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Global gas blues

800px-LNG_Tanker_ARCTIC_PRINCESS_vor_Hammerfest_(N)_-_Juni_2015

The Arctic Princess/Joachim Kohler Bremen, Wikicommons

With the administration of Gov. Bill Walker pushing full-speed ahead for an Alaska natural gas pipeline and the full-on export of liquified natural gas (LNG) from the Kenai Peninsula, it might be a good time for Alaskans to take a serious look down under to what is happening these days in Australia.

There is only one appropriate word for the LNG mess in that country, and it is an acronym: FUBAR.

Many will know the meaning. Others might need to Google it. It isn’t being spelled out here because the “F” is the F-word, which would describe the situation in the moment for in-country consumers of Australian gas.

They’re F-ed.

Australia is a world leader in LNG exports. One would think Australians would be sitting pretty and taking advantage of that gas. They aren’t.

Exporters in kangaroo country seem to have signed contracts to deliver more gas than they can now produce. To meet the requirements of those contracts, they’ve had to buy surplus Aussie gas, and they’ve been offering more and more money to get gas as the surplus has gone down, down, down.

Competition for the remaining gas has sent Australian, in-country gas prices up, up, up, which is not a good thing for Australians.

“In recent weeks, average prices have been treble their normal price across the market. But in South Australia, they have soared even higher,” Giles Parkinson reported in mid-July at Reneweconomy.com, an Australian website tracking energy markets.

A trebling in Alaska would be a little like energy prices in Anchorage – where both heating and electricity are tied to relatively cheap, Cook Inlet natural gas – rising to the level of energy prices in Fairbanks, where woodsmoke has been threatening to choke the city as Interior residents go back to the Ages of Soot to find some sort of affordable way to heat their homes.

“Our air quality is unacceptable,” John Davies, an assemblyman in Alaska’s second largest city observed this winter. “It’s unhealthy. It’s causing deaths and disease and admissions to the hospital. People are beginning to leave town because of it.”

Fairbanks Daily News-Miner reporter Amanda Bohman has written at length over the  years about not just the dangers of wood smoke, but the crisis of high energy costs in the Interior city.

“The foreclosure rate for Fairbanks has been creeping up since 2012, and those who watch the housing market say the high cost of heating is a major factor,” she noted in a 2014 story. The foreclosure rate in Fairbanks is running the opposite direction of the statewide trend.

People have been bailing out of the Golden Heart City. Alaskans fleeing the Interior led to an Alaska out-migration that actually saw the overall state population fall in 2014.

One “factor adding stress to the equation of whether to stay in Alaska or venture elsewhere is the continued high cost of home heating. In cold winters and years with high costs for heating fuel, some residents’ fuel costs exceed their mortgage payments,” the News-Miner opined.

Australians are now learning about high energy costs.

Supply and demand

As the Aussies have discovered, markets don’t care what people want. Markets simply and predictably react to the law of supply and demand. This can be a blessing or a curse.

Alaskans are living both at the moment. Every time they drive into a gas station to fuel their car or truck with gasoline creeping toward historic lows, they enjoy the blessing. At the same time, the state, which is almost solely dependent on crude oil taxes for revenue, is facing a budget deficient of more than $3 billion because of low crude oil prices. That’s the curse.

The deficit led Gov. Bill Walker to seize about half of Alaskans’ expected Permanent Fund Dividend for 2016 to try to partially paper over the hole. He capped the PFD payout at $1,000 when many were anticipating a more than $2,000-per-person check for themselves and their children as their annual payment for the state’s oil wealth.

Walker’s move left some Alaskans unhappy. Former U.S. Senate candidate Joe Miller of Fairbanks wants Walker recalled.

But things could be worse. Alaskans could be living in Australia where instead of losing a government handout people are losing hard-earned cash. Were this Australia, Anchorage residents would be looking at increased home energy costs way beyond the $1,000 Walker appropriated to help keep state government afloat.

Anchorage energy, according the Alaska Housing Finance Corp., costs on average about $2,800 per household pear year. Were the price of gas to triple, as in some of Australia now, the cost would be more like $8,400 per year, and the annual loss to the average consumer would be $5,600.

That makes the PFD reduction look small. So look at the bright side Alaskans, you could be Australians.

Big ambitions

So what exactly went wrong down under?

Australia went huge, as Republic presidential candidate Donald Trump might say, in the international LNG market. It went so huge that some Australia producers oversold the amount of gas available.

That left them with contracts to supply more gas than they had coming out of their wells.

Companies short on gas were forced to buy gas from rhe few companies with gas. With demand up and supply down, prices inevitably rose dramatically. This soon led to problems for both the gas companies and Australian consumers.

“A $200 billion investment splurge has put Australia on track to surpass Qatar as the largest global producer of LNG later this decade,” Bloomberg reported. “(But) at the same time that so much gas is being siphoned off for export, prices for natural gas within Australia have soared to more than double last year’s level.

It’s not a good time down under.

Santos, Australia’s homegrown oil and gas company, finds itself in a serious pinch.

“After spending billions of dollars constructing a world-class liquefied natural gas export project in Australia, Santos Ltd. has found itself short of gas,” Bloomberg reports. “The country’s third-largest energy producer, which isn’t pumping enough of its own gas to feed its Gladstone LNG plant yet, is having to buy expensive local supplies to fill the gap. Meanwhile, prices for the LNG that Santos is selling have plummeted by more than half in the past two years amid a supply glut driven in part by rising Australian production.”

Santos is bleeding money. Is there a warning her for Alaska, which would also like to go huge in the LNG business?

