My Pipe Dream At Any Cost?

by

Dave Harbour


First: An Auction Story

You have been waiting for the big auction and this is the day.

The most famous artist in your great land created an oil painting decades ago that happened to feature the big black and white husky which begat the great, great, great, great, great grandson which fathered your constant companion, “Jake”.

Your emotional attachment to the estate sale painting of that famous sled dog sire has captivated your attention for weeks, since the passing of your neighbor and best human friend.

Owning it would be a dream come true.

And the painting’s value is enhanced as you recalled the countless hours you and Jake spent at the next door home of, old Robert, the last male descendent of the revered artist.

You two would sit there by the fireplace, beneath the large painting, with your faithful huskies sitting at your feet, a cup of black coffee or a libation in hand.

You would talk endlessly of youthful adventures on the sea, in wild forests, avoiding ‘sweepers’ while floating down some salmon stream in an old air-filled raft, dealing with dangerous winter sled dog races through sub zero winter storms.

You save for the auction.  You hope no one else has the attachment you do, or values the painting as you do.

The bidding begins and, to your surprise, the action is robust.  Hands raise and the auctioneer catches every outcry, wink and nod.  The price swiftly moves from $250 by one hundred dollar increments to $3,000, then with $250 increments to $5,000…well past your savings and pre-determined bidding limit.

A crowded and animated room — full of friends, neighbors, local business leaders, the museum director and the largest local art gallery owner — begin chasing $1,000 increments to a final sales price of $26,250.

You wish with all your heart — as you say good-bye to everyone and turn to walk home — that the familiar painting and its image could have hung over your own fireplace.  It would have been so comforting to sit in your own family room with Jake and a million memories, fire blazing under that familiar image.

How you wish you could have returned home with the prize!

Should you have forgotten your savings limit and simply captured that beloved image with credit card debt?  Wouldn’t it have been worth it to make payments for something so dear?

But then, reality settles in.  “I established the limit at what I knew I could have afforded”, you say to yourself.

“I knew that if the bidding took the price higher, I would be tempted to go into debt,” you thought.

You knew that debt at your age — and the effect of indebtedness on your family — would far outweigh the selfish satisfaction the prize would have given you.

Rational thought seemed to comfort you.

“I knew that sitting under the painting would provide fleeting satisfaction as I contemplated the impact of debt for the next five years”, you reminded yourself.

You knew that the simple joy of being with Jake — without the presence of the painting and its cost — would continue to be quite enough.

And, so it was, that while you coveted and wished for a thing that became unattainable, you soberly recognized the truly valuable elements of life.

And, I’m guessing that your last thought was one of gratitude to the great Creator who had given you a wonderful life, loving family, friends like Robert and a faithful companion.

Actually, your dreams have come true, haven’t they?

Second: A Gas Story

The efficient Arctic Gas Pipeline of the 1970s failed when a National Energy Board Decision upheld Justice Berger’s (See 6-14-02 entry)  recommendation for a Mackenzie River Valley, 10-year pipeline moratorium.  (Canada can be its own worst enemy, too.)

The Alcan pipeline project failed with advent of the 1980s, as gas prices plummeted and the project became infeasible.  Producers like ARCO studied LNG export options but those alternatives then were also infeasible.

Then the late 1980s recession along with lower natural gas prices (i.e. courtesy of gas deregulation) made virtually all oil and gas projects infeasible.

As gas prices recovered in the early 2000s, industry and governments began once again pursuing projects to monetize Mackenzie Delta and Prudhoe Bay gas — with separate overland pipelines to Canadian and Lower 48 consumers.

Then, a half-decade later, with the advent of new shale oil & gas technology and low, domestic prices, Arctic gas pipelines south became infeasible.

Arctic gas proponents then shifted their focus on LNG export options that had grown in feasibility.

By the mid 2010s, LNG feasibility had become more popular with the evolution of more LNG import demand, local distribution systems, shifts from other fossil fuel power generation projects and growing populations.

