|Between an overreaching governor who seems intent on commanding if not socializing Alaska's energy industry, and a President who seems intent on crippling if not shutting down Alaska's energy industry freedom is threatened on America's Last Frontier. Today we explore why this is so. -dh|
To our hundreds of Canadian readers: We apologize for the lack of news directly affecting you today; but we must focus on an Alaska Governor who exhibits a certain hubris impacting both the energy industry and Alaska's future. You may find object lessons which also apply on your side of the border. In this not very well organized stream-of-consciousness video, Governor Walker repeatedly emphasizes that his gas reserves tax idea is not intended to punish industry. He goes on to say that he has a budget problem that must be addressed. He adds, unbelievably, that he has no problem taking over the energy industry if it does not conform to his will. Watch out for fireworks ahead! -dh
Alaska LNG Project Risk
Is Alaska's Reliance For Government's Equity Participation In A Multi-Billion-Dollar LNG Project Based On Rosy or Reliable Assumptions?
Yesterday, our radio host friend, Glen Biegel (NGP Photo) asked that we join him for an Alaska LNG project discussion. Most of the discussion revolved around a Black and Veatch document commissioned by the Alaska Department of Natural Resources. Download the B&V study here.
Because these are difficult, complex subject areas, we invite readers to send us additions/corrections.
We have endeavored for nearly 15 years to create the most complete, accurate, and searchable (Upper right column search box) northern energy archive existing anywhere.
To do this, we have relied on our readers in government, industry, academia and the media.
We are more than an energy industry; we are the basis for North American wealth, security, wellbeing and quality of life.
Therefore, it is not only our industry that is under attack at international, federal and local levels, but the foundation of our free society as well.
Let us keep the faith, for a civilization depends upon our continued success, though we don't often think of it that way.
Thank you for your support and steady stream of emails and phone calls.
Listen to part of our Black & Veatch conversations here (Dave Harbour Interview; Glen Biegel and Tom McGrath discuss legislative session and socializing industry; Senator Cathy Giessel on the Legislative Session); especially interesting are the discussions about risks not enumerated in the study.
This writer has concluded that the B&V paper does not rise to the level of a "study" partly because of the noteworthy omission of project risks, but also because, as it states, a good deal of the data for the paper was provided -- without critical analysis -- by the Governor Bill Walker administration's Department of Revenue.
The paper attributes other input to the state-owned Alaska Gasline Development Corporation (AGDC).
In yesterday's Alaska Journal of Commerce (AJOC) report by journalist Elwood Brehmer, Walker was quoted as saying of the B&V paper: "I appreciate this objective review of the consequences of the state purchasing or not purchasing TransCanada’s share of the (Alaska LNG Project)...."
Here, Walker offers a deceptive statement to the people of Alaska. The review is not "objective", as he promises, because it uses Administration input to support the Governor's desire to seek maximum equity position in a highly risky project whose risks are understated or ignored by the B&V consultants.
As close as the paper gets to 'risk factors', can be found on Page 49 which itemizes the paper's assumptions. The "implied" risks are, therefore, associated with how reliable the "assumptions" turn out to be.
The AJOC piece reports that the, "...overall cash flow to the state over the first 20 years of operations would increase $7.4 billion, or about 6 percent, without TransCanada (TC), according to the report. It estimates annual state revenues in the $3 billion to $5 billion range, totaling $76.7 billion over 20 years with TransCanada’s participation and $84.1 billion without the extra partner."
But this and all other projections are based on the Page 49 "assumptions".
For example, do our readers think that:
- This massive project will be completed by 2025/26? If not, there will be a cost of delay. That is a risk. Does having the state involved in the decision making create delays? The paper says the state can hire some of the TransCanada technical experts should the state buy out TC; either way, could personnel disruptions create delay? B&V says on Page 46 that no technical delays are "expected". In short, the rosy revenue picture depends on everything going as "expected". And, if things don't go as "expected", if the "assumptions" don't pan out, well, that will be a budget problem for a future administration and legislature. Don't increased project costs result in a revenue requirement demanding higher, less competitive LNG tariffs?
