Dear Neighbors

Do you want to be bound, by contract, to pay natural gas prices that are double what is paid in the Lower 48 – for the next 20 or 30 years? How’s that for attracting business to Alaska? How’s that for your pocketbook? The folks who held the press conference on Tuesday didn’t mention any of that, did they? Unfortunately, the gasline debate has devolved into competing sound bites. Those pushing the project want you to think the lights will go out tomorrow if you don’t do what they propose. It’s bad policy to scare people into ill-advised projects. Frankly, the sound bites on all sides are pretty trite – because this issue is too difficult to discuss in accurate sound bites.

Here’s the downside of last week’s “in-state” gasline proposal. No one builds a pipeline without a 20 to 30 year consumer commitment to pay for that gas. How angry will the public be if we sign on to 20 to 30 years of expensive gas, only to later see cheap gas, at half or two-thirds the price, ship right by us in a large-diameter pipeline to Valdez or the Lower 48? Wouldn’t that be classic government action – getting you the most expensive gas, and shipping the cheaper stuff out of state. We’d be bound to keep paying for the expensive gas. Expensive by Southcentral standards, though cheap compared to current Fairbanks and rural costs.

So, the in-state line is worthy of analysis. It may become our only realistic option to ward off a natural gas shortage. But now is not the time to sign on to that project. Possibilities remain realistic for better, cheaper options that, unlike the in-state only line, could produce state revenue on top of cheaper gas throughout the state, and would have the side benefit of increased oil production.

Killing the Chances of Cheap Alaska Natural Gas

Five years ago I would never have dreamed that so many of our “pro-development” legislators would want to dump the option of our most promising gasline – a large diameter line to the Lower 48 or Valdez. The large diameter gasline would result in low-cost natural gas for the state – about half to a third the price of the inefficiently-sized “in-state” line. The larger line would also get Alaskans substantial state revenue – $500 million to $2 billion a year – something the in-state line wouldn’t produce, because its volume would be so small, and state production tax laws don’t apply to gas used in state. The larger line would substantially promote jobs and more gas field development, which, in combined oil and gas reservoirs, would make currently infeasible oil pools practical to develop.

A Big Pipeline to the Lower 48 or Valdez:
Problems, but Cheaper Alaska Gas and Needed State Revenue

The large pipeline project has real, but potentially solvable problems. The main problem is that Lower 48 shale gas prices – about $4/mcf – make the economics of the large pipeline difficult. Although, it is projected that natural gas prices in the Lower 48 are likely to rise soon by upwards of 50% or more to the $6 range, which makes the big line very economic. Why? Shale gas is polluting groundwater and rivers, and many local residents oppose shale gas production, so regulations on shale gas are growing. Finally, coal production is likely to fall because of new emissions rules, so demand for natural gas is expected to grow substantially. Natural gas is the cleanest fuel bridge we have to a renewable energy future. So – with the predicted long-term natural gas price of $5 to $7/mcf – a large pipeline, either to Valdez or the Lower 48, with in-state spur lines, becomes feasible.

There are also ways to make the big line cheaper. Technically, the more loans the pipeline builder uses, the cheaper the allowable transportation charge will be (under federal law) – so we’ve mandated that the builder use at least 70% debt. Want to lower the transportation cost even more? Currently there is an $18 billion federal loan guarantee for the large pipeline project. If our delegation can increase that federal backing to the $30 billion level, it will reduce the cost of this project. And, the proponents of an in-state line want $7 billion in state backing. If the state were to use that money for a big line, to buy a share, and demand a lower return than the 12% most pipeline owners get – to let’s say an 8% return, the federal regulatory authorities would lower the allowable transportation charge even more – and the state would get a pretty good return – 8% a year is better than we do on most of our investments.

Can Cook Inlet Gas Buy Us Time to Make A Decision?

