It has become customary in Alaska over the past 30 years for gubernatorial candidates to say a North Slope natural gas pipeline is closer than ever, and only they can make it happen.
We hear, again, how high natural gas prices make the dream possible. That doesn’t mean the project is viable. Prices are high now because supply bottleneck and inflationary forces are impeding gas production worldwide. That would be true here, too. The current Alaska cost estimate was made in 2019, pre-COVID and pre-inflation. No one knows what the project would cost now, but it would be much more than estimated then.
Alaska gas faces the age-old challenge it has always faced: competition. There is just too much other stranded gas out there that can be brought to market for less cost. Worldwide, there are about 200 North Slopes’ worth of gas reserves. Much of this gas is sitting at tidewater, and unlike Alaska gas, it does not need an expensive pipeline to move it to the point where all other projects start.
The necessity of the pipeline creates another problem: size. Because pipeline economics require significant economies of scale, there has to be a large volume of gas going through the line to bring the per unit costs down. Thus, where other projects only need to place small amounts of gas incrementally into markets slowly as they can absorb it, Alaska has to place a large volume in a short amount of time. This is commercially difficult.
Because of the large size and high cost, investors will require gas shippers commit to pay to move the gas every day for up to twenty years, regardless of the market price, cost, or whether they actually have gas. That is a huge, risky commitment.
It was the Palin administration’s failure in 2007 to appreciate the fundamental financial nature of these commitments that caused the state to overstate the potential returns from the project, and lose several hundred million dollars in the Alaska Gasline Inducement Act (AGIA) venture.
Shippers will need large long-term sales contracts in place to be able to make such commitments. And such contracts are rare. Much gas worldwide today is sold on short-term contracts.
Finally, in regards to other investment hazard, Alaska over time has been its own worst enemy in relation to fiscal risk. The ACES oil production tax system, put in place in 2007 (out of displaced wrath toward a corrupt oilfield service company), and rescinded in 2013, had some of the highest tax rates in the world. It was seen by many as confiscatory as anything Venezuela ever did.
And three times in the past 16 years, ballot measures sponsored by some citizens were put before Alaska voters. The gas reserves tax initiative in 2006 would have caused producers to pay more than a billion dollars a year if they did not commercialize natural gas, regardless of whether it was economic. And initiatives in 2014 and 2020 would have imposed oil tax rates similar to ACES.
These efforts failed, but they could have gone either way. This history would give any investor great pause before sinking tens of billions of dollars, especially in the absence of a diversified tax base, only to have it expropriated by the state.
The producers would probably sell the gas to a third party on the Slope, and assign the fiscal risk to them. It is hard to imagine anyone would bite.
We are as close to a gas pipeline as we are to a Mid-East peace plan. It would be refreshing to hear someone say, “Vote for me. I will not waste your money on fantasies.”
Roger Marks is an economist in private practice in Anchorage. From 1983-2008, he was an economist with the State of Alaska Department of Revenue Tax Division.
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