- The State's royalty will be taken 'in kind' (RIK) as opposed to 'in value' (RIV)? What do readers think; should Alaska's royalty gas be taken 'in kind'? Taking gas as RIK means the state thinks it can market its own gas for a higher price and under better terms than the producers could get. BP, ConocoPhillips and ExxonMobil are some of the most effective, successful, sophisticated, well connected gas marketers in the world. If the state would just take the royalty in value (RIV), as cash, the producers would sell royalty gas along with their own and the state would be the beneficiary of their expertise in achieving the best possible price. It really does seem like egotism-gone-wild when a governor thinks he can successfully joust in a quixotic adventure to negotiate better than those whose entire world-wide business is based on obtaining the best value for their oil and gas resources. In essence, Alaska's gas marketing effort, if it takes royalty gas "in kind", will likely be directly competing with the gas marketing efforts of the producers. Isn't it likely that the state could at some point say to the producers, "You need to back off trying to market to xxCompany/Country. That's where we want to sell our royalty gas"? Accordingly, a new state gas marketing bureaucracy the Governor creates to market gas is untried and unproven and should represent to Alaskan citizens another grave, risk factor not vetted by B&V. (Note: Yes, we are aware that the producers want Alaska to take the royalties they owe "in value" because it supposedly creates better "alignment" among the state and private pipeline participants. We would only caution what what may look like 'alignment' today could more resemble a relationship nightmare later.)
- The Alaska LNG project will cost $45 billion in 2015 dollars, when producers have always said the project could be expected to cost in a range between $45 - $65 billion? The final and best cost projection for the project's capital cost is not currently available but the governor wants decisions to be made in the special session based on a pretty flimsy assumption that the project's capital cost is limited to $45 billion. If, as is likely the case, the project costs more, the tariff increases, gas sale income decreases and Alaska LNG becomes less competitive with other sources. This is a huge risk. Is that huge risk really what citizens want their government to embrace?
- Long term oil prices (upon which B&V) bases a gas price, will be about $85 per barrel? A year and a half ago, the price was over $100. Now, Alaska crude is valued in the $45 - $50 range. So what if the long term price is $45 or less? Do Alaskans seriously want to bet their future on oil prices rising to $85 or more? Because if that dream does not come true, the Alaska investment will be worth much less and at some point the state could be required to sell its gas by subsidizing the transportation costs (and, with what money?).
- Alaska will be able to sell its royalty gas under this formula: 13.5% x Oil Price + $1? But our June LNG price reports demonstrate that the spot market in Japan has tumbled from $18/MMBTU over a year ago to $7.65 this past June. If Alaska were in the business now, it would still have to pay the transportation tariff even though it would lose money on the gas sale. An important risk for citizens to accept with the Walker approach, is that the state may or may not make enough from sale of its gas to pay the transportation tariff. Since part of that tariff goes to pipeline/LNG owners and since Alaska's governor wants to be an owner, there is a very real risk that the state would have to move money from one pocket of the general fund (i.e. for a tariff payment) to another pocket of the state (i.e. as tariff income). The risk is that the state marketers, in a volatile world LNG market, would not be able to "break even". Meanwhile, can you imagine the headlines, the legislative hearings, the conflicts between gas owners, gas transporters, gas marketers and politicians? One would hope for unimaginable consensus and good will; one fears for unimaginable strife, threats, demonizing and economic uncertainty. Note: the governor has said he seeks a 51% equity position in the project. Increased control means proportionally increased risk.
