8-21-17 Alaska LNG Project Subsists On Subsidies

Alaska’s Government Gas Pipeline/LNG Project Still Treads Water

We fear government owned/subsidized projects — even wasteful or uneconomic ones — produce support industry crony capitalists who become dependent on the client and supportive of socialist government benefactors and candidates for public office.  A misplaced fear?  You be the judge.

by

Dave Harbour

In spite of low prices and unprecedented competition in the gas/LNG industry, Alaska’s government subsidized North Slope gas monetization project continues to tread water, shall we say, “gasping for air”.

Alaska Governor Bill Walker. Northern Gas Pipelines file photo by Dave Harbour

It seems to be awaiting a life-saving miracle as it responds to regulatory questions, keeps staff and contractors employed and manages ‘marketing’ offices in Tokyo and Houston.

To us, the only way this socialized pipeline project can have a hope of achieving reality is if the Federal government foolishly donates  about $40 billion to Alaska as a faux-infrastructure measure.  Investors from Japan and the Republic of Korea are polite to Alaska’s leaders but their “Memoranda of Understanding,” pretending interest in Prudhoe Bay gas, are meaningless diplomatic bribes to keep communication channels open.  The options for LNG buyers include low cost LNG projects located at or near tidewater (i.e. Australia, Indonesia, Russian Far East, Middle East, Etc.), Vs. Prudhoe Bay gas which must be transported by a buried, refrigerated pipeline, some 800 miles from the North Slope to tidewater before it can be liquefied and loaded onto cryogenic tankers.  That expensive pipeline must be included in the price of transportation — unless government subsidizes it — a liability not shared by Alaska’s major competitors.

A proposed Alaska LNG export terminal would be located at the end of an 800 mile Arctic gas pipeline…. This scheme to monetize Alaska North Slope gas competes with worldwide tidewater projects with less expensive logistics, less infrastructure burden to finance and lower labor costs. Alaska’s governor and the state’s government owned pipeline project, in desperation and in the midst of fiscal crisis, seeks federal support subsidies to compensate for the uncompetitive pipeline bureaucracy it has created. -dh

So, Alaska’s pro-government=owned gas project governor, Bill Walker, has asked that President Trump make Walker’s bureaucrat pipeline a part of the pending federal infrastructure program.  With gifted federal dollars, the project could avoid a bloated capital cost that includes the 800 mile Arctic and sub-Arctic gas pipeline.  Government pipeline officials could then say they were, “more competitive with other Pacific Rim and Middle East, tidewater gas export projects”.

Talk about crony capitalism.  Such an imprudent expenditure by Washington would make Obama’s Solyndra pale by comparison to this Alaska boondoggle.

Here’s our gentle response to some millennials among us who might wonder, “What’s wrong with government running an energy project?”

Those of us who have, the hard way, become familiar with Alaskan politics know that a project run by temporary elected and appointed government officials can only end in disappointment.   Those not wishing to repeat the errors of history will remember that Alaska once provided government subsidies and equity investment, low interest loans and grants to the likes of uneconomic dairy farms, barley growers, grain silos, and a gold-plated, seafood processing plant.

An enormous, multi-billion dollar LNG project investment would be one of the great mistakes not just of Alaskan history but of U.S. history.  Even federally guaranteed government loans would encounter the same risky obstacles.

The public would soon become aware of:  1) tension between politicians and producers over project labor differences, hiring practices, export gas prices and unpredictable/predatory tax policies; 2) political tensions as project bureaucrats request more subsidy; 3) project tension as potential buyers demand more engineering, design and financing plans — since final FEED, much less FID mileposts — have yet to be achieved; 4) Interstate tension between Alaska and taxpayers around the country; and, 5) countless constituent tensions as the project faces risks of: non-completion, force majeure, gas price fluctuation, buyers reneging on gas purchase agreements, reliable throughput commitments, inappropriate political pressures applied to project bureaucrats, employment offices; and 6) law enforcement tensions arising from predictable contracting graft and corruption, cronyism and nepotism.

So, yes, Alaska’s world-class, bureaucrat-controlled gas monetization project is alive.  It may be alive today, but at best it is treading water until one or more of the inherent liabilities above — or, another — overcomes its struggle to impersonate a prudent, free market energy project.

Another threatening reality could cause Governor Bill Walker’s struggling, government gas scheme to expire more immediately:  Alaska’s current fiscal crisis.  That crisis is characterized by gross and uncontrolled government spending and diminished revenue caused by low Prudhoe Bay production and low oil prices.  Adding confusion and fear to oil and gas investor conversations is the reality that the current governor and half the Legislature favor increasing Alaska’s already predatory industry taxes, following an already turbulent, 45-year tax history.

That tax history includes discriminatory and retroactive industry taxation and perennial political threats to impose a tax on natural gas reserves–even if a gas project’s economics are infeasible.

With the state still spending billions more than it takes in, our statement to Forbes last year stands: “Why would anyone invest in a state that has one foot over the edge of a precipice and the other standing on a banana peel? What we need to show investors is that in Alaska a deal is a deal.”

