Only a day after the Alaska Gasline Development Corporation blasted bad Alaska press as the problem threatening construction of the 49th state’s longest-lived pipe dream, a high-profile analyst of global markets dumped a bigger and equally negative assessment on the short-term prospects for construction of expensive, new natural gas projects.
“Cheap, abundant US supplies of natural gas combined with forecasts of growing global LNG demand early next decade are not enough to ease the uncertainty facing the next wave of LNG,” reported S&P Global Ratings.
The problem is simple micro-economics. Supply at the moment exceeds demand, and though demand is expected to grow significantly into the near future, it is going to have a hard time gobbling up all the surplus supply.
The International Energy Administration doesn’t expect liquified natural gas (LNG) prices to rise until sometime well into the 2020s.
“We will see massive amounts of new LNG capacity coming to the market … so we will probably continue to have well-supplied markets into the middle of the 2020s,” Keisuke Sadamori, director of energy markets and security at the IEA told Reuters last week.
“It’s not good for us if you have a prayer for this decade,” said Larry Persily, the former director of Alaska Natural Gas Transportation Projects for the federal government and now a natural-gas consultant for the Kenai Peninsula Borough.
A one-time deputy commissioner of the Alaska Department of Revenue who has worked for both Republicans and Democrats, Persily lost his federal job when the U.S. government decided a long envisioned gas pipeline from Alaska through Canada to the Lower 48 states was an economic no-go.
Walker’s vision
Enter the all-Alaska gasline, a dream of Alaska Gov. Bill Walker for decades. As an attorney and activist, he pushed the administration of Gov. Frank Murkowski to build it in the early 2000s.
Instead, Murkowski tried to work out a deal with the major North Slope oil producers that hold the rights to the gas for a pipeline to the Lower 48, but that didn’t work out.
Walker thought his idea had a shot when Sarah Palin soundly defeated Murkowski, whose close links to the oil producers were questioned, and took over the governor’s mansion in Juneau.
“Murkowski viewed us [Walker’s Alaska Gasline Port Authority] sort of as the enemy,” Walker told Natural Gas Intel in December 2006. “I think we were really just focused on what was best for Alaska and not so much what was necessarily best for the leaseholders in Prudhoe Bay. He had a philosophy that what was good for them was good for Alaska and the time frame for the leaseholders would be whatever’s best for them and we just didn’t see the world that way.
“The leaseholders are conflicted with other projects throughout the world, and they have to prioritize what they do, and we understand that. But we don’t think Alaska should necessarily be in a queue on that.”
In interviews, Walker has expressed the belief the major oil producers in Alaska – BP, ConocoPhillips and Exxon-Mobil – are sitting on Alaska gas as money in the bank instead of making solid economic decisions as to the present value of the gas.
Palin tried to use the Alaska Gasline Inducement Act, which she rammed through the Alaska Legislature with the assistance of Democrats, to force the companies to build the gasline. That didn’t work, and Walker was left unhappy with Palin because AGIA had settled on the route through Canada to the U.S. while Walker wanted an all-Alaska route to tidewater.
As the Republican candidate for vice-president of the U.S. in 2008, Palin famously declared, “I fought to bring about the largest private-sector infrastructure project in North American history. And when that deal was struck, we began a nearly 40 billion-dollar natural gas pipeline to help lead America to energy independence.”
The reality was that the project hadn’t turned a shovel of dirt and never would.
Frustrated by the inaction, Walker launched his first bid for governor in 2010. It was all about the gasline.
“Republican gubernatorial candidate Bill Walker has positions on many Alaska issues, but he has passion for developing the state’s huge reserves of natural gas,” Juneau Empire reporter Pat Forgey wrote at the time.
Walker lost the Republican primary to incumbent Gov. Sean Parnell, who had stepped up from the position of lieutenant governor after Palin’s surprise announcement she was resigning. That followed her failed bid for the vice-presidency as the running mate of Republican Sen. John McCain. Palin went on to become Alaska’s best known pol-ebrity.
Parnell abandoned AGIA and negotiated a deal with the producers; TransCanada, a pipeline company; and the Alaska Gasline Development Authority, a state entity, to begin work on a new gas pipeline project.
