate in the negotiations between the state and the producers to see whether the two projects could be merged at some point.
The state should also negotiate the hard political issues with the producers, such as a fiscal certainty. The state will be at least risk if it is in commercial alignment with the producers. This means taking its gas in kind and taking an equity position in the line. These issues should be addressed and resolved within the timeline set for negotiations.
Second, we should take TransCanada out of the equity stream for this project. The state called for bids under the Palin Administration for the AGIA gasline in 2007. There was only one bidder -- TransCanada. ExxonMobil, BP and ConocoPhillips did not bid, yet they hold the gas leases. The governor stated her belief that it was not in the state's interest to have producer-owned pipeline, so as a result of the AGIA license, TransCanada will be an equity owner in the LNG pipeline. That is an equity interest which in my opinion should belong to the state.
Can anyone tell me what TransCanada brings to the table that makes it deserving of an equity share? It has no gas. The LNG line is not going through the Yukon, where TransCanada had rights of way. It is no longer negotiating with the producers on behalf of the state. TransCanada is fine company, but the state made a bad contract with conditions that must now be resolved. So let's get on with it.
Frank Murkowski was governor of Alaska from 2002 to 2006, one of its U.S. senators from 1980 to 2002, and chairman of the Senate Energy Committee from 1995 to 2001.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch. Alaska Dispatch welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.