The Mackenzie Delta gas seemed more permanently stranded while Prudhoe Bay gas owners again began reviewing LNG alternatives.

The gas owners and large gas transportation companies seriously studying feasible ways to market gas from the 1970s forward, had always concluded that pipelines were cheaper after studying ALL alternatives, including LNG.

And, they had never delayed development of Alaska gas, from our first-hand knowledge, based on some allegation of bias against LNG export projects.

During those decades, Alaska LNG advocates, who did not own the gas, sought to use political influence to cause gas to be marketed via LNG transport through their own marketing organizations — with insufficient attention to project feasibility.

To use the left column analogy, they seemed to want to buy the dream at any cost, as long as someone else shouldered the major cost.

The gas owners, however, were not careless enough to allow gas to be marketed via — what was over those years — inefficient, self-serving LNG transportation project feasibility.

To this day, early advocates of LNG, continue to be upset with and demonize the gas owners.  The gas owners are North Slope producers, who have paid for leases and have the right to market the gas they discovered.

Alaska’s North Slope producers are among the most important companies in their industry, with LNG and pipeline expertise and oil/gas marketing expertise and world wide contacts.

They are best suited to create the most feasible projects and market gas most profitably.  Since Alaska’s oil & gas tax revenue rests on a percentage of value, the greater value obtained by producer experts will enhance the value of Alaska’s tax and royalty revenue.

The producers continue to professionally and diligently work this year.  Their effort will determine the feasibility, once again, of exporting Alaska North Slope gas.

But this time, there are nearly a hundred LNG projects hoping to compete for the limited demand in a very competitive market.

And Alaska is not one of the lower cost projects; that is, Alaska is attractive because of its vast reserves but unattractive because of its market remoteness, climate, logistical challenges, high labor costs and an unreliable investment (i.e. political) climate.

What is competitive?  Whereas LNG used to sell in Asia at a price range in the high teens per million Btu, the price now hovers, miserably, in the mid single digits in today’s abundant, shale-stimulated gas market.

It is also a reality that any investor in major Alaskan projects must know that once an investment is made in a jurisdiction with an unsustainable budget, the investment risk — the risk of wealth expropriation via predatory taxation — is great, perhaps too great.

Alaska LNG diehards, like the neighbor lusting after a long coveted painting (Above, column left), desperately want ownership in an LNG project — if they can get government to assure the project is built.  But at what cost?  At any cost?

We citizens and consumers are pretty objective.  We want to monetize Alaska North Slope gas profitably.  We don’t want to be in debt.  We don’t want to waste public money.  We want a stable economy.  We want and desperately need new oil and gas investments — from investors who trust us — to sustain falling production on top of rock bottom oil prices.

The LNG diehards, like Alaska’s governor who advocated infeasible LNG projects for their own special interests, now try to convince Alaskans something to the effect that, We will make a lot more money if we are equity owners in a gas pipeline.

But Alaska’s citizens and consumers are not stupid.  They have seen many (i.e. actually, “all”) Alaska North Slope gas projects die because of changing markets and technologies.

They know that while a gas project might be built at just the right time, it also might fail, as others have.

No one can predict today whether in 2025, when the Alaska LNG project is scheduled to go on line, it will be making money or losing money.

If Alaska’s government (and citizens) are equity owners of an economically feasible gas pipeline, they might make more money than they would as passive acceptors of 1) royalties, and 2) a severance tax, 3) a property tax, and 4) an income tax.

But if the pipeline costs more than shippers are willing to pay for transporting gas — or ends up with few or no credit worthy customers — Alaska could be in the disastrous position of being an part-equity owner that must PAY the difference between the cost of transport/financing vs. transportation income.

It has been said and pretty well confirmed that in energy and economic matters, “Alaska is its own worst enemy“.  How could any thinking person disagree, based on Alaska’s history?  This earned reputation lives on today, because of its history of predatory taxation, retroactive taxation, attempts to pass a reserves tax, and irrational, political hostility toward the state’s largest investors.

