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6-25-15 Uphill Road For An Alaska LNG Project

25 June 2015 8:18am

It's An Uphill Road For An Alaska LNG Project

Whether most Alaskans appreciate it or not, the best hope for a successful, Alaska LNG project is that Alaska's largest producers support it.  Today, we analyze why that so.


Dave Harbour

Alaskans have consistently supported higher taxes on Alaska's oil companies and higher spending on social services -- with some exceptions.  

The Alaska tax and spend model is not unlike the model employed nationally, in Washington D.C., except national leaders are capable of spending more than they take in by merely printing more money.  

Ultimately, that model taxes the public via inflation rather than directly, diminishing the value of the money as it lowers the value of individual savings and paychecks.  

The beauty of that model is that a future generation pays for the votes attracted by this generation of politicians.

As politicians increase tax levels, their overspending redistributes wealth to some individuals and to supporters able to maintain investments in real estate, land, capital projects and enterprises producing recurring revenue -- investments that benefit from inflation.

It can be and often is an intellectually dishonest, but effective formula for gathering reelection votes from some at the expense of others.  

Logically, that concept is unsustainable.  The concept is unsustainable because more and more taxation must end at some finite point and because ever higher government spending depends on that finite tax revenue.

As the unsustainable economy approaches, liberal lawmakers have historically found it quite tempting to unfairly demonize companies for not, "paying their fair share", and to embarrass fiscally responsible lawmakers for being, "uncaring and insensitive to the needs of...."

As we'll explain, the day of reckoning has now caught up with Alaska.  The state imposes high taxes, is depleting its remaining savings accounts while continuing its spending spree.  (No one can say Alaska's leaders were not warned!)


Alaska's elected leaders tasted an addictive elixir of $900 million in bonus bids from the 1969 Prudhoe Bay Lease Sale.

In 1971 Congress approved the Alaska Native Claims Settlement Act, critical to the approval of a project to transport the immense Prudhoe Bay oil reserve to market. 

Congressional approval of the Trans Alaska Pipeline System (TAPS) in 1973, by the tie breaking vote of Vice President Spiro Agnew, coincided with mid eastern turmoil, including the Arab oil embargo and a later takeover of Iran's monarchy by Islamic extremists, still in power.

So, oil prices remained high, for a time.

Alaska's government spending and tax policies were mostly controlled by democrats and a few liberal republicans during the decades of the seventies and eighties, when the high oil prices magnified the value of high production, around 2 million barrels per day.  

Yes, the former 'pioneering state' had now become addicted to a growth in income and spending phenomenon that is probably unique in the history of American states.  (Other states, because of the blessing of advanced 'fracking technology' are encountering tax and spend challenges, too.)  We believe none have reached the level of tax and spend excesses adopted by Alaska -- though Alaska could serve as a role model for the need to avoid unsustainable tax and spend policies.

When oil prices began to fall in the mid-eighties, many oil field and support industry employees -- and those dependent upon them -- left the state.  However, production was still strong and the state pretty much continued its march toward becoming the most attractive welfare state in the nation.  We are not aware of any significant social program anywhere that is not replicated in Alaska, and, at a high per capita cost.  

From the 80s onward, Alaska has became the highest per capita taxing and spending state and with the highest number of not-for-profit organizations per capita in the U.S., a vast number of which came to depend on government largess -- 90% funded by oil taxes. 

