The heads of three huge and powerful companies, who don't much like each other, met with the governor of Alaska and some select invitees Thursday to talk about how to put together the deal of the century for the 49th state. Afterward, nothing had officially changed as regards a long-discussed, long-stalled pipeline to move stranded natural gas from the North Slope to markets anywhere. And yet everything had changed.
Or maybe not. The significance of the parley was dependent, in large part, on who was reading the tea leaves.
The cynics, and there are no shortage of those in Alaska, saw the Anchorage visit of Exxon Mobil Corp., BP and ConocoPhillips chief executives as nothing but a big show. All three companies have been whining about taxes since former Gov. Sarah Palin and state Democrats saddled them with Alaska's Clear and Equitable Share (ACES) back in 2007. Since then, ACES has netted the state $15 billion more than the previous oil tax, which was already providing more than enough money to cover about 90 percent of the cost of government in the state.
The companies contend that Alaska's oil taxes are so high they stifle further investment on the North Slope. Gov. Sean Parnell, who in the past worked for one of the oil companies and for the law firm that lobbied for another, pushed for lowering those taxes to encourage investment.
What better public relations, in the cynic's view, than to have the leaders of the biggest oil producers in the north show up to make like they're the state's newest best friends and champions?
Many of Alaska's leading Democrats, in fact, appeared to have tossed their invites to Thursday's spectacle into the circular file.
State Sen. Hollis French, a former Democratic contender for governor, admitted to being a little miffed at getting his invitation only the day before the lunch-time gathering. It conflicted, he added, with the regular and long scheduled meeting of the Bartlett Democratic Club at the Denny's on Debarr Road. French opted for Denny's and noted many of Anchorage's other top Democrats were there. French said he did talk to people who attended the governor's hootenanny, and they told him nothing new happened.
Or at least nothing much new to French happened. He, like others in the know, has long recognized that the once-heralded Alaska gas pipeline to the Lower 48 is dead. That's the pipeline Palin announced was under way back in 2008.
"I fought to bring about the largest private-sector infrastructure project in North American history, and when that deal was struck, we began a nearly $40 billion natural gas pipeline to help lead America to energy independence," she told a cheering Republican National Convention as she accepted the party's nomination for vice president, based on, among other things, her alleged energy policy credentials.
Another nail in TransCanada's coffin?
In reality, nothing ever began. One of the most telling moments at Thursday's luncheon and subsequent, brief press availability, was that no one even talked about Palin's pipeline as a remote possibility. An official of TransCanada Corp., the foreign pipeline company with which the state still has an agreement for construction, said the paperwork needed to obtain permits from the U.S. Federal Energy Regulatory Commission will be filed in October, but other than that Tony Palmer, vice-president of projects development, sounded pretty downbeat.
"I would love to build this pipeline," he said, which is a long way short of Palin's reassuring claim in 2008 that "we began a nearly $40 billion gas pipeline to America." And if Palmer was downbeat, the heads of the companies holding the contracts for most of the proven reserves of North Slope gas -- about 35 trillion cubic feet -- were simply dismissive.
Where once they were talking about gasline construction, Thursday's talking points, from the chieftains and from Parnell, were all about how to "commercialize natural gas."
What exactly does that mean? Well, in simple English it means they want to make money off Alaska gas, and that there is no money to be made shipping gas to the other U.S. states. New gas discoveries there, and new technologies exploiting once inaccessible gas, have driven stateside gas prices so low they won't even cover the cost of transporting it between Alaska and the Lower 48.
The picture is different in Asia. Gas prices in Japan, Korea and China, observed ConocoPhillips CEO James Mulva, are in the "double digits." That has fueled renewed talk of an all-Alaska gas pipeline, from the North Slope to a port in Southcentral Alaska. From there, Alaska gas could be shipped.
Parnell becomes the latest in a long line of all-Alaska gasline proponents. But the governor said he's not going to tell the oil companies what to do.
"This is a private sector project," he said.
Market demands drive the private sector. Market demands in the case of Alaska's natural gas are far over the horizon. No matter what is done to produce it now, or how it is done, the product isn't likely to get to the market until, optimistically, early in the 2020s. TransCanada's Palmer argued natural gas prices in the Lower 48 could be higher by then, but most analysts doubt they will be much higher. More and more shale gas is coming online in the states. It's conceivable that environmental concerns with hydrofracking are likely to slow shale gas development and boost the costs. But few in the oil and gas industry expect prices to go high enough to justify the $40 billion (and growing) cost of constructing a gasline south from Alaska, through Canada, where it can hook up to U.S. points beyond.
Alignment? Not even agreement (yet)
Mulva said a gas pipeline to an Alaska port, a plant to liquefy natural gas there, and sales of liquefied natural gas (LNG) to foreign markets looks like the best play. BP chief executive Robert Dudley said that company, too, is onboard with a gas pipeline, but admitted that given the nature of markets today all options need consideration. LNG isn't the only possibility. Gas to liquids -- basically the conversion of LNG into diesel -- could also hold some potential. Royal Dutch Shell this year brought online a gas-to-liquids plant in Qatar in the Mideast. The Shell Qatar plant is reportedly:
... The equivalent of a new giant oil field, in terms of production. But rather than producing crude oil, its main products are finished diesel and kerosene (jet fuel). It cost about $18 billion to build, and along with a smaller associated LNG plant, will yield $6 billion a year in profits on a projected cost of $70 per barrel of oil.