- The cost of debt will be 5% and the return on equity will be 12%. Since the 2008 recession/depression the federal government has gone deeper than ever into deficit spending, with current debt approaching $20 trillion. The Federal Reserve sold bonds (i.e. and incurred debt thereby) to raise cash for deficit spending but has also engaged in QE, quantitative easing, the selling of even more debt for the stated purpose of providing more liquidity to the market place. When you have a lot of something, its value decreases. Accordingly, with the volume of money increasing, the cost of debt has stayed in the low single digits during these years. Money has been cheap. Older citizens will remember the inflated interest rates of three decades ago rising to the level of 18-21%. So this B&V assumption that for the 20 year life of a project debt cost will remain low, in the 5% range, constitutes a predictable and likely risk. If project borrowing rates increase, another assumption is affected: the return on invested equity (ROE). Many of the risk factors above, if not appearing as enticing as B&V and the Governor hope for, could have a drastic effect on the ROE hoped for by pipeline owners. Oil companies are used to taking such risks; it is part of their business and they have become proficient in operating in that risk environment. Do you believe a state government should gamble its resources by undertaking the types of ownership risks discussed here? As an observer, all we ask is that citizens accept such risk to their economic future with eyes wide open, not just on the basis of an - in our opinion - incomplete paper provided by a consultant who obtains his raw input from a biased client.
In addition to the "Assumptions" B&V listed, we would add these:
- Additional cost risk could increase the overall tariff which could make LNG from this project uncompetitive with gas from other LNG exporting countries. Competitors include but are not limited to Australia, British Columbia and the Lower 48, among many others. Most of those projects enjoy all or some of these natural advantages over Alaska:
- gas at tidewater, no need to pay for an expensive, 800 mile Arctic pipeline.
- less expensive operating climates.
- less difficult geography and port challenges.
- lower labor costs.
- lower logistical costs.
- closer proximity to markets.
- The B&V paper concludes with the statement on Page 47 that, "This presentation was prepared for the State of Alaska (“Client”) by Black & Veatch Corporation (“Black & Veatch”) and is based in part on information not within the control of Black & Veatch." While the state and consultant will surely respond that, "Well we put his sort of statement at the end of all of our work products," it should, nonetheless, be taken very seriously by citizens of Alaska whose economic future rides on decisions made, in part, on the validity of information the Walker-purchased paper provides. In essence, this statement points out the risk -- if not the likelihood -- that information provided to the consultant is one-sided, wrong and/or misleading.
Credit worthiness. The rating agencies have calculated increased risks to investors in Alaska. Those risks include: 1) a deficit budget, 2) an unfunded state employee pension liability rivaling Detroit's a few years ago, 3) lack of discipline to cut spending, 4) the propensity to add new entitlements (i.e. Medicaid), and 5) the tortuous relationship between the state tax and regulatory authority and its largest investors. The agencies and a multitude of New York analysts also consider, 6) the reliance of the state on one source of revenue and the tenuous reliability of that revenue source on an oil pipeline that is running nearly 3/4 empty. Accordingly, the risk of lowered bond ratings could increase the interest rates Alaska will pay on General Obligation and/or Revenue Bonds. An increase in interest rates could dramatically alter the happy picture painted by B&V and its client. Are Alaskans prepared to support this and all the other potential risks noted here?
First, the Governor has said he wants legislators to consider a gas reserves tax to use as 'leverage' against the producers; apparently he believes that threatening producers with a tax on gas that is not being marketed will force them into investing billions into a gas project in the event they should not want to pursue a project--or find it infeasible.
But -- as of today, as Senator Giessel noted -- the Governor has provided the legislature with no draft bill to accomplish his idea of a reserves tax. (The video gives our readers a revealing perspective of the Governor's position on matters he wants the special session to cover. What do you make of it?)
The Governor also wants the legislature to consider whether to end the relationship with TransCanada Pipe Lines, Ltd. or not. But neither has he provided draft language to implement his TC desires.
* * *
Our editorial position expressed a hope, when Governor Walker won his election, that he would be successful.
But we have carefully followed his progress. We find, as further substantiated by many recent reports, including this one, that the emperor is not fully clothed.
