Troublesome Alaska Gas Pipeline/LNG Issues Involve the Saving/Losing of “Face”

Opinion by

Dave Harbour

Understanding Asian culture and customs is critical for creating durable Asian business relationships

Alaska has historically enjoyed business relationships with various Asian countries, including China, the Republic of Korea (ROK) and Japan.  These relationships have traditionally evolved among private buyers and sellers of Alaska’s natural resources, including minerals, liquefied natural gas (LNG), timber and seafood products.  In some of these cases, government officials have used their ‘bully pulpits” usefully: to diplomatically support these transactions, but not “control” the process.

Since the discovery of Prudhoe Bay in the winter of 1967-68, Alaska North Slope and Canadian Arctic explorers and producers have studied ways of transporting gas from this remote region to southern markets.   Advocates have promoted about a dozen pipeline/LNG schemes over the decades until this time.  As we have shown, all of those projects have fallen prey to some combination of volatile markets, changing laws, predatory tax policies and, most notably. the amazing evolution of oil & gas shale technology over the past decade.

Governor Bill Walker. Northern Gas Pipelines photo by Dave Harbour

Today’s Alaska gas advocates continue to find eternal hope springing from LNG technology.  With shale technology creating massive new domestic supply and LNG export projects, Alaska’s gas has remained stranded.  Election of the current governor, Bill Walker, three years ago, brought new life to the LNG concept.  After all, at that time Asian gas markets were robust and the exploding shale revolution had not yet produced enough new supply to dampen Pacific area pricing.

As the years passed, however, increasing LNG worldwide supply suppressed prices and fathered a trend away from long term gas supply contracts toward short term deals.  Traditionally, pipelines and LNG projects had depended on the longer term (i.e. 20 years) agreements to provide security for financing the large capital requirements.

Two years ago, Alaska’s three major producers (i.e. BP, ConocoPhillips and ExxonMobil) reached a conclusion that the time had not yet come for financing and marketing one of the largest capital projects in history (i.e. $40-60 billion).  Their instincts proved accurate as large LNG projects continued to come on line and prices continued hovering a low levels.

But Governor Walker wished to continue pursuing the Alaska’s remote Alaska North Slope gas monetization project.  The producers who had been involved with the state in sponsoring studies of an LNG project withdrew active participation and Walker’s “independent” Alaska Gasline Development Corporation (AGDC) continued studying the project and participating with FERC in the regulatory process.  Some citizens continued to question the wisdom of pursuing what appeared to be a currently uneconomic project while the state was deeply mired in a financial crisis.

Simultaneously, Walker and the AGDC traveled to various Asian countries in the search for markets that could absorb large tranches of the 35Tcf gas reserves.  Successfully finding markets would have allowed the Governor to play a principal role in converting the reserves into cash and jobs.  The state retains ownership in its royalty gas reserves which it has the option of taking “in kind” and marketing it independently, or taking it “in value” as a royalty percent of producer-marketed reserves.   Producers would also be paying production and income taxes to the state and a property tax, or, a payment in lieu of taxes in the event the project were owned by the government.

The state, with support from the White House, achieved a series of meetings with the Chinese leadership earlier this year resulting in various memoranda of understanding among Alaskan and Chinese government agencies.  These, along with other agreements with Japan, the Republic of Korea and Vietnam are all courteous documentation, affirming that the parties are interested in working together to build an Alaska gas pipeline/LNG project and market the transported gas at some future time and under then appropriate conditions.

This writer would only caution readers that the Asian concept of saving and losing face could give great meaning to current political relationships between Alaska’s temporarily elected and appointed politicians and bureaucrats negotiating with the world’s largest LNG purchasers in Asia.

“Saving face” can be a concept as simple as not behaving before hosts or guests in a way that causes an Asian person embarrassment.  A westerner could “lose face”, by mistreating his host or guest.  The concept of losing or saving face may be more complex, too.  For example, how does an Asian say “No” to your proposition in such a way that you do not lose face, or, are not offended.

While the concept of “face” is similar among cultures, one seeking professional interaction in a specific culture could experience or cause loss or saving of face in different ways, if not properly prepared.