Walker was unhappy and launched another bid for governor as an independent candidate. This time, he won the support of Palin and help from Alice Rogoff, then publisher of the state’s largest newspaper, and from an agreement with Democrat gubernatorial candidate Byron Mallott to run as a “Unity Ticket.”
Mallott, the one-time head of a regional Native corporation in the Alaska Panhandle, abandoned his bid for governor to sign on as Walker’s number two. With Rogoff’s newspaper pounding the drum about Parnell’s failure to aggressively pursue charges of sexual misconduct involving the Alaska National Guard, Walker and Mallott beat Parnell and his running mate 48 percent to 46 percent.
In with the old
One of Walker’s first acts in office was to bring back to the Alaska Department of Natural Resources Mark Myers and Marty Rutherford, who had championed Palin’s AGIA plan to pressure the oil producers to build the gas pipeline.
The duo signed on to lead the old Parnell plan to build a pipeline in cooperation with the oil companies. The project was then run by Exxon-Mobil, the most successful privately owned oil and gas company on the planet. (Globally, it ranks fifth but all of the oil giants in front of it are government-owned entities.)
Parnell’s friendly partnership between the state and Big Oil didn’t last long. Exxon lost the leadership role shortly after it suggested that global energy markets indicated work on the project should be slowed down to plan for construction sometime after 2020.
Walker took that as another attempt on the part of Big Oil to stiff Alaska and announced the state was going to take the lead on the plan for construction of the $45 billion to $65 billion pipe from the North Slope to tidewater at Cook Inlet where a liquified natural gas (LNG) plant was to be built to prepare the gas for export.
So far, the state has spent millions on studies, hiring and travels to Asia to try to sell China, Korea or Japan on gas. Keith Meyer, the governor’s half-million dollar man and gas czar, was back there making another pitch for gas in mid-October when the Gasline Corp. reiterated a year-old complaint about all the Alaska negativity.
Only a month earlier, Walker had claimed international interest in Alaska gas was “unprecedented.” The claim might well have been true.
The problem comes in the difference between shoppers and buyers. Asian gas consumers after the best deal would be fools not to talk to Alaska with proven gas reserves of more than 45 trillion cubic feet, enough to power Russia’s Surgot-2, the world’s largest gas-fired power plant, for the next 120 years. That power plant produces about 40 percent of Russia’s electricity.
Alaska’s got gas. What it doesn’t have is a gas pipeline, and the high-cost of building one will make Alaska gas costly. A study prepared for the state by a consultant estimated global oil prices would have to top $70 per barrel before Alaska gas would become close to competitive in the world market.
Natural gas prices have historically been tied to oil prices, but have started to decouple in recent years because of the oversupply of gas. Most oil analysts don’t expect gas prices to reach $70 per barrel until sometime in the 2020s.
Day-by-day, it looks more and more like ExxonMobil was right and the governor was wrong, something Walker seemed to suggest weeks ago in an appearance before the Alaska Resource Development Corp.
He conceded then it might be time to give up, and added that “some people are starting to talk about direct-shipping of LNG from the Slope,” according to a report in the Mat-Su Valley Frontiersman.
The Russians are already producing LNG in the Artcic and shipping via ice-breaking tankers with the Koreans and Chinese partnering to build more of those ships. according to Marine Link.
Persily doesn’t, however, expect any of this to stop the state push for a gasline.
“Keith Meyer is never going to say it’s over,” Persily said.
And that’s understandable. If you were making $500,000 a year to sell the idea Alaska’s gas can be sold, would you say its unmarketable?
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As an old saying states, ” You can’t squeeze blood out of a turnip.” Governor Walker should have known a long time ago that the economics just are not right for an Alaska natural gas pipeline yet.
Overriding idea here – the natural gas on the slope must be used for affordable energy within the state, but the only way (economic truth here) to make it affordable is to tap into overseas markets. Sure, batch shipments of LNG down the TAPS sounds like a technically-feasible idea, but only if it provides affordable energy to where it is needed most – Interior Alaska. If these batch shipments can’t be offloaded in Fairbanks, Delta, Glennallen, then they aren’t benefiting Alaskans at all. Anchorage sucks up most of the State revues, but it also has Cook Inlet at a sweetheart rate. Stop strangling the rest of the state and let us in on the what the state constitution says we have a right to.