You might be confused by conflicting stories about how much natural gas remains in Cook Inlet. Last month there was a very successful lease sale to natural gas producers in Cook Inlet, and the United Stated Geological Survey has substantially increased its estimate of how much recoverable gas remains in Cook Inlet. The State Division of Oil and Gas said of the sale, “We’re thrilled. This has been a great day for Alaska. It’s potentially a rejuvenation, a renaissance, for the Cook Inlet, not only deep oil targets buy shallow gas plays on the way down.” And a drilling rig the state has subsidized (that I voted for) is on its way to Cook Inlet, as it clears some regulatory hurdles. If this pans out, Cook Inlet production will allow us time to see if we can make the large diameter line work – and bring us what Alaskans deserve: cheap gas and needed revenue.

So why are people talking about a shortage? Because the gas we have on contract will soon run out. New exploration has to occur to replace those producing wells. That means we have little gas on contract, and exploration is needed for the gas most experts believe remains in Cook Inlet.

Oil Company Foot Dragging

Two of the three major oil companies have opposed it. In my view, to kill the current TC-Alaska proposal to build a large diameter pipe, ConocoPhillips and BP pretended for two years to have a project of their own (the so-called “Denali” project). They’ve “surprisingly” pulled the plug on it. I think it was a stalking horse to get folks to dump support for the TC project. I have so say, there never seemed to be a lot of people working in the Denali Pipeline office when I drove by it (next to Barnes and Noble).

Many GOP legislators who side with BP and Conoco have joined them in opposition. Conoco and BP don’t like the line in part because it requires mandated consumer protections, and promotes competition on the North Slope for gas production – something they’d like to monopolize from competitors. And it requires that Alaskan’s don’t pay the full transportation cost Lower 48 or Asian consumers pay – since we are a closer market to the gas we are buying.

Estimates from three years ago said that, instead of the $9 to $17/mcf prices the March and July AHFC presentations have penciled – in-state gas on a large diameter pipeline would be in the $5 to $7 range. Those probably need to be updated, but all experts agree a large diameter pipeline produces needed state revenue and cheaper gas. Why? It’s like a ferris wheel with only one car. A ride on that would cost more than a ferris wheel with 20 cars. A big line can transport 16 to 20 times more gas. A small line transports a relatively small amount over a long distance. It’s inefficient.

What’s Left To Do?

Like Sen. Tom Wagoner from the Kenai Peninsula, I worry that the bluster about this project might deter explorers from looking for gas in Cook Inlet. They may wonder whether they’ll be able to sell it if utilities sign on to the in-state line. We have to tone down the rhetoric so that doesn’t happen.

We have to analyze some of the cost assumptions in the recent in-state line report. In March the cost estimate from the same folks was that a line that met current in-state demand – roughly 250 mcf – would cost over $17/mcf; and that, if we could get a big buyer to purchase an additional 250 mcf, we could bring that price down to $11/mcf. Though questions remain whether a commercial buyer would spend that kind of money for Alaska gas. Potential out of state buyers can get natural gas at half to a third the price. The new estimate cuts those prices to $9 and $11 respectively. Why the big difference? That’s a legitimate question. More engineering has to be done to come up with a reliable cost estimate for this line, and we should do that engineering.

This discussion leaves out one other important point. The state seems poised to move ahead with a $3 billion Susitna Hydro project. If that goes, and reduces interior and rural electricity costs, is a $7.5 billion in-state line needed so quickly? Should we do both? Money, at least in my back yard, isn’t growing on trees. The Susitna project may take too long to build to meet the power needs in our communities, but we should think about which projects we are going to put our money on, and what we want to have for a state savings account. We should add up all the money those projects would cost, and see if that money would be better spent on cheaper energy from a large diameter line.

In an ideal world, the increase in projected Lower 48 natural gas prices will make the big line a go – and we will be able to tide ourselves over until then with Cook Inlet gas. And to be fair to folks in Fairbanks and rural Alaska, we should subsidize their energy costs.

We will also have to find out how much time we have to wait. But jumping on board the current in-state proposal, at least now, would guarantee you only one thing – gas that’s 50% to 100% higher than anyone pays in the Lower 48. I want an Alaska that attracts business. High gas prices won’t do that.

Best,