When Alaska’s political leadership matures to the point of seeking just and fair tax and spending policies, we believe investors aplenty will renew their search for economic projects.  And that will also be the time when temporary politicians and appointed bureaucrats realize that supporting the free market is how best to generate economic prosperity.

Just watch Venezuela’s Nicolás Maduro.

And, for those needing more examples, look at the experience of one investor in Alaska and Argentina: Repsol.

Washington, D.C. – On Thursday, August 24, 2017 at 11:30 AM EST, U.S. House Resources Chairman Rob Bishop will host a press call to discuss the Trump Administration’s review of National Monument designations and reforms to the Antiquities Act of 1906.  Stand by for news….


12 Comments

  1. Tom Zimmerman August 22, 2017 at 10:09 am - Reply

    Even though I have a vested interest in the oil and gas industry to see a pipeline built ,I totally agree it is not in the best interest in the long term for the state to ” go it alone” for the stated reasons in this article. I have been here long enough to have experienced all the states debacles throwing billions down the rabbit hole never to be seen again. I applaud you for efforts in trying to right the listing state fiscal ship.
    I flew with Urban Rahoi to his camp in the Wrangle mountains when the Delta Barley project was in the middle of clearing 250,000 acres or so. His comment was “look at the worlds largest moose pasture in ten years”. He was not far off. It has basically grown up with willows now; a favorite moose food. I do not know what the answer is but to get the word out to more people who could perhaps see the light. This is what happens when you strangle the golden goose. I am venting.
    thanks for your efforts.
    Tom

    • wpnorthern August 22, 2017 at 11:53 am - Reply

      Thank you, Tom, for the thoughtful response. Dave

    • wpnorthern August 30, 2017 at 8:45 am - Reply

      Thank you for commenting, Tom. To me, you are not venting but like many of us are concerned. We are heartbroken to see the free enterprise, pioneering traditions of self reliance give way to greed, incompetent state budgeting, and creation of the greatest magnet welfare state in the Nation.

      I knew Urban, too. Unfortunately, there few like him anymore.

      I appreciate you and the time you took to comment. I’ll look forward to receiving more from you whenever the Spirit moves you!

      Dave

  2. Bill Gwozd August 22, 2017 at 11:50 am - Reply

    Hi Dave,
    My thoughts:
    1. We should consider LNG offshore on the north slope for say 6 months a year with direct tankers to markets? a 4Bcf/d supply equals 1 tanker per day, so would need a fileet of 18 tankers. If so, we could invest in extra tankers (say another dozen) to transport after 6 months, though have the tankers wait ‘somewhere’ extending the life to 7 months from 6 months a year. Concurrenty, we could invest in ice breakers to keep tankers moving say an extra month or so, thus aiming for deliveries up to mid Nov and resuming around mid April with ice breakers. I would think the last tanker ‘convey’ in Nov would be with an ice breaker. I talked about this cocept in one of my annual Inuvik speaches 6 and 5 years ago. The thought here is to bypass the long haul gas pipeline.
    2. We would have to think about the remaining 4 to 5 months as what to do with the gas. It is too much gas for power generation and too much gas for petrochem, though Gas to Diesel might be the route and if so, the diesel could be stored in the winter, and transported out in the summer.
    3. My concept is to break the gas into a summer and a separate winter solution. By eliminating the long haul gas pipeline, the LNG project might have stronger economics since Alaska north slope has tidewater access
    4. The technocrats will offer rebutal, though looking for alternatives to commercialise stranded gas is required, so whether my ideas come to fruitation or other ideas, that does not matter, rather looking for new alternatives is what we need to do
    W. P. (Bill) Gwozd, P. Eng.
    President, Stranded Gas Commercialisation Group

    • wpnorthern August 22, 2017 at 1:01 pm - Reply

      Good to hear from you, Bill.

      I have never thought of the idea of a two season solution to Alaska’s stranded gas. Your creative and elegant concept may well be the answer that makes the cut someday. Our friend, Richard Peterson has been laboring on behalf of a GTL solution but politics, regulation and Alaska’s peculiar location worked against the odds, until now. Still, the low price environment will be a challenge to any Arctic gas transportation project. I hope we can stay in touch and appreciate your taking the time to put the concept down for all to see and mull over. Dave

  3. Bunny Chong August 22, 2017 at 5:59 pm - Reply

    It is a LOT to read but Al and I will definitely read not only YOUR information, but the comments that are provided. Thank you for keeping us “informed.” Bunny and Al

    • wpnorthern August 23, 2017 at 12:36 am - Reply

      Your feedback is always valued, Bunny and Al; thank you! Dave

  4. […] Alaska’s Government Gas Pipeline/LNG Project Still Treads Water Northern Gas Pipelines, Dave Harbour, August 21, 2017 […]

  5. Mike Prax August 26, 2017 at 8:08 am - Reply

    Thank you Mr. Harbour for providing a well thought out perspective on the Alaska Gasline Project and thank you Mr. Zimmerman for placing the general interest of Alaskans above your personal interst in business construction of the gas line would bring – that is exactly the charactor quality that is needed today to promote a civil society for tomorrow.