So now, TAPS' North Slope crude oil throughput has diminished by about 3/4, even though companies are working hard to find and produce Arctic oil.  
Because of its spending policies, Alaska's government operating budget has become about 90% dependent on TAPS' North Slope throughput.
Unlike the 80s when throughput remained high during a low price period, Alaska is now experiencing low TAPS throughput and low prices for that throughput.
This double whammy, though it would not have been unexpected by prudent planners, has caused chaos in Alaska's political model that requires ever higher oil revenue for ever higher costs of government.  Unfortunately, such circumstances can lead to a phenomenon known as an, "Economic Death Spiral", wherein higher and higher taxes produce less and less revenue.  While Alaska has not reached that level of hopelessness, the fact that the condition exists is sobering incentive to make the best possible decisions, early enough.
The 48" TAPS oil pipeline traces a path from the Arctic, over the mountains of Alaska to the Valdez seaport, some 800 miles.  TAPS was built mostly above ground, and insulated against the cold, so it could move the otherwise viscous oil in a warm-fluid state...even during many sub-zero months.  (In contrast, a gas pipeline would be mostly buried in the cold ground with cold gas flowing through it.)
But the day surely approaches -- says the 'prudent planner' within us -- when the warm oil throughput is so little and maintenance costs are so high and winter temperatures are so cold, that production must cease.
Who would be the first to suffer?  Not the oil companies.  They would dismantle TAPS, revegetate the right of way and transfer exploration and production budgets to more attractive areas.  
Those suffering from a TAPS shutdown would be citizens dependent on programs funded by oil tax and royalty revenue.  Especially vulnerable would be Alaska Native villagers who value 'subsistence' lifestyles, lifestyles which have become tethered to the benefits of oil money: health clinics, schools, airports, ports, SUV's, snow machines, fuel subsidies and myriad social programs.
The foregoing demonstrates why Alaskans are so focused on the need to both find and produce more oil...but also to market Alaska's North Slope natural gas reserves.
From Oil to Gas
For decades Alaskans have lusted over a project that would monetize the huge natural gas reserves on the Alaska North Slope, at least 35 Trillion Cubic Feet (tcf).
In other places, we have documented the history of Alaska's gas projects, all of which have failed to prove economically feasible.
Today, Alaska's three major producers have committed to creating a feasible gas project but have maintained their position over decades that any multi billion dollar gas pipeline project must have fiscal certainty.
In other words, we could not imagine investors putting another 800 miles of pipe in Alaska, along with a tidewater LNG plant, with the risk that the state will then increase taxes on oil and/or gas.  This could dilute the value of the investment--perhaps even to the extent that politicians could render the investment infeasible after investment decisions were made based on current tax statutes.
The state Constitution requires that the taxing ability of the state remain unabridged and that no legislature can take action that binds a future legislature.  A Constitutional amendment is likely required in order for elected officials to be able to provide large project investors with appropriate evidence of fiscal certainty.
Just as the project led by Alaska's producers (AK-LNG), approaches final sanctioning decisions, the Governor and Legislature are faced with the challenge of obeying the Constitution while meeting the reasonable, fiscal certainty needs of major gas pipeline investors.  And, they must do so as dependent constituents cry out for the government to, "Feed me, feed me".
Recently, the Governor of Alaska presented a letter to producers stating his willingness to work on fiscal certainty for the gas project, but not for oil investments.  The letter also named other 'demands'.
This is troubling for a number of reasons.  One reason we are troubled, is the reality that the owners of the gas are also the owners of oil.  What's to prevent gas investors from spending $60 billion on an Alaska LNG project only to have a predatory legislature/governor swoop in for an increase of oil taxes?  The result of unpredictable oil tax increases could be equally damaging to a gas pipeline investor's bottom line.  In short, we must suggest to Alaska's governor that fiscal certainty for a gas pipeline investor not applied to that investor's Alaska oil and gas activity is -- in our opinion -- no fiscal certainty at all.
Meanwhile, Alaska's gas competes with everyone else's. 
Our mid-Atlantic energy analyst friend, who prefers to remain unnamed, warns us today that the LNG market is becoming increasingly competitive.  Many of the three dozen North American LNG projects investors are considering will simply not remain economically feasible for a number of reasons unique to those projects.  
How will Alaska fare with its competition when most competing projects have:
  • more moderate climate and terrain
  • more inexpensive logistical costs
  • better proximity to the markets
  • gas reserves closer to LNG tidewater facilities (i.e. no cost for an 800 mile Arctic/Sub Arctic pipeline)
  • lower labor costs
  • lower political risks 


TODAY, the Vancouver Sun published this report that British Columbia Premier Christy Clark's government is recalling the legislature for a "rare summer session" to pass key legislation enabling a liquefied natural gas project.  
This would be BC's version of increased fiscal certainty.
Meanwhile, faced with this competition, Alaska continues to spend its depleted savings, allow run-away spending and make rather hostile demands on the oil/gas investors.  At the same time, the Governor and his Revenue Commissioner are hinting that oil tax increases are lurking behind the dark horizon.
Alaska's leaders from the Governor to every legislator better start accepting the fact that the large, North Slope oil and gas producers are Alaska's greatest economic friends.  They are the golden goose.  They are the human treasure which provides the money, technology and capability to explore for, produce and monetize Alaska's remotely located resources.  
Treating investors with courtesy, fiscal stability and good communication is the best way to both improve throughput of TAPS and entice a gas pipeline/LNG project investment.
The second best way to assure that prosperity is for elected leaders to do what they were elected to do: put Alaska's financial house in order.  Make the budget sustainable.  It may not be a pleasant job, but if today's crop of politicians can't do it they should make way for others who can do it.
Yes, the great, Alaska North Slope gas monetization project is on an uphill road.  Hazards abound as does competition and internal strife.  Great skill and determination are required to achieve the summit.
If Alaska's leaders can just rise to the occasion, summon the required diplomatic, communication and common sense attributes ... and recognize that their very best hope for success is a willing, capable and dedicated group of major producers ... great things can happen for all the participants.  
Otherwise, Alaska could find itself overtaken, outmaneuvered and outclassed by other oil and gas jurisdictions that have a greater ability to lead, cooperate, make wise decisions and act.
Will Alaskans snatch victory from the jaws of defeat, or will the gas monetization challenge be too great for this generation of leaders?
The AK-LNG project's window of opportunity seems still to be open.  For how long, we do not know.  We hope the state's elected leaders can muster the mighty effort required to accommodate the needs of investors to create the new gas project reality that Alaska's economy and citizens so desperately need.