The leaseholders/producers have the exclusive rights to produce gas on the North Slope. Once gas is produced, under SB 138, the state could receive its production taxes and royalties in the form of gas. The state doesn’t have gas to sell until it gets a share of production. What matters and what is critical are gas sales agreements. Until the leaseholders/producers have gas sales contracts and produce, the state has no gas to sell. All of the administration’s trips to the orient are selling space in an empty project. Time would be better spent trying to broker contracts between buyers and those that actually have gas to sell. The governor is wasting money the state doesn’t have on his pipe dream and fight with ExxonMobil.
History will show that Walker was the wrong governor at the wrong time. And history will show that Walker did great harm to Alaska. When the price of oil dropped in half, and state revenues dropped in half, Alaska needed a business person running the show. Alaska needed someone who could do like countless other CEOs of corporations have done before – cut and downsize, so your cost of operations does not exceed the amount of revenue coming in the door.
But Walker didn’t do that. It’s as if he couldn’t be bothered with being a governor, because his mission was to build a gas line whether it made economic sense or not.
Next fall, when Walker is run out of office, his successor will basically be starting from ground zero at putting the state on solid fiscal footing. Because Walker did very little to fix Alaska. Mostly he made a few targeted cuts (like to police and roads) to give the public “shock and awe” about the budget and (in his mind) drive people in fear to new taxation. Taxes to fund a government paradigm based on $120 oil.
Alaska state government is bloated (yes Bill, its true). The list of state agencies is much too long. The state is in many businesses it shouldn’t be in. The state shouldn’t be a mortgage company (AHFC), an investment bank (AIDEA), a gas line developer (AGDC), a student loan company, a seafood marketing company, an energy assistance foundation or be performing many of the health and social services functions non-profits fill. Many state agencies should be disbanded and left to the private sector. This list: http://alaska.gov/akdir1.html, should become much shorter.
What’s mind-numbing is that BP, perhaps the most inefficiently and poorly managed corporation in Alaska … they quickly cut costs to match revenues when oil prices fell. But the State of Alaska, they proved they are even more inefficient that BP. Insane. No significant cuts to staff, salaries, benefits or deals with pensioners. No union-busting, no agency shedding, no restructuring, no downsizing … nada. Just smoke, mirrors and lies … because Walker is too busy with his gas line to nowhere fantasy to care about being a real governor.
I’ll just mention here James, that no amount of cutting would have made it so “cost of operations does not exceed the amount of revenue coming in the door.”
What you’ve done here is built a “strawman” that assumes Walker could have done this “impossibility.” One can argue about whether/not government has been cut enough, without totally collapsing our economy, but that is something else entirely.
Solution? GTLs, batch shipping synthetic diesel down TAPS with oil. Target market is the Pacific Rim (both sides). You aren’t competing with LNG producers any more. AK will be competing with refineries.
Good news: can use existing infrastructure in TAPS and won’t need to build a new pipeline.
Bad news: it puts to rest for all time the notion of an all-Alaskan natural gas pipeline.
The second may bother proponents a lot. Cheers –
The Legislature should have passed Frank’s pipeline deal 20 years ago.
Technology has come a long way. Instead of running pipe we should run high voltage DC from the Slope. It would give Alaskans low cost electricity creating an economic boom, plus it could connect to the lower 48 grid.
Other sources of energy could also add to the line.
there’s no doubt it’s time to think about alternatives for using and or shipping NS gas, or for Alaskans to just resign themselves to the fact the gasline will get built when the markets are willing to pay significantly more for gas than they are now.
This mad fixation on a gas pipeline accompanied by in excess of 100 million in wasteful spending pursing it is, thankfully, about to end. In spite of Walker’s pandering to the AFN, those who are fed up with crime, commercial fishing interests in the Cook Inlet, and recently, if you can believe it, the sports fishing communities in the Mat Su valley, he will be handed his hat and shown the door next November. Let’s hope that he cannot do much more damage before that happens.