    • wpnorthern August 28, 2017 at 5:26 am - Reply

      Thank you so much, Mike. Such reinforcement means much to me…and also to fellow readers and commenters. Dave

  6. Richard Peterson September 2, 2017 at 9:22 am - Reply

    Dave another well written and thought out commentary. Two things come to mind reading your comments and those above. First President Trump just placed import tariffs on bio-diesel coming from Argentina

    “Argentine biodiesel exports will be priced out of the U.S. market, its leading industry body said, after Washington decided on Tuesday to impose steep duties on imports that it said were unfairly subsidized.”

    Wouldn’t the world LNG producers say the same thing about Alaska LNG if the Federal Government gives it $40 billion to mover forward. Could they go to the World Court and ask that AK LNG be deemed unfair to the rest of the world. Could Japan, China or other Asian markets be forced to reject lower cost AK LNG?

    Two season solution. Good idea and the Russians are already doing this with their ice class LNG tankers and their large fleet of ice breakers. I think the US has one or two. I see a major price drop for AK LNG in this scenario. If you can only supply LNG in non winter months then you will have to seriously discount your LNG vs a supplier who can supply year round. How much is the discount? I have no idea but I suspect it will be large.

    Dave likes to point out that there has always been a year round option that uses the under utlized TAPS pipeline capacity. Gas to Liquids. With today’s technology you can produce a synthetic crude oil to run down TAPS. The capital costs of a North Slope GTL plant are unknown. That said Shell built a 140,000 bbl/d GTL plant in Qatar in 2008-2012 and it cost twice ($9+ billion) what their FID number ($5 billion) was. Ok first you would never build the GTL plant on the North Slope. You would build modules around the world and float them to Prudhoe Bay just like all the major facilities on the Slope were. You might even use the same procedure the ARCO Salt Water Treating Plant did. Build the plant in Asia on an enclosed barge, tow it to Prudhoe Bay and leave it on the barge. So lets assume that the Shell 140,000 bbl/d plant originally estimated at $5 billion now costs 6 times more for Alaska. That is still $30 billion, much less than the AK LNG project. One final point I like to make. If you can sell the 35 trillion cubic feet on the North Slope at $3 per mmbtu (that is higher than the Henry Hub price today) you will generate $95 billion in gross revenue for the gas sale. That same 35 trillion can be converted into 4.2 billion barrels of liquids. Sell that at todays price of crude oil, $50/bbl and you generate over $210 billion in gross revenue. One final point. If you take the current AK LNG project and the currently proven North Slope gas reserves you deplete the reserves in under 25 years. If you limit the GTL program to 200,000 bbl/d it takes almost 50 years before depletion. What do you want a 25 year life or a 50 year life at a higher revenue.

    • wpnorthern September 2, 2017 at 10:19 am - Reply

      Another perceptive comment, Richard. Thank you for continuing to add to the body of Alaska energy knowledge. One never knows when the right time will meet the right company with the right commodity with the right technology to produce an economic project. But one thing we know for sure: neither Governor Walker nor President Madura can force either Alaska or Venezuela to SUCCESSFULLY transform a bureaucratic sow’s ear into socialist silk purse. Onward…. Dave

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About the Author:

Dave Harbour, publisher of Northern Gas Pipelines, is a former Chairman of the Regulatory Commission of Alaska, a Commissioner Emeritus of NARUC, NARUC's Official Representative to IOGCC and Vice Chairman of NARUC's Gas Committee. He served as Gas Committee Chairman of the Western Conference of Public Service Commissioners. He also served as commissioner of the Anchorage Bicentennial Commission and the Anchorage Heritage Land Bank Commission.He earned a Bachelor of Arts Degree: English, at Colorado State University, a Master of Science Degree: Communications-Journalism at Murray State University and graduated from Utility Regulatory School for Commissioners at Michigan State University. He served as a Vice President for Communications and Public Affairs at Alaska Pacific University, taught bank marketing classes at the University of Alaska and was an English teacher at Los Alamos High School.Harbour served in ranks of Private - Captain during a 4-year assignment with the Army in Korea, Idaho, Georgia and Fort Meade and received the Meritorious Service Medal among other commendations.Harbour is also a past Chairman of the Alaska Council on Economic Education, the Alaska Oil & Gas Association Government Affairs Committee, the Anchorage Chamber of Commerce, the Export Council of Alaska and the Department of Commerce's District Export Council. He is a past President of the Alaska Press Club, American Bald Eagle Foundation, Consumer Energy Alliance-Alaska and Common Sense for Alaska.Harbour was instrumental in founding the American Bald Eagle Research Institute (UAS), the Alaska Support Industry Alliance, the Downtown Anchorage Business Partnership, and Arctic Power.He also served as CEO of several small Alaska organizations, including the Anchorage Parking Authority and Action Security, Inc. Harbour is also Chairman Emeritus of the Alaska Oil & Gas Congress.Harbour's wife, Nancy, is a professional, performing arts administrator and his three boys, Todd, Benjamin and William work in the fields of environmental management, energy marketing and medicine.