·        There are many global players trying to enter the market, including over 35 projects seeking ground-breaking in North America

·        Prices of the underlying commodities have slipped dramatically. This includes crude oil (Far Eastern LNG is linked to oil prices), natural gas for LNG, and land-based gas deliveries

·        Japanese nuclear power is re-emerging after being shut down, and China (among others) are seeking more nuclear plants

·        The rate of demand for power appears to be slowing, in keeping with slower global economic growth (see charts below)

A report CITI crossed our desk today, which underlines (and adds to the count of) growing pains being felt by the global LNG market. In particular, this raises serious questions about the ability of LNG exports from the US to have much impact on raising the price structure for domestic natural gas


Dave Harbour, publisher of Northern Gas Pipelines, is a former Chairman of the Regulatory Commission of Alaska and a Commissioner Emeritus of the National Association of Regulatory Utility Commissioners (NARUC).  He served as NARUC's official representative to the Interstate Oil & Gas Compact Commission (IOGCC).  Harbour is past Chairman of the Alaska Council on Economic Education, former Chairman of the Anchorage Chamber of Commerce, and past President of the American Bald Eagle Foundation and the Alaska Press Club.  He is Chairman Emeritus of the Alaska Oil & Gas Congress.

Opinions or viewpoints expressed in this webpage or in our email alerts are solely those of the publisher and in no way reflect the opinion(s) of any affiliated company, person, employer or other organization.




24 June 2015 7:37am

 Committee on Natural Resources Chairman Rob Bishop commented this morning on a decision by the U.S. District Court of Wyoming to grant a stay of the Bureau of Land Management's (BLM) hydraulic fracturing rule. As a result of the decision, compliance with BLM's rule, which was originally intended to go into effect on June 24th, has been delayed until early August.

“This is a rule based on fear not facts that favors Washington bureaucracy over progress and science. The DOE and the EPA have both found fracturing safe yet the propagandist scare tactics go on. The ballooning lawsuits are an obvious sign of flawed policy. Back to the drawing board for BLM would be an understatement. The regulation is fundamentally wrong and should be ended entirely.  The U.S. District Court of Wyoming’s decision to grant this stay is a positive step in that direction.”




23 June 2015 12:33pm

U.S. Sen. Lisa Murkowski, (NGP Photo), today advanced her efforts to lift the current ban on most U.S. crude oil exports...

Lisa Murkowski, Crude Oil Exports, Iran Sanctions, U.S. Senate, Dave Harbour Photo...by releasing a report making the case that sanctions on Iranian oil should not be lifted without also lifting the current ban on U.S. crude oil exports. ThereportCross-Currents: Iranian Oil and the U.S. Export Ban, connects the dots between Obama Administration statements to support this argument.

“We are letting Iran export its oil to markets that we prevent our own companies from accessing,” Murkowski said. “Any deal that lifts sanctions on Iranian oil will disadvantage American companies unless we lift the antiquated ban on our own oil exports. The impending deal with Iran is at the center of the nexus between national security and energy policy.”

The release follows another Senate Energy and Natural Resources Committee report released earlier this month, Rendering Vital Assistance: Allowing Oil Shipments to U.S. Allies, which laid out the regulatory basis for other nations to request exemptions from U.S. oil export restrictions. Earlier this year, Murkowski and Sen. Heitkamp, D-N.D., introduced S. 1312, the Energy Supply and Distribution Act, which received a legislative hearing at the Energy Committee on June 9.


21 June 2015 7:02pm

Enbridge transfers liquid pipelines business in $30B deal – Business – CBC News

Enbridge Inc.is planning more investments in Canada's natural gas and power sector as well as pursuing global opportunities after freeing up cash ...

Calgary Herald, opinion by Peter Breedyeld.   ... the royalty review should change its focus from getting more dollars per barrel, cubic foot or tonne, to getting fossil fuels out of the ground faster.