With humility, we still believe he could develop a positive working relationship with the State's major investors. With courage, he could work with the legislature to craft a sustainable budget. With good judgment, he could seek wise counsel from good counselors rather than dictating policy emanating from an unsuccessful, decades-old career in his quixotic but failed search for an Alaska LNG project.
We seriously hope he can still achieve that dream, for his success could be Alaska's success. We are also certain he will fail again unless he changes his attitude.
His rigid pattern of wanting to force an LNG project into reality "his way", is not the way to create one of the largest construction projects in the history of the world. He often suggests that this is what his past governor mentors, Bill Egan and Wally Hickel, would do in pursuing the interests of an 'Owner State'. Many older Alaskans knew both of the former governors well and some might say, "I knew them and I know Governor Walker; Governor Walker is not them."
Such an enormous accomplishment (i.e. as a major Alaska North Slope gas monetization project) can only materialize with the enthusiastic, voluntary support of the free market, encouraged by a governor's unselfish but firm, diplomatic and inclusive leadership skills.
So far, Alaska's leaders have not very well articulated the risks associated with government ownership of energy projects. Hopefully, the Legislature will identify the risks and make sure that citizens do not see gas pipeline ownership as a sure bet for billions in future revenues.
Since the early 1970s industry as attempted and failed to produce an economically feasible Alaska North Slope gas monetization project. Luckily. For if the project had been built earlier, various economic cycles (i.e. circa. 1996 & 2007) could have killed it.
Today's citizens should not focus on dreams of future dollars. If they ignore the enormous risks, they may ignore the billions their governor wants to spend or borrow now, in his determination to command and control private sector energy projects.
In such hands may rest the largest, most dangerous risk of all: the risk of flawed judgment.
- Tom McGrath - Glen Biegel
- Glen Biegel - Dave Harbour
- Senator Cathy Giessel - Glen Biegel
|Quote of the day from our Aussie O&G analyst friend:
...from an anonymous letter circulating in Saudi Arabia, said to be written by an unhappy faction of princes:
“We will not be able to stop the draining of money, the political adolescence, and the military risks unless we change the methods of decision making, even if that implied changing the king himself.” (Our Note: between this, Amerca's poor leadership and Russia's Mid-East adventure, oil and gas prices may not be in a week what we believe they will be today. -dh)
Today: Doyon, Limited, a major Alaska landowner, describes its aggressive exploration program for oil and gas in an accessible area west of Fairbanks, in Interior Alaska. Read more (thanks to Doyon's James Mery)....
A president leading his nation toward disaster
When one considers the Administration's passive-aggressive opposition to virtually all fossil energy projects, he reveals himself to be an enemy of American public interest.
We have described these and many other attacks on the U.S. economy by this administration.
The pattern is undeniable.
Were the Congress not so lacking in self-confidence and determination to defend the Constitution against all enemies, both foreign and domestic, they should have authored impeachment charges long ago.
So now, just consider that one important result of denying the export of plentiful American oil, is to minimize international demand for U.S. oil shale and other energy projects--that could improve national security, dramatically increase employment of American citizens, neutralize much of the balance of payments deficit, reduce the national debt and improve U.S. leadership in the world power vacuum now being filled by a Russian leader-- a man with fire in his belly and traditional leadership skills, no matter how badly perverted they may be.
Denying American energy exports is a frontal attack on the free market, on the wellbeing of American companies and citizens.
It is yet another act that comforts America's enemies and denies benefits to allies and other friends of the United States.
It is another sign of a leader coaxing his flock to follow him to a cliff overlooking a very deep canyon, from which there is no returning.
“It is unfortunate that the White House fails to understand the national security and geopolitical benefits of lifting the ban on oil exports. Ask Poland, which is 96 percent reliant on Russia for its oil, or Japan, which must continue to rely on Iran, if U.S. oil ‘is not needed at this time.’ The veto threat reveals a fundamental misalignment within the administration. These policy contradictions merit further attention. Regardless of what the president’s advisers may tell him, congressional legislation has become necessary: even though he has the authority to act, he has not – even though the time is right, the need is clear, and the global dividends promise to be significant.”
