Is the ANS gas glass half full or half empty?

by

Dave Harbour

Tim Bradner has a long history with the Alaska oil and gas business.  With his brother, the former Speaker of the House of Representatives, Mike Bradner, he brings to his clear-eyed journalism a sharp and accurate political perspective. 

Tim Bradner. Northern Gas Pipelines file photo by Dave Harbour

His ADN article today illustrates Bradner’s grasp of Alaska’s current Alaska North Slope (ANS) gas challenge, “Alaska Needs Options For Its Natural Gas”.  Sadly, Alaska is truly needy and, put another way, one could say, “Alaska has no current options for its enormous, stranded, North Slope gas reserves.”

Today, we supplement this analysis with a note of reality, ending with a plan for prosperity.

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

The article opines that, “Walker points out, rightly, that finding markets for North Slope gas is hugely important for the state’s economy.”  We would add that Alaska has already identified potential LNG markets: the Lower 48 and Asia.  However, North America has an overabundance of its own conventional and gas shale reserves and Asia has plenty of competitive LNG sources that do not have the liability of an 800 mile Arctic gas pipeline to finance.  Accordingly, Alaska’s Arctic gas must for the foreseeable future be low man on the totem pole for Asian gas markets, when it is compared with tidewater gas from more temperate zones from Australia and Indonesia to Qatar.  

Therefore, logic leads us to support the article’s observation that, “Some Alaskans look askance at Gov. Bill Walker’s continued quest for a gas pipeline, particularly one led by the state.  It hardly seems like the thing to do, given our multibillion-dollar budget deficit.”

Harold Heinze. Northern Gas Pipelines file photo by Dave Harbour

Few people in Alaska have a better political and technical background of Alaska’s North Slope gas conundrum than former Arco Alaska, Inc. president, Harold Heinze.  He’s quoted in the article as believing that, “…having the governor out waving the flag is the best sales effort Alaska can have, particularly in Asia where official status is important.”  But logic also leads us to conclude that in light of Alaska’s immediate budget crisis, spending money to market a currently uncompetitive commodity cannot attract respect from hoped-for buyers.  

Further, since the biggest fiscal crisis in Alaska’s history would appear to require the greatest effort in history to resolve, one wonders if every hour and dollar spent on “marketing” an uncompetitive commodity now actually contributes to a bigger/faster financial crisis.

And, let’s face it:

What if suddenly, next week, LNG prices went through the roof and Alaska’s producers found willing signers for 20-year “take or pay” contracts on ANS LNG for the huge volumes available?  That would be just great, wouldn’t it?  But any tax and royalty revenue due the state government would follow completion of  LNG transportation and liquefaction facilities 8-10 years from now … and, that’s over a half-dozen or more years after the state has already spent its nearly empty savings accounts subsidizing an unsustainable bureaucracy … and even then it would shoulder an unfunded liability in favor of its retired municipal, state, university, primary and secondary school employees of between $8-10 billion, or more!

Heinze wisely added that, “…its a tough market.  LNG prices are about half of what is needed…,” and noted some potential alternatives, shipment of natural gas in a converted liquid form through the Trans Alaska Pipeline System (TAPS) and/or shipping gas directly to markets from the increasingly ice-free Beaufort Sea coast above Prudhoe Bay.

Richard Peterson. Northern Gas Pipelines file photo by Dave Harbour

Mead Treadwell. Northern Gas Pipelines file photo by Dave Harbour

Bradner also interviewed longtime Alaska Gas To Liquids (GTL) advocate, Richard Peterson noting the premium price the liquid gas could attract.  Having spoken recently with former Lieutenant Governor Mead Treadwell on this subject, we also appreciated Bradner’s interview with him revealing interest in the ANS shipping concept and the fact that Russia already moves LNG south from its own Arctic production areas.

After reviewing Bradner’s report, one wants to optimistically conclude that, indeed, the glass is half full.  For, not only does Alaska have the great, ANS gas potential, but with a more reasonable federal administration one logically anticipates better access and regulatory reasonableness affecting the vast oil, gas and mining resources within Alaska’s federal lands and its off-shore waters.

But, but while the future potential is good all the way around, today Alaska is in what financial advisors might call a, “cash flow crisis”.  When a business with good future potential is in a cash flow crisis, it may keep its doors open with great expectations.  But optimism doesn’t make payroll and a serious effort is needed to bridge the gulf of low cash flow.

This is where we believe that the first step of the 12-point path to recovery is required.  While Alaskans maintain optimism for the future, they must also accept reality and admit that today the glass is, indeed, half empty.  Financial survival of the state is at stake.  Thousands of well paid private sector employees have already been laid off with many more “reductions in force” to come.  A quickly approaching real estate crisis amid overall economic malaise is possible if not likely.

So where do the facts lead us?  How to we move from this glass half-empty state to the full glass state of fiscal sustainability?  

While we’d love to have you comment below on your own ideas, here are a few for you to consider:

  1.  Immediately stop searching for ways to subsidize uneconomic energy projects.  A state rapidly going out of business cannot afford that luxury…if it ever could.  Kill forever the concept of forcing “renewable portfolio standards” on Alaska’s utilities and consumers.
  2. Immediately suspend all ANS gas/LNG project activity and costs to state government (AGDC); producing and marketing energy is not the role of government.  Venezuela and Argentina and Brazil and Mexico have proven that socialized manipulation of energy projects creates corruption and hurts citizens.  Period.
  3. Stop the embarrassing and spendthrift “marketing” of Alaska gas to savvy markets that know Alaska’s gas is not currently marketable.  They are not dumb!
  4. Support rather than demonizing or over regulating or over taxing the great Alaskan oil and gas and mining companies.  They are the state’s future financial salvation and its largest investors.
  5. Improve Alaska’s Constitutional limit on government spending to give fiscal certainty to future investors who, with good reason, have learned that under current policies the 49th state is an unpredictable and addicted spender — a threat to investment.
  6. Focus all governmental efforts on making the state government sustainable, as its own Institute of Social and Economic Research (ISER) has so long recommended.
  7. Cut programs and governmental agencies much more: to a sustainable level based on the projected volatility of the state’s major source of revenue: oil and someday gas, coal, and metals.  Make these cuts before further damaging the faltering economy with taxes.
  8. Proudly admit that Alaska is a fossil fuel state.  That is reality.  If one continues to pretend that ‘diversification’ is the key, just note that most diversification is uneconomic and attracts more citizens and programs requiring government services while exacerbating new budget crises.                        

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If Alaska can admit it is a natural resource dependent state, create a lean government budget that pays its way during low natural resource commodity times — while allowing savings to accrue during high price commodity times — it can truly become what its founders and Congress intended for the new state: a state that can survive and pay its own way by virtue of its natural resources.

This may be the most logical and best way to evolve from a state with a half full glass to one whose cup runneth over.