Oil prices were down Thursday, but oil was still trading for more than $100 barrel. Shell's project is expected to produce 260,000 barrels of crude-oil equivalent per day. Do the math. If there's a $6 billion profit at a projected oil price of $70 per barrel, every dollar per barrel over that price is essentially profit, hefty profit. Billions and billions of dollars. A whole lot of cash, even for these titans of industry.
Not to mention that while demand for LNG is expected to double, supplies of LNG are also steadily increasing. Australia and Angola are both now bringing new LNG supplies into the global gas market, and the Canadians are seriously considering the LNG business, too. They, like Alaska, are battling domestic gas prices lower than the costs of developing new gas prospects.
Oil supplies aren't growing nearly so fast. A number of oil-industry experts worry about a liquid fuel shortage ahead. Doug Reynolds, a professor of oil and energy economics at the University of Alaska Fairbanks, this week told an Interior audience he could envision oil prices hitting $200 a barrel, according to the Fairbanks Daily News-Miner. Reynolds is among a significant number of experts, including those at the Energy Department, who believe the world is near "peak oil," the point at which production plateaus.
As crude markets convulse, political leaders in Canada are pushing the use of LNG to fuel heavy trucks -- both to increase demand for domestic natural gas (of which there is a large supply) and decrease demand for oil.
Alaskans are intimately familiar with oil supply problems. Oil flowing down the trans-Alaska pipeline has been dropping for years, and there is now a debate raging about the lowest level at which the pipeline can continue to function. A gas-to-liquids plant somewhere along the line, which could inject diesel back into the flow, might help to keep crude oil moving to Valdez for a longer period.
Graveyard of pipedreams
All of which makes the issue of monetizing Alaska's natural gas a complicated one for all parties involved. Everyone knows the gas is valuable. Everyone wants to make money off it. The question is how. BP's Dudley said there was value in sitting down with his colleagues from Exxon Mobil and Conoco to discuss "alignment issues" with a goal of figuring out "what it would take to develop this great Alaska resource."
Former Alaska Gov. Tony Knowles, one of few Democrats in attendance at Thursday's event, noted it was nothing short of unprecedented: what other oil province has gathered heads of the world's largest privately-owned oil company (Exxon Mobil); the world's second-largest company in terms of energy holdings (BP); and the world's fifth-largest energy company (Conoco)?
These company chief executives, Knowles noted, never gathered in Alaska to talk with any governor before. They've never before appeared interested in getting on the same page in terms of developing North Slope natural gas, either.
When Palin steamrolled the Alaska Gasline Inducement Act (AGIA) through the Legislature to try and force pipeline construction, BP and Conoco countered with a private gasline construction company. Exxon Mobil, meanwhile, snuck in the back door of the governor's office as a TransCanada partner. Denali -- The Alaska Gas Pipeline, the effort by BP and Conoco, died last year. And by then, the TransCanada-Exxon Mobil project appeared to be on life-support, too, kept alive mainly by state subsidies.
Clearly some folks need to get their acts together. But that's not as easy as it might seem, noted Sen. Tom Wagoner, R-Kenai, co-chair of the Alaska Senate Resources Committee. U.S. anti-trust laws put some constraints on the heads of major oil companies meeting to scheme ways to make Alaska natural gas profitable.
Still, the BP and Conoco CEOs who met with the media after the Exxon Mobil-Parnell reception expressed confidence that it might be possible to get something done if everyone worked together. They did a nice lot of talking without really saying much.
Exxon Mobil, of course, continued to hide from the media, which is pretty much what it has done since its tanker -- the Exxon Valdez -- smeared Prince William Sound with 11 million gallons of crude oil back in 1989. Exxon Mobil CEO Rex Tillerson notably avoided the small mob of reporters who hung out in the second-floor lobby of the Deni'ana Center downtown. An Exxon Mobil company spokesman did issue a statement to Dispatch:
Today's reception was organized by Exxon Mobil, ConocoPhillips and BP. It's a normal part of business for senior management to meet with community leaders. We find it more conducive for discussions to take place in the absence of cameras and microphones.
It was hard to tell whether spokesman David G. Eglinton was clueless as to the reality of what happened Thursday, or thought the media so clueless such a statement would fly. Because the truth is that what happened at the Deni'ana Center in Anchorage was anything but "a normal part of business" for the oil industry in Alaska.
The lingering question remains simple: What does it all mean? Was it just posturing? Or is it really a sign of progress on a 21st century deal to rival the 20th century construction of the trans-Alaska oil pipeline, a deal that changed Alaska forever? It might be. There were some in state government hinting the meeting wasn't the first and likely wouldn't be the last. And that means exactly what?
Time will tell. It always does.
CORRECTION: This story was updated Jan. 6, 2011 to clarify that BP is backing a plan for a gasline.
Contact Craig Medred at craig(at)alaskadispatch.com