Our Commentary: Alaska Gas Commercialization & Fiscal Crisis

See tomorrow’s Christmas Eve gasline, tax, fiscal crisis editorials from Christmas 2001

On the subject of the adjacent column stories we would observe (as more fully documented throughout this webpage) that:

  1.  The original Alaska North Slope and Mackenzie Delta gas PIPELINE projects, involving your author, were economically feasible for a time but derailed by Alaskan/Canadian politics and enviro-political activists in the 1970s.

  2.  Alaska North Slope and Mackenzie Delta gas PIPELINE projects were on the one hand, uneconomic, and on the other hand delayed in the 1980s by macro-economic realities.

  3.  Alaska LNG projects promoted in the 1970s, 80s, 90s were never economically viable.

  4. Alaska North Slope and Mackenzie Delta gas PIPELINE projects reawakened in the early 2000s due to attractive gas prices.

  5.  Alaska North Slope and Mackenzie Delta gas PIPELINE projects were delayed in the mid-2000s by economic realities brought on by advanced oil and gas shale technology which produced an oversupply of gas.

  6. The oversupply of gas created by the shale revolution reduced prices in North America — but not the world, as yet — and made LNG export projects economically feasible and Arctic gas pipelines uneconomic.

  7. To this day, the Alaska North Slope LNG project is not economically feasible due to the rapid development of more economically attractive LNG export projects throughout Canada, the Lower 48 states, Australia, Indonesia, the Mid-East and elsewhere.

  8. Alaska’s current North Slope LNG export project is one of the most uneconomic of all currently competing, North American export schemes.  Why?  Because competing projects are not grounded to Arctic climatic, working conditions, labor costs, logistical expenses in addition to hostile environmental forces and a state government which has demonstrated time and time again that it presides over an unreliable investment climate.  Some of its leaders regularly demonize the very investing companies that discover and produce the gas at great expense.   Its elected officials constantly threaten the imposition of new or higher taxes.  Its government has not only enacted predatory oil taxes but applied them retroactively.  It offers tax incentives for exploration and limits those offers to favored companies.  After tax incentives have been offered and expenses accrued, the government delays or refuses to deliver the promised incentives.  Finally, any energy investor exercising due diligence will find that the national credit rating agencies have been steadily downgrading bond ratings due to the 49th state’s lack of budget discipline.  With a large, annual budget deficit, politicians are now talking more and more about imposing new and increased taxes.  

  9. Finally, investors will note that Alaska is led by an Administration intent on spending more public money promoting LNG exports — at a time of deficit.  The state leadership is intent on pursuing its LNG project when oil industry investors have indicated that now is not the time to risk more capital on an LNG export project…and, when the value of gas worldwide cannot yet be expected to elevate an expensive, Alaska project over its competitors.

    Alaska’s governor and legislature are poised as January approaches to begin a new legislative session.  We believe the state would be well advised to cut its operating expenses to the sustainable level recommend by the University of Alaska’s Institute of Social and Economic Research (about $4 billion) and focus 100% on its fiscal crisis.  It should put its LNG pipe dreams on hold and return previously budgeted LNG promotion money to the general fund.  It should only persue and actively and financially support an Alaska North Slope gas commercialization project when those most capable of making that decision are willing to undertake the risk to do so.  

    In short, the state should support rather than demonize industry investors because the fortunes of the former are, after all, dependent on the success of the latter.