This means giving royalty discounts to companies that can get new fossil fuel projects up and running faster, and streamlining the approval process to get projects approved faster.

Alberta is in a race against time. The G7 has made our great fossil fuel resources an economically perishable commodity, which we need to extract and export as fast as possible in order to maximize the value Albertans get from our fossil fuel bounty


20 June 2015 8:08am

Fraser Institute.  It’s been a difficult couple of weeks for Kinder Morgan’s proposed expansion of the Trans Mountain pipeline. The Santa Barbara oil spill has irritated already-sensitive public concern about oil pipelines. And as the pipeline’s review before the National Energy Board continues, several new reports commissioned by municipalities and groups in the region have expressed serious concerns about the potential effects of an oil spill.

One study found that more than one million birds might be affected by a spill and 100,000 could possibly be killed as a result. Another assertedthat millions of barrels of oil could erupt into flames, start a forest fire on Burnaby Mountain, stranding 30,000 students at Simon Fraser University. The latest report concluded that a 16 million-litre spill in the Burrard Inlet could deliver a $1.2 billion blow to Vancouver’s economy. Alarming scenarios indeed. But a focus on worst-case scenarios loses sight of what’s vastly more likely to happen, which can only be assessed by looking at the overall performance of pipelines, where progress in controlling spills has been tremendous.

According to Transportation Safety Board data, from 2009 to 2013 there were 770 pipeline accidents and incidents in Canada. Of this number, 654 resulted in some sort of release of product. Again, this mayseem large, but during this period Canada’s federally regulated pipeline system moved more than 11 billion barrels of petroleum and natural gas products, making the per barrel accident rate remarkably low.

More telling still is that only five accidents or incidents in this period resulted in any sort of environmental damage. This means....  (More)


19 June 2015 10:53am

Tim Bradner, Homer News, AGDC, state owned, take off points, taps, natural gas, gas pipeline, LNG, Photo by Dave Harbour, Morris CommunicationsHomer News by Tim Bradner (NGP Photo).  The state-owned Alaska Gasline Development Corp. has developed preliminary designs for “offtake” facilities that would allow communities to take natural gas from a large-diameter gas pipeline, if one were built.

The designs were presented to AGDC’s board of directors at its June 11 meeting.

CANADA'S ENERGY CITIZENS.  Canada’s oil and gas industry strives to continuously improve our safety record and the safe transportation of our energy products. When it comes to tanker safety we have a record to be proud of and we are always trying to improve.

Here are some facts you may not hear every day:

-Oil tankers have been moving ....  (Read More)

Under legislation allowing the state to participate in the large Alaska LNG Project, the state has the responsibility to designate up to five gas “offtake” points for communities along the pipeline route, and to assist in developing facilities including lateral pipelines, such as one planned to be built to Fairbanks from the route of the large gas pipeline.

The Hill by Timothy Cama.

A Senate spending panel advanced a bill Tuesday to block or weaken key Obama administration environmental rules on climate change, water and other subjects.

Lisa Murkowski, US Senate, budget cuts, Photo by Dave HarbourThe bill would fund the Environmental Protection Agency (EPA), the Interior Department and other related agencies at $30.01 billion for the 2016 fiscal year, about $400 million less than what Congress passed for this year.

The Hill by Deven Henry.

The House Appropriations committee approved a $30.17 billion Interior and Environment spending bill on Tuesday that cuts Environmental Protection Agency (EPA) funding by 9 percent and blocks key Obama administration climate rules. 

Lawmakers approved the bill on a mostly partyline vote, and much of the debate centered on measures in the bill targeting EPA policies. Republicans said the measures are necessary to rein in what committee Chairman Hal Rogers (R-Ky.) called an “unnecessary, job-killing regulatory agenda.”

“This administration has been hell-bent on implementing all sorts of regulations that are harmful to both our economy and our energy security,” Rogers said.

It would overturn the EPA’s rule asserting power over small waterways like wetlands and streams and prevent it from writing a strict new rule on ground-level ozone pollution.

Under the bill, administration officials would not be allowed to enforce the EPA’s carbon limits for power plants in states that object, or enforce the Interior Department’s regulations on hydraulic fracturing in states that already have such rules.

It is the first time the Senate has passed an Interior and EPA spending bill through subcommittee in six years.

“This bill aggressively deals with the EPA’s regulatory overreach on both the funding end and the sensible policy provisions,” Sen. Lisa Murkowski (NGP Photo), chairwoman of the subcommittee responsible for writing the bill, said at the Tuesday meetings to consider it.

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