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Alaska LNG Project Faces Market Challenges…And Political Challenges
Competition Perspectives: Part I (Part II, Part III)
by
Dave Harbour
Alaska and Mackenzie Delta producers are eyeing LNG exports to Asia as this generation's best option for monetizing Arctic gas.
Previous generations were close: with the Arctic Gas project in the 1970s (i.e. including TransCanada); displaced by the Alcan project in the 1980s (i.e. vigorously opposed by TransCanada); and the Alaska Highway gas pipeline project given new life with higher gas prices and passage of the Alaska Natural Gas Pipeline Act of 2004 (i.e. led by TransCanada).
Evolution of Arctic gas projects continued with Governor Sarah Palin's (NGP Photo) support of the Alaska Gasline Inducement Act (AGIA, 2007), giving a subsidy to TransCanada just as the great North American shale gas phenomenon began eliminating that market for expensive, Arctic energy.
However, with subsequent support from the Legislature and Governor Sean Parnell (NGP Photo), TransCanada's project evolved into a duet consortium with ExxonMobil, and more recently achieved significant alignment of interests with the State's Administration, Legislature and other producers.
Meanwhile, the state's operating budget is increasingly unsustainable, depending as it does on drawing down savings accounts in response to its 90% dependence on diminishing oil production.
With the Obama Administration seemingly doing everything possible to prevent oil, gas and mining activity on federal AND state lands (i.e. Readers are welcome to challenge us on this accusation and we will be happy to document it), Alaska's economic prospects are at further risk.
To add to the lack of optimism, in a diminishing oil production environment, a coalition of minority activist and anti-business groups is promoting repeal of Alaska's oil tax reform law (See yesterday's commentary)–though the majority of Alaska's private sector leaders oppose repeal.
The Senate Bill 21 reform effort was passed into law less than a year ago after years of analysis and debate about how to increase investment and natural resource production, royalties and taxes. Repealing SB 21 would send a dramatic signal to the investment world that in Alaska, "A deal is not a deal".
Now, the state's economic hopes are focused like a falcon's gaze on hopes for a gas pipeline and LNG export project whose prime market would be Asian consumers.
However, just as changing domestic gas markets over the last 45 years have killed hopes and plans for monetizing the huge Arctic gas reserves, so now do the furies appear to be conspiring against Alaska's export hopes.
In Canada, a number of LNG projects have been approved or are in mature permitting stages — by a supportive federal government — and seem to be mostly targeting Asian markets.
Even though Japan's Fukushima tragedy resulted in more demand for LNG, Japan is also considering lower cost coal as a competitive alternative, which diminishes consumer appetite for more expensive LNG imports. We note that Japan has been one of the most prospective markets for Arctic gas.
Meanwhile, members of Congress who have studied the issue are telling the Administration that unless the Department of Energy increases the approval rate — and decreases the backlog — of LNG project applications, markets could be lost 
to other energy sources.
The Department of Energy's LNG export function — under direction of Assistant Secretary for Fossil Energy, Christopher Smith (NGP Photo) — seems to be increasing its approval activity.
| Fuel Fix. Oil industry and business groups have formed a new coalition to make the case for expanded exports of American natural gas.
The “Our Energy Moment” campaign, which is described as a grassroots organization, aims to counter the arguments of export foes, as the Obama administration weighs applications to widely sell liquefied natural gas overseas. |
An increased approval rate for Canadian and Lower 48 LNG projects is certainly good for North American economies.
Logically, a larger number of LNG exporters means more competition for an Alaska project.
Most projects will be attempting to secure long term supply contracts with utilities and/or large industrial users. As those markets become satisfied with the growing number of current LNG projects, Alaska North Slope and Mackenzie Delta gas will surely have a more challenging time — as later comers — elbowing their way into market niches that will pay top dollar for long term contracts.
We suspect that one saving grace of current Arctic gas projects is the high degree of expertise focused on their successful outcome. In particular, we note that many if not most of the Alaskan and Mackenzie Delta producers have LNG experience and some affiliated interests with each other and even with Canadian west coast and Lower 48 LNG exporters.
Where does this leave Alaskan citizens and investors?
- In six months, Alaskans will vote on whether to stabilize or destabilize their investment climate. Depending on the referendum's outcome, we can envision either massive new investment in the state or massive withdrawals of capital investment plans, over time.
- If the August plebiscite favors investment, we can envision all parties attempting to fast track gas pipeline timetables. If the vote repeals tax reform, we see a gloomy end to this generation's plans for monetizing Alaska gas.
- In the next three years, the Obama Administration will either ease up on Alaska or continue its nearly perfect record of opposing, slowing and/or stopping every major development they can in the state. If projects can be sanctioned under the federal assault, more oil and gas can contribute to a sustainable economy. If federal pressures continue and even increase, prospects for more oil, gas and mining production are limited.
In conclusion, we cannot overstate the importance of the August referendum vote on whether to repeal Senate Bill 21.
This is because repeal of SB 21 would recreate an investment climate that has minimized what could have been sufficient investment to stabilize if not reverse waning, North Slope oil production.
As we have demonstrated above, Arctic gas LNG projects will have a challenging enough time finding a market niche even in the best of circumstances. But repeal of SB 21 will, in our view, totally emasculate the investment climate along with plans for a gas pipeline.
We would also offer this additional perspective on the highly lauded, state financed, in-state gas pipeline project, under control of the Alaska Gasline Development Corporation. That project was designed to meet growing demand for natural gas as a heating and power supply for the majority of Alaska's population.
But with 90% of the state budget depending on oil production — along with a third of Alaska's economy — repeal of SB 21 would result in growing job losses and a massive, lemming-like out-migration of citizens from the state over the next five years.
In such circumstances, existing natural gas supplies will be more than sufficient to supply the survivors without the need for or expense of a new, in-state gas pipeline.
Finally, we invite those seeking optimism to find it by joining us in seeking a stable tax environment and for more powerfully exercised state's rights in the face of an overreaching and predatory federal government.
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