But now, citizens and legislators know the risky history of:

  • The Arctic Gas 1970-era project ; and
  • the 1980-era failure of the NW Natural Gas/Alberta Gas Trunk Line, Ltd. Alcan project; and
  • Failure of several generations of LNG advocates, including: El Paso Natural Gas; Yukon Pacific; Alaska Natural Gas Development Authority; Alaska Natural Gas Port Authority; and
  • the 1990-early 2000 Alaska Highway Gas Pipeline project (owned by TransCanada) and Mackenzie Valley Gas Pipeline failures (in which TransCanada participated with Canadian aboriginal groups).

The vast Alaska natural gas reserves certainly may justify investment by private energy companies in a new effort to monetize their gas.

The success of energy companies for well over a century has entailed risk.  But the risks are often acceptable because they are risking their own capital and because they are experts in the business.

In today’s world of increasing socialism, Alaska seeks to take equity risk, without having commensurate expertise, perhaps knowing that it can always just burden individual and corporate citizens, with new taxation, to keep government whole when the investment sours.

ADN by Alex DeMarban.  In December, 1,020 Alaskans who had been working in the oil and gas industry collected $1.1 million in unemployment benefits. That compares to 518 in December 2014, Lennon Weller, a state Department of Labor economist, said Friday.

Alaska faces a bleak economic future wherein its decision makers have allowed the state to become dependent on the fortunes of a volatile and risky oil business.  And that risk has led to an unsustainable economy destined for bankruptcy in less than ten years.  Of course, disaster could be averted with a “eureka discovery” of newfound wealth or a harsh, disciplined expense cut…so we need not be completely demoralized by the options.

Unfortunately, the governor whose experience rests on failed, self serving LNG advocacies, now advocates risking public money on equity risk in an LNG project when immediate economic realities threaten the state’s economic survival:

  • a state operating budget almost 90% dependent on Prudhoe Bay oil; and
  • a state economy over a third dependent on the oil industry; and
  • a Trans Alaska Pipeline System (TAPS) transporting Prudhoe Bay oil which is 3/4 empty; and
  • oil prices that are 3/4 lower than they were 18 months ago; and
  • oil production diminishing; and
  • a nearly $4 billion annual operating budget serving a population of fewer than 800 thousand folks, and
  • a multi-billion dollar state employee retirement unfunded liability; and
  • the highest per capita spending and debtor state in the nation; and
  • government constituencies seeking to impose new taxes and fees on the private sector so that the public sector can remain as unharmed as possible; and
  • impartial New York rating agency creditworthiness announcements revealing an increasingly dark, Alaska economic outlook, exacerbated by a higher cost of borrowed money.

No one wants to see the economically viable construction of a gas pipeline project more than this writer, having worked directly and indirectly for or with a number of them since 1972.

But we join fellow citizens in not being willing to support public money being invested in any company’s ownership, much less one involved in the highly complex, highly risky field of oil and gas.

As we walk away from the idea of paying more for pipeline risk than we can afford, like the neighbor in the other column, we can nevertheless comforted, if:

  • we have endeavored to act like adults, and
  • if we tried to be prudent custodians of public money, and
  • if we tried to restrain our zeal for a gas project in light of economic realities, and
  • if this is the heritage we should look back on later, once the present has become prologue.

We take final comfort in knowing that with many decades of gas pipeline experience, North American energy investors have the best chance of developing an economically feasible project.

Alaska’s North Slope producers have the best chance of succeeding, that is, if they can be treated reasonably and fairly in a prudent state — with malice toward none — that finally learns how to balance a budget based on a volatile but provident source of natural resource wealth.

Sure, we may not have had the gas monetization project I wanted, or you wanted, or the governor wanted.

But, acting now with intelligence and honor, and knowing our own limitations in expertise, we and the next generation may escape from a dreary outlook, into the bright light of a prosperous future featuring a feasible, profitable Alaska North Slope gas pipe dream turned into reality.