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Energy

Governor says Alaska will know in a year if market will support pipeline project

  • Author: Alex DeMarban
  • Updated: September 1, 2016
  • Published September 1, 2016

Despite the huge challenges facing the massive Alaska LNG project, Gov. Bill Walker said on Thursday the state has an unprecedented opportunity to take the reins of a project and finally build a pipeline and sell natural gas from the North Slope as state leaders and companies have long wanted.

This is the first time in history the producers have offered real commitments to sell their gas while also leaving the door open for the state to attract major new partners to help support the liquefied natural gas project, Walker said.

In an interview with Alaska Dispatch News, Walker said he will continue his "relentless" pace to see a project built. Walker sought the interview after weeks of seemingly bad news about the gas line, including reluctance by the producers to move ahead with the current project and a consultant report saying the gas line wasn't competitive with other projects around the world.

Walker said the state will take steps to determine whether potential buyers and investors will support the project. He said the state will have an answer within one year whether the project can move forward — or not.

If the interest is not there, the state backs off.

"If the market says, 'You know what, you should have been here 10 years ago, or 20 years ago and we would have signed up and we're not interested, (then) that's it," he said.

"Why would we not do that, especially when we have a $4 billion deficit, an oil pipeline that is declining in throughput and three-quarters empty? Why would we not make sure our other resource up there has a chance to go the market?" he said, referring to the huge quantities of natural gas on the North Slope that have never been produced to sell.

Oil companies have long used the natural gas to produce more oil in part by reinjecting gas into rock formations to keep oil reservoirs pressurized, leaving oil no place to go but up. But even with gas reinjection, production of the more valuable oil is expected to drop to a point in the coming years that opens the door for the gas to be sold.

Walker's optimism — he said he sees the patch of blue sky the state has long been waiting on — comes amid a low point in the massive Alaska LNG project that has formally been pursued since early 2014 by lead partner ExxonMobil, as well as BP, ConocoPhillips and the state.

The project is really a group of giant projects, including a facility on the North Slope to remove high levels of carbon dioxide for reinjection underground, an 800-mile pipeline to move the gas across the state, and an operation in Nikiski where the gas would be superchilled into a liquid for shipment on oceangoing tankers.

The four partners have collectively spent more than $500 million so far to study the concept in an early engineering phase informing an environmental review by the Federal Energy Regulatory Commission.

Though Alaska LNG engineers have found ways to save money and drop the price of the project to its low estimate — around $45 billion from $65 billion — a study commissioned by some of the project participants recently found the project is uneconomic even if prices for liquefied natural gas rose significantly from their currently low levels.

The producers are not expected to move ahead into the next, costly engineering phase. But they have said they're interested in seeing a project completed and can play a role in a state-led project, at the very least by selling Alaska their natural gas.

Now the project is going through a transformation phase, with the state planning to take over leadership of the project by the end of the year.

Critics of the state-led idea have said Alaska doesn't have the expertise or capital to support such an undertaking, but the state will look for a major engineering firm to manage the project, even as numerous questions remain about the final form the project might take. Under any scenario, gas production is not expected to begin until at least 2023.

The recent competitiveness study, by energy consulting firm Wood MacKenzie, found key potential benefits to state ownership Walker has touted, including that a state-led project could be economic for investors at today's prices under the right circumstances — such as if investors accept a lower return on investment — 8 percent instead of 12 percent — and if the state can achieve federal tax breaks.

"Right now we're getting zero off that resource, so that'd be 8 percent more than we're getting right now," Walker said.

Walker said his goal is selling the gas so it brings long-term and fair returns to the state — $1 billion to $2 billion a year. The project is critical to Alaska for a variety of reasons, including stoking continued investment in the state's oil and gas fields by industry and providing a cost-effective energy source for Alaskans that could also open up opportunities for new projects in the state, including mining.

Walker said he hopes the gas line looks like a centipede, with smaller lines branching off to support projects and communities across the state with relatively inexpensive gas.

Walker said the amount of natural gas is so huge it can revolutionize the state's fortunes, much like North Slope oil development began to do in the 1970s, providing opportunities for families and young pipeline workers like he once was.

Walker said past gas pipeline projects have died because the oil companies have not wanted to sell the gas, even though it was produced from state leases. Now they're being helpful by offering to sell that gas and working on a project transition, while also providing a unique opportunity to the state, he said.

Critics have called Walker's pursuit of the pipeline an obsession that should end. But Walker said he's pushing ahead, even if that turns out to be a detriment to his political career. He said he's not making decisions to win office, but is trying to do the right thing for the state.

"If it costs me the re-election, so be it," he said. "Shame on me," he said, if his goal was about political survival.

Walker said the state is currently taking steps to ask the federal government if the project can qualify for tax breaks, a benefit once secured by the Alaska Gasline Port Authority, he said. The municipal-led entity, run by Walker before he became governor, tried and failed to construct a gas line.

The state's representative in the current project, the Alaska Gasline Development Corp., has said it has a year of funding available to work on a state-led project, about $30 million. The work this year includes seeking buyers, such as Asian utilities, to sign contracts for the gas, hopefully providing a financial foundation for investors to enter the project.

"Those who want to slow down, it has been 40 years. I'm not sure how much slower we can go," Walker said.

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