Passage of oil tax legislation was a principal achievement of the Legislature this session. Over the next 5- to 7-year period we will see whether the producers react to the lower tax by investing enough in development to arrest the decline in oil flow or whether it will simply (and significantly) reduce revenues to the state.
The Legislature also continued its extraordinary expenditure of funds in pursuit of multiple, competing gas and energy projects for the Railbelt. In the period FY 2004 – FY 2013 the state spent $557 million on consultants and reports on the gasline to the Lower 48. (This does not include money spent in support of the Alaska Natural Gas Development Act passed by initiative in 2002.) Since the passage of the Alaska Gasline Inducement Act (AGIA), the state has paid TransCanada and ExxonMobil $240 million for a failed open season and continuing efforts to obtain a FERC license. As a consequence of last year's amendment to the 2008 AGIA license, the state must pay the balance of its $500 million commitment to TransCanada to pursue an LNG line with its producer partners ExxonMobil, BP, and ConocoPhilips even if it never comes to fruition.
In the session just ended the Legislature committed $355 million for design and planning of the Bullet Line, on top of the $72 million appropriated in prior years. The Legislature has appropriated these funds even though it has no financial commitments from potential shippers in advance of its expected open season in 2015. Will the Bullet Line make sense if more gas is found in Cook Inlet, from which pipelines to Southcentral are already in place?
The Legislature committed $332.5 million in grants and loans to truck LNG from the North Slope to Fairbanks, even though trucking is the least efficient form of transportation and will be redundant if the Bullet Line is built.
Meanwhile, the Legislature appropriated $95 million during this session to continue initial work on the Susitna hydroelectric dam. This will surely be followed by continuing and increasing expenditures as the studies needed to progress the project are funded.
The problem that political leaders face is that these projects either make no commercial sense or are so risky that prudent, private investors will not finance their development. Without state money and without contracted customers, no private investors will actually advance the big LNG project, the Bullet Line, the Fairbanks Trucking Project, or Susitna.
Alaska cannot reduce these risks on its own; the risks are both in Alaska and in the world market. Moreover, while increased energy is needed for the Railbelt, the state cannot continue to sustain having legislators appropriate state funds in support of their colleague's favorite project in order to obtain funds for their own favorite project. The best project needs to be selected, and a business plan developed to allow that project to be constructed before the money runs out. The expected loss of state revenues over the next several years to the reduced oil tax and the continued decline in flow makes the need for a decision that ends this practice even more acute.
It is time to prioritize -- select the most economic project and let the others go. How?
The Legislature and administration should create a "Panel of Technocrats" to compare the merits of the various projects and decide on one. The Panel would include economists; oil and gas marketing experts who have expertise in Alaska and in East Asian energy markets; specialists in engineering, public finance and permitting, all of whom have experience building large projects in Alaska.
The enabling legislation for the Panel would set out criteria for selecting a final project, such as monetizing Alaska's gas to the maximum benefit of its people, providing a stable, reasonably priced energy supply to the Railbelt, maximizing jobs in Alaska, and limiting the expenditure of state capital and operating funds. The Panel would review the projects without regard to the politics and prepare an "apples to apples" comparison of the pros and cons of each. The project selected by the Panel would be presented to the Legislature for an up or down vote. The others would be abandoned.
There are a number of issues the Panel might consider:
Could abandoning all but one of the projects be a boon to that chosen? For example, if the Bullet Line were chosen, the artificial capacity cap of 500 million cubic feet per day imposed by AGIA on any other state-supported gas line would be lifted, and the line could be sized to the economic sweet spot.
While a premium for LNG is currently being paid in Japan, could the producers, the Alaska Legislature, and the federal government decide/agree to build it and get it built before projects in Australia and British Columbia, also planned for Japan and East Asia buyers, fill the market?
What are the realistic prospects for permitting, financing, and constructing the Susitna Hydro Project in time to supply the Railbelt's increasing energy needs at a reasonable cost?
The Panel is not a perfect solution. But, it would provide the Legislature and the public a mechanism to address the inordinate and unsustainable amount of money the Legislature is spending on competing energy projects in Alaska at a time when revenues will be declining due to the new oil tax legislation and declining flow.
Harry Noah was commissioner of the Alaska Natural Resources Department under Governor Walter Hickel, senior manager of the Yukon Pacific LNG pipeline project, and preceded Dan Fauske as manager of the in-state gas pipeline project known as the "Bullet Line."
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch, which welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.