Alaska’s Imprudent LNG Project
Reader question: Should Alaskan Politicians Align Their State’s Future With Communist China’s — or, instead rely on free enterprise development of Alaska’s natural gas transportation system–WHEN IT BECOMES ECONOMICAL? Scroll down to answer in comment section.
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As my kids would might say, it blew my mind this week when China’s news blog, Xinhua, announced, “The Alaska Gasline Development Corp. (AGDC) said on Thursday that it has signed up the state-run Bank of China (BOC) and leading U.S. investor Goldman Sachs to help raise funds for its 43-billion-U.S.-dollar liquefied natural gas (LNG) project.”
We must note before proceeding that $43 billion is the lowest estimate from a bureaucratic Alaska agency (AGDC)of an LNG project that has no FERC approval, no financing plan, no final investment decision, no long term customers and a scheme that is not competitive in today’s highly efficient, low-price LNG trading world. An earlier high-end estimate for the Alaska scheme is closer to $60 billion.
Why would Alaska, climbing into bed with China on a long-term, multi-billion dollar energy deal, raise the hackles on the back of my neck?
Well, to start with, The United Nations, including the U.S. and South Korea, are still at war with China and North Korea, having signed only an ‘armistice’ on 27 July 1953. Defying logic, Alaska seeks a good faith, long term relationship with communist China–not the paragon of good faith partners. That could change with ongoing negotiations, but our experience tells us to view Chinese/North Korean promises skeptically.
The state’s governor, Bill Walker, a lawyer, has been a decades-long advocate for failed LNG export projects. Two years ago, as governor, he took over the LNG study project led by Alaska’s three world-class producers, BP, ConocoPhillips, ExxonMobil. After many hundreds of millions of dollars spent on Arctic gas transportation project research over the decades – and more recently — they had concluded that the time for an Alaska LNG project had still not yet come. Yet the long-time advocate, Walker, was now in a position to ask the three if they minded if he took over the project. What could they say? No doubt the three must have doubted the wisdom of such a decision, especially since the governor’s deep pockets had a large hole in the bottom, now referred to as Alaska’s fiscal crisis!
Over the past two years, Walker and his AGDC team have opened “LNG Marketing Offices” in Tokyo and Houston. Some say he’s spent more time working on this bureaucratic pipe dream than on the state’s threatening fiscal challenge. Various state financed entourages have made many pilgrimages to China, The Republic of Korea and Japan. Korea and Japan energy officials have provided diplomatic “Memoranda of Understanding” that express polite interest in importing Alaska Gas, someday.
China has shown greater interest. Somehow, Walker was able to convince Commerce Secretary Wilbur Ross, and President Trump, that supporting Walker’s dream with President Xi would be a winning idea that would support Trump’s infrastructure plans. At a meeting last November in China, Trump and Xi witnessed the signing of a so-called “Five-party Joint Development Agreement (JDA)”. Two of the five parties are Alaska state government interests and three are Chinese government-run oil and finance corporations. Like the Japanese and Korean documents, these are largely diplomatic agreements to someday reach some type of binding, commitments.
To overcome a growing skepticism, the Alaska administration is conducting a full-court-press effort to convince Alaskans that China is a valuable trading partner, not deserving of a bad rap. The China Daily recently promoted an upcoming, May trade mission Walker and his staff are planning. It quoted Alaska officials as saying that, “China is the biggest customer of Alaska seafood, buying over $796 million last year, more than any other country and an increase of 27 percent from 2016, they said. Alaska has profited from selling other resources to China, including over $355.8 million worth of metal ores and millions of dollars of forest products in 2017. China’s purchase of these resources adds significantly to a healthy and diversifying statewide economy across Alaska without ceding control or management of these resources….”
Of course, China need not have Alaska “cede” control or management of its resources in order to make its influence felt as the state’s largest trading partner—especially if it plays a major role in a multi-billion dollar LNG project upon whose royalties & taxes the state might come to depend.
And, we would observe that private companies selling fish, minerals and timber to China are far different than politicians committing the entire state to a long term relationship with a communist government that may or may not be backing North Korean aggression in the near future…and which may or may not become more aggressive as America seeks with its Japanese and Korean and Taiwanese allies to take a stand for protecting traditional East and South China Sea neutral transportation corridors.
The major Alaska producers are not a part of the Alaska LNG project because they believe that this is not the time. Are the Iditarod state’s politicians better gas traders, economists, pipeline/LNG engineers than the world’s greatest energy companies?
The government of Alaska has, in effect, expropriated the Ak-LNG project which is now owned, managed and operated by temporarily elected and appointed Alaskan politicians and bureaucrats making long term deals with communist China. What could possibly go wrong?
Though LNG prices are trending away from long term contracts, toward spot and short term contracts, Alaska needs long term gas sales/LNG purchase agreements to create a successful finance plan. However, the project in any case is infeasible because it must force a costly 800 mile Arctic pipeline into any finance plan which would compete with highly efficient tidewater projects around the world. The majority of those venues are in milder climates with better logistics and cheaper labor.
The socialist-leaning governor is now trying to convince his Legislature to cede a constitutional responsibility by giving him carte blanche authority to accept funds from third-party investors in connection with the LNG project. His bureaucrats would allocate borrowed funds for some purpose, under some terms, committing some collateral or good faith that will escape the requirement for a legislative appropriation and associated legislative hearings, etc. Twin specters of corruption and the probability of unacceptable risk rise.
We have observed, not altogether in jest, that this entire scheme reflects the bold and imprudent action of a huge state with a tiny population – and a correspondingly tiny gene pool — overseeing what may be a majority of the country’s remaining natural resources. Adding to the spectacle, we should remind readers that Alaska’s Governor pursues this pipedream fantasy while trying to create a subsidized, uneconomic natural gas utility in Fairbanks and has acted to voluntarily increase Medicaid coverage — further exacerbating the state’s fiscal deficit.
Meanwhile, the state struggles amid a multi-billion dollar fiscal crisis caused by overspending, mushrooming of what has become a world class ‘welfare state’, and imprudent dependence on oil as the source for over 85% of its operating budget. Today, its leadership tries to convince rating agencies, the White House and editorial boards that the state’s management is prudent.
We are certain that China’s government-owned banks and oil companies do not care whether Alaska is prudent or spendthrift. China’s long term planning obviously involves values not limited to profitability. We have witnessed China’s imperialistic values at work while recently observing their economic hegemony sprouting like hothouse mushrooms from Panama and South America to Africa and back to the East and South China seas.
Alaska’s political management is not, in our opinion, prudent and the hackles on the back of this Alaskan’s neck are stiffer than ever after writing this.
Dave Harbour is former Chairman of the Regulatory Commission of Alaska and the Export Council of Alaska. He also served as Chairman of the Alaska Council on Economic Education and the Anchorage Chamber of Commerce. One of Harbour’s earlier Washington Times Op-Eds, “Fishing on the Korean DMZ”, also dealt with China. He is a Commissioner Emeritus of the National Association of Regulatory Utility Commissioners and Chairman Emeritus of the Alaska Oil & Gas Congress. Harbour is a former President of the Alaska Press Club.