Here is a reference to the concept of face experienced in China.  Just imaging if you, as an Alaska elected leader asked the President of China, “Would you like to buy our gas? You have a great demand for gas.  President trump would be pleased, you know, to improve our balance of payments position through the sale of Alaska gas.  So, do we have a deal?”  Of course we know our Governor would be very proper and charming, but we think we understand the basic essence of the meetings.  We also understand that the Chinese would never say, “No, we don’t need/want your gas.”  But they might say, “Someday, when the time is right we would be happy to consider the purchase of your gas and we would be happy to sign memoranda to that effect.”

Yes, ConocoPhillips has shared a long history of Cook Inlet LNG sales to Japan.  Until recently, in fact, this was America’s only LNG export facility.  But the Cook Inlet gas was located near ConocoPhillips wells and transformed into LNG at a nearby, Nikiski location.  The current North Slope gas/LNG project has the burden of transporting gas 800 miles from the Arctic down to Nikiski and then competing in a low price LNG world with many LNG export projects located at tidewater (i.e. Australia, Indonesia, Sakhalin Island, etc.).  While with ARCO, your writer had the pleasure of working with a Japan LNG marketing effort and coordinating with a senior Nissho Iwai  executive.  The project proved to be infeasible during the 1980s, largely due to the huge burden of financing the 800 miles of pipeline, to Japan’s growing but still small market and to the relatively low, projected price of gas.  To the end, our friends displayed an interest in doing business with us, “when the time was right”.  See the video below re: the concept of face in the Japanese culture.

Why is the concept of face important to Alaskans.  Face is a concept that is actually universal.  That is, a good leader or good husband or good restaurant waiter finds it an advantage to not criticize employees, wives or customers in front of others, if at all.  In Asia, the concept of face is more ubiquitously studied and observed from the earliest days of childhood to the social and professional graces of adulthood.

Let’s say you approach one of Asian heritage.  This person is the product of centuries of social protocol.  You are an Alaska politician who wants to please constituents by monetizing Alaska’s remote and stranded, enormous natural gas reserves.

The major natural gas owners — dedicated to developing those reserves on behalf of their shareholders — have nevertheless counseled that, “now is not the time”.  We believe they have offered that counsel because of: current low prices of LNG, the current abundance of LNG, the trend away from long-term LNG sales contracts to short term and spot pricing, and Alaska’s SPECIAL PROBLEMS.

What are Alaska’s special problems?  Whereas most or many of the world’s LNG projects are located at or close to tidewater, enjoy temperate weather, enjoy low labor rates and have comfortable logistical access to supplies.

Nevertheless, we persevere.  Our government officials visit their government counterparts and are given wonderful greetings, dinners, serious meetings, entertainment.  In fact, our officials are treated better in Asian capitals than in any Lower 48 travel!

Their kind hosts would never want Alaskan elected officials — especially since they know President Trump who is on the rampage about trade deficits — to lose face.

So what is the lesson here?

When government officials visit with foreign officials they will ALWAYS be treated with exceptional courtesy that does honor to the Asian host as the guest is honored.  When an Asian government official courteously hosts an Alaska government official, that does not mean that the Alaska official will walk away with a durable, signed gas supply agreement, with a 20 year term, acceptable to Alaska’s producers as well, that will be acceptable to today’s citizens…and to those citizens who will be living with thaat contract long after today’s temporarily elected and appointed government LNG managers are gone and forgotten.

We appreciate the noble intent of some public officials to market Alaska’s gas.  We appreciate that Alaska’s peripatetic politicians are treated well by their Chinese communist, Japanese and Korean hosts as they travel.

But as Argentina and Venezuela have demonstrated, a socialist government owning the means, transportation and/or distribution of production is bound to fail under weight of the perverse incentives inherent to the political process.

NOTE:  Your author served for 13 months on the general staff as Public Affairs Officer for I Corps (Gp) on the Korean DMZ.  Reporting to LTG William P. Yarborough and his Chief of Staff, Arthur D. “Bull” Simons, Harbour was an Infantry Captain and graduate of the Defense Information School; he served as the primary contact between United Nations forces on the DMZ, local Korean governments and the news media.  Two decades later in Alaska, he served on the Civil Advisory Board of LTG Thomas McInerney, attended the Air War College and toured various Asian military facilities, even enjoying a formal tea ceremony served by the wife of Tokyo’s Mayor, in their home.  (Ref: Harbour’s OpEd, “Fishing on the Korean DMZ”.  He has toured much of China and the Russian Far East and served as Chairman of the Department of Commerce’s District Export Council for Alaska.)


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