Alaska, of course, wouldn’t face the production problem of Australia. There is plenty of gas on the state’s North Slope, but were the state to proceed with a $40 to $50 billion gas pipeline to tidewater a global gas glut has the potential to turn state operation of a 49th state gasline into a money losing nightmare.

And the International Energy Agency isn’t offering a very sunny forecast as to gas demand in the immediate future.

“We see massive quantities of LNG exports coming on line while, despite lower gas prices, demand continues to soften in traditional markets,”  IEA Executive Director Fatih Birol said in June.

The IEA is forecasting a 21 percent increase in LNG production by 2021 based solely on projects now in the works. It forecasts oversupply through at least that year.

This is part of the reason the oil producers involved with the state of Alaska in trying to bring Alaska gas to market suggested a slowdown in development of the natural gas pipeline and LNG facilities.

The response of the state was to announce that it would take over leadership of the project and push boldly on. Analysts say it could be a right and decisive move for the state, or Alaska could be on the way to becoming the next Australia.

Australia’s Santos lost $2.7 billion last year.

The rewards in the oil and gas business can be great as Alaskans learned well while enjoying the bounty from taxes on major oil producers through the days of $100 per barrel oil. But the risks of the oil and gas business are equally great.

Australians thought they had the tiger by the tail not that long ago.

“First gold, then coal and iron ore. Now, a new bonanza is about to be unleashed from beneath Down Under: Australia’s got gas,” the Associated Press reported in 2010. “It will be the next stage of a long boom that has enriched Australia and made it a key supplier of the raw materials underpinning Asia’s development—from the girders in city skyscrapers to the fuel burned to light them.”

Today, Australians are getting mauled.

The boom is looking more like a boomerang on the gas front.

“The contribution to federal tax revenues from multinational oil and gas companies has slumped and a senior academic has warned that the mega-gas projects coming online off the Western Australian coast will not contribute a single dollar in royalty payments ‘in her lifetime,'” the Sydney Morning Herald reported this summer.

“The only royalty-like payment applicable to liquefied natural gas (LNG) projects in Commonwealth waters, including the $US70 billion Gorgon plant operated by Chevron, is the ‘petroleum resource rent tax’ (PRRT).”

The PRRT take in Australia fell from $1.9 billion in 2005 to $1.4 billion this year and is projected to fall to $800 million by 2020. In Australia as in Alaska, some blame the problem on oil and gas companies hiding their profits, but the companies are struggling.

Chevron, which had promised Australia $1 billion in gas taxes and royalties by 2019, is at the moment looking a bit like Santos. It last month reported a quarterly loss of $1.47 billion despite budget slashing.

The company is in the process of laying off 6,000 to 7,000 people or about 10 percent of its workforce.

The oil and gas business will, of course, improve some day. Oil and gas are limited commodities. Demand will increase; supply will diminish; and price will hift accordingly.

The mulit-billion dollar question facing  Alaska is when.

A state that was once oil rich could in the future become gas rich, or it could become a something of a northern version of Australia, where parts of the country are already reported to be enduring a recession despite a supposed wealth of natural gas.

Alaska has big budget problems now. A state-owned pipeline company bleeding money Santos-style could make the problem truly huge.

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3 replies »

  1. You’d think rational minds could make a quick and easy decision, based on what we do and don’t know, to shelf the AKLNG project.

    1) We know that NS gas will be valuable someday. But we know that AK LNG is not economically viable today, or in the foreseeable future. So now is not the time to build a $65 billion LNG pipeline.
    2) We know that the 3 AK oil majors have determined that now is not the time to build an Alaska LNG pipeline. Only the state says the project makes sense. 3 say no, 1 says yes.
    3) We know that oil companies can build pipelines. We know that the state has had many failures in infrastructure projects. So the state shouldn’t be the lead in a complex mega-project.
    4) We know that obsessions can blind people and organizations to economic reality, and this often is a path to bankruptcy. We know that our governor is blinded by an obsession to create his legacy via an LNG gasline.

    A decision to put the gasline project on the shelf should be easy and simple to make. The fact that the LNG project still lives is a testament to egos, lack of accountability, corruption, disregard to Alaskan citizens and government waste.

    Like

  2. Thank you for this article. The first topic before the Legislature in January should be a decision to stop funding this AKLNG project. We have spent enough on “pipe dreams”. A decision to end this now could, with minimal impact at this time, save the state hundreds of millions (leading to billions) of dollars. We have already spent at least $540 million on AGIA with hundreds of millions more on the “bullet line”, trucking North Slope gas to Fairbanks, and on AKLNG to date including the buyout of Transcanada as our partner in AKLNG.
    The Warrior Achilles of Greek Mythology would have had to have been an octopus to have enough heels to illustrate the danger to Alaska in this endeavor in a role other than that of an objective sovereign to tax and regulate. First, unlike the multi-nationals, we are restricted to only one location in which to do business. Second, every time we have an election the nature and scope of the state effort will change. Third, the Legislature is simply not equipped to function in an oversight role for such a dynamic and complex enterprise, Fourth, we literally compete against ourselves to sell our North Slope gas with sources from Cook Inlet, the Nenana Basin and other potential reserves available. Fifth, our Constitution does not allow a current legislature to bind future legislatures on issues including taxes. Sixth, the state may well find itself in conflict with local governments over local taxing authority of the assets and rights or way. Seventh, current infrastructure and government services cannot absorb the impact of this project before significant funding is available. Finally, this endeavor places the corpus of the Permanent Fund in jeopardy as a last resort to collateralize debt incurred by the State.
    I fear we could put Australia to shame if we approach this endeavor as either an equity partner or as the sole owner of this enterprise.

    Like

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