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.
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: “ 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.