In July, the U.S. Senate Energy and Natural Resources Committee, chaired by Murkowski, reported favorably her bipartisan bill, the Offshore Production and Energizing National Security Act (S. 2011). If enacted, the bill would fully repeal the outdated restrictions on exporting American oil, while preserving the emergency authorities of the president to act during emergencies.
Calgary Herald by Bloomberg's Jeremy Van Bloom.
Enbridge Inc., Canada’s largest oil pipeline operator, plans to spend $38 billion through 2019 on new projects including liquids and natural gas lines, as well as power generation and gas processing, chief executive Al Monaco said.
“We have so many opportunities, but many come with a higher degree of risk,” he said during an presentation to investors Wednesday in Toronto. Enbridge’s previous spending plan lasted from 2014 to 2018 and had $44 billion of projects.
Enbridge is focusing on expanding “low-cost, incremental” projects like twinning existing pipelines to provide producers with new transportation capacity as they struggle with low crude prices, Monaco said. The company’s $7.5-billion Line 3 replacement is the largest project. More...
|Juneau Empire by Elwood Brehmer. Gov. Bill Walker’s proposal to increase the state’s share in the Alaska LNG Project could put Alaska on the hook for more than $14 billion....|
Is EPA A Lawless Agency?
We are sorry to hear today that our friend and former Alaskan, FERC Commissioner Phil Moeller, will be leaving the agency at the end of this month. However, FERC's loss, in our opinion, will be another organization's gain.
We offer him our very best wishes. -dh
We've had significant evidence over the last seven years that the EPA and other agencies reporting to the current administration regulate Americans and their businesses outside of the rule of law and due process.
The report we provided readers yesterday substantiated that observation.
Here, today, is an official comment from the Alaska Miners Association. -dh
* * *
International Business Times by Maria Gallucci. The Trans-Pacific Partnership could boost exports of some U.S. energy supplies by making it easier to ship and sell the fuel to Pacific Rim nations. The biggest recipient likely would be Japan, which is eyeing deliveries of American liquefied natural gas to replace output from its nuclear power plants.
The 12-nation agreement completed in Atlanta this week is expected to call for the “national treatment for trade in natural gas,” a provision that would lower regulatory hurdles and cut tariffs among members of the free trade pact. If approved by Congress, the TPP likely would require the U.S. Department of Energy to approve automatically all gas exports to the 11 other nations, potentially accelerating LNG exports.
* * *
ADN by Alex DeMarban. A new report offers reasons why Alaska would benefit by buying pipeline builder TransCanada out of the Alaska LNG project, including that it would make an extra $7.4 billion over two decades of operation.
The downside is that without TransCanada, the state would have to pay an extra $7 billion to $8 billion upfront to cover construction and other costs.
* * *
Here are two vignettes from conversations our mid-Atlantic energy expert had today:
· The bad news: A producer told me today about some monster production from a Marcellus well last month, that netted sixty cents per mcf.
· The good news: A midstream specialist told me about presenting at the Marcellus Shale Coalition Conference in Philly last month. We had presented there three years ago, so we compared notes. We mentioned that there had been about 2000 protesters outside the Convention Center, in full throat and bearing little similarity to sane people. He said there were a fair number of protesters this year, too. He went out and tried to confront one scruffy young man who was carrying a placard. “What’s your complaint about developing our natural resources?” The response :
Wait for it…
“I haven’t got any complaint. I was just hanging out in the park, and they came and offered me $50 to carry this sign. I needed the money.”
(So much for dedicated, environmental activists! -dh)
Our respected, mid-Atlantic Oil & Gas analyst friend tells us today that weather trends do not work in the favor of natural gas prices, as follows:
"Regular readers know our devotion to studying weather patterns, partly because they can have significant impact on energy supply/demand, but mostly because we find it interesting. Every month we forward the monthly Browning World Climate Bulletin. It is without peer both its forecasts and its educational content on the subject.
"For the time-constrained, here is the summary updated fall-into-winter forecast:
"Summary: The strong El Niño is expected to last until spring and fade to moderate through spring. This, combined with the Icelandic volcano should allow rain to return to the South in autumn and produce a cool wet winter in the southern tier of states and a warm dry winter in Canada and the northern tier of states.
"This is not good news for the natural gas market. In fact, it is just about as gloomy as it could get. We should point out that this Bulletin is closely read by commodity traders, given it great track record. This fact is likely a contributing factor to the depressed Henry Hub price (closed at $2.47 today, and the 12-month strip is $2.71).
"For new people to the Bulletin, we urge them to give it at least a quick review. It is a tremendous education about how global weather works. This is NOT a global warming piece; it is about weather."
Statement from the Alaska Miners Association referring to a Cohen Group report issued yesterday, and about which we reported here:
Today, the Cohen Group released a report detailing its findings from an independent review conducted on the Environmental Protection Agency’s actions at the Pebble Project. The Alaska Miners Association has issued a Press Release, attached to this email, with its response:
The Alaska Miners Association (AMA) today welcomed the release of the report of an independent review by The Cohen Group evaluating actions by the U.S. Environmental Protection Agency (EPA) at the Pebble Project and called upon policymakers to thoroughly review the findings to ensure future investment in Alaska.
Decision reached on Stream 2003 Reservation of Water applications
(Anchorage, AK) – The Division of Mining, Land & Water’s Water Resources Section has issued its decision on the Chuitna Citizens Coalition Inc.’s three Reservation of Water applications for Middle Creek/Stream 2003, a tributary of the Chuitna River. These applications were requested to protect flows for the purpose of protection of fish and wildlife habitat, migration, and propagation, one of the four purposes authorized by Alaska Statute 46.15.145.
The decision was signed on Oct. 6 by Water Resources Section Chief David Schade and published today. The decision grants a Reservation of Water to the Chuitna Citizens Coalition in the lower reach of Middle Creek/Stream 2003. The decision does not grant the applications for the main reach and the middle reach of Middle Creek/Stream 2003. This decision does not award any water rights or permits for mining-related activities.
Before granting a Reservation of Water, the Water Resources Section must make four findings required by AS 46.15.145(c): “The commissioner shall issue a certificate reserving the water applied for under this section if the commissioner finds that,
(1) The rights of prior appropriators will not be affected by this reservation;
(2) The applicant has demonstrated that a need exists for the reservation;
(3) There is unappropriated water in the stream or body of water sufficient for the reservation; and
(4) The proposed reservation is in the public interest.”
In this case the Water Resources Section also received competing water right applications for use of water in Middle Creek/Stream 2003 to support PacRim Coal LLP’s proposed coal mine. When it receives applications for competing uses from the same source of water and there is not enough water to supply all applicants, the Water Resources Section is required to balance the interests involved and give preference to "the use that alone or in combination with other foreseeable uses will constitute the most beneficial use." (Alaska Statute 46.15.090)
In the decision, Schade wrote that he found two arguments regarding the Reservation of Water applications to be compelling. First, the applicant made a compelling argument that the Department of Natural Resources should not allow PacRim to develop a coal mine that would significantly and negatively impact the Chuitna River watershed, and second, the Alaska Mental Health Trust Authority and others made the compelling argument that while the state and federal permitting processes must be stringent, they must also allow for a predictable and complete permitting process that allows all available information to be compiled and presented to the state and federal regulatory agencies.
“The Water Resources Section will analyze the entire Chuitna watershed and the consequences and protections of the different proposed uses. This review will occur after other mine-related permitting is complete and the best information is available for all the Chuitna water right applications," Schade said.
"I really appreciated the public’s involvement in this process. We received more than 8,500 comments and held a hearing on the objections raised by a number of groups with conflicting views about this decision. This involvement was helpful in making the best decision possible,” Schade said.
Division of Mining, Land and Water Director Brent Goodrum added, “This decision culminates a vast amount of hard work and public participation on these applications. The decision provides for the continued protection of fish and wildlife habitat within in the Chuitna River watershed. The decision also allows for a continued rigorous evaluation of the proposed coal project by state and federal regulators.” He also noted, “This decision is unique in that it is the first time that the State of Alaska is awarding a water reservation on state waters to a private entity.”
By issuing this decision, the Department has complied with and fulfilled an Alaska Superior Court order to issue a decision on the Chuitna Citizens Coalition’s Reservation of Water applications. The decision may be appealed to the Commissioner of the Department Natural Resources within 20 days.
To read the decision and related documents, go to http:// dnr.alaska.gov/mlw/water/reservations/chuitna.cfm.
Note: Reservations of Water are also frequently referred to as Instream Flow Reservations.
DNR Newsroom: http://dnr.alaska.gov/commis/dnr_newsroom.htm
DNR on Social Media: http://dnr.alaska.gov/commis/social_media.htm
DNR Public Information Center: http://dnr.alaska.gov/commis/pic/
Here is a piece we have posted in the last 24 hours on our NGP Facebook and Twitter pages re: Alaska's economic future.
Today's Wall Street Journal Editorial: "A new report takes apart the EPA’s veto of a mining project" (Thanks for the tip, Dan Kish.)
In an accompanying piece the WSJ notes:
Our columnist Bret Stephens writes that at the President’s Friday press conference, Mr. Obama described alternatives to his Syria policy as “mumbo-jumbo,” “half-baked ideas,” and “as-if” solutions. “So it is with this president. It’s not enough for him to stake and defend his positions. He wants you to know that he thinks deeper, sees further, knows better, operates from a purer motive. His preferred method for dealing with disagreement is denigration,” says Mr. Stephens.
One for the annals of overbearing bureaucracy—the EPA issued a rejection of an Alaskan mining project before the mine’s owner had even applied for permits. A Journal editorial says that a report due to be released today finds that the EPA’s decision to ignore regular procedure led to basic scientific flaws. As a result, other government agencies refused to cooperate with the Beltway regulator.
It is by now beyond dispute that the Environmental Protection Agency went rogue when it halted Alaska’s proposed Pebble Mine project. And yet, there’s more.
The more comes via an independent report that criticizes the agency for its pre-emptive 2014 veto of Pebble, a proposal to create the country’s largest copper and gold mine in southwest Alaska. Under the Clean Water Act, the Army Corps of Engineers evaluates permit applications for new projects. The EPA has a secondary role of reviewing and potentially vetoing Corps approval. Here, the EPA issued a veto before either Pebble could file for permits or the Corps could take a look.
Pebble CEO Tom Collier didn’t take this lying down. He filed a lawsuit. Then he asked former Senator and Defense Secretary William Cohen to conduct an outside investigation. Mr. Cohen agreed, as he writes, “on conditions of independence. I would follow the facts wherever they may lead, and any conclusions would be mine alone.” His 346-page report, released to be Tuesday, is a straightforward yet withering takedown of EPA’s conduct. Read more, here.
Alaska's Economic Survival. Certainly part of the State's economic survival rests on the outcome of federal treatment of Alaska natural resources, as in the recent Pebble and Shell matters. But a big part of Alaska's future rests in the judgment of Alaskan public officials.
Some, like me, will say, "Alaskans, their governor and legislature need to help our biggest investors become MORE competitive in a low price environment."
Others will say, "We need to take more from our biggest investors in a low price environment NOW so we don't suffer."
The first group is dedicated to the long haul and to a sustainable economy. The second seeks maximum transfer of wealth "from them to us" NOW, at the expense of the long term, at the expense of our kids' generation.
The first approach offers an economic spiral up, leading to a brighter future for all. The second leads to an economic death spiral down, wherein the hope of the future is mortgaged for the temporary pleasures of the present.
The same principle of a sustainable and hope-filled future applies to national taxing, spending and economic sustainability issues.
Dave Harbour, former Chairman
Alaska Council on Economic Education
Shell’s Alaskan oil plan makes long-term sense amid questions over shale’s longevity
The National, by Steven Kopits. Shell announced this week that it was abandoning efforts to develop oil from the Alaska’s outer continental shelf (OCS).
Faithful readers may wish to review related personal correspondence from last night with our esteemed Aussie oil and gas analyst, here.
Our equally esteemed Mid-Atlantic oil and gas analyst friend adds this note today that should be an even stronger signal to Alaska's Governor Bill Walker.
And, what is that signal?
The note signals Walker that he better start acting as though Alaska were competing with oil and gas producing areas that have more competitive natural attributes.
Walker should observe that signal and begin sending his own signals to oil & gas industry investors. He should begin showing them that he fully supports their oil and gas projects; will defend them before the feds; will cease demonizing industry; will remove from the table options for increased industry taxes; and, will cease efforts to attach conditions to a gas transportation project, including the condition of state ownership.
He should also bite the bullet in Alaska's failing economy and begin decisively cutting state spending.
The company had drilled a well in the Burger prospect in the Chukchi Sea this past summer, but the results were disappointing. Although the company found hydrocarbons, the flows were insufficient to warrant further exploration. With that, Shell decided to suspend activities in Alaskan waters indefinitely.
Shell had such high hopes. If all went well, it would have produced an average of 650,000 barrels of oil for 35 years from the OCS. From 2025 until 2060, the OCS would power Alaska’s economy and contribute up to 10 per cent of domestic US oil production.
The project, which we estimated would cost more than US$300 billion in total, would have represented the largest infrastructure project in the United States in the next 15 years.
There was no more visionary initiative anywhere in the world.
For Shell, the Alaskan OCS was the third leg in the company’s answer to peak oil. Shell was among the first to recognize in 2005 that increasing oil production would be a heroic undertaking. Finding new oil would be “no cheaper, no easier”, it said.
To meet the challenge, Shell proposed a three-legged strategy. First, a massive gas-to-liquids plant would be constructed in Qatar. And it was. The Pearl GTL plant, as it is called today, came on line in 2011. It produces 8 per cent of Shell’s total output, equaling 260,000 barrels of diesel and lubricants daily.
The second leg of Shell’s strategy rested on a series of liquefied natural gas plants. These plans were essentially scrapped earlier this year when Shell canceled four LNG projects.
This left the third leg, Alaska, which was perhaps the jewel in the crown. The scale of ambition, the volumes, the duration and the vision were breathtaking. The commitment was enduring. Even when the going got tough, Shell hung in there and continued to fight for Alaska, despite head winds from regulators, Greenpeace and a series of technical setbacks.
With weak initial well results, however, Shell capitulated and has suspended operations in Alaska “for the foreseeable future”, which should be read as “permanently”.
The vision of oil scarcity that fuelled Shell’s ambitions after 2005 has dissolved, the victim of the shale revolution. As little as two years ago, the promise of shale was uncertain and underestimated (not least by me).
Whereas Shell was prepared to go to the ends of the earth for new oil, company management could have driven a couple of hours from corporate headquarters to a fully plumbed basin – the Permian – and produced more oil with nothing more than fracking and horizontal drilling.
Alaska is redundant under such circumstances. Consequently, until the shale revolution has run its course and oil prices have returned closer to $100 per barrel, expect Shell to keep its distance from Alaska. By the time the dust has settled, the wait could be a decade or more.
And yet I still believe in Shell’s earlier vision. Shale may prove an endless cornucopia of new oil, but maybe not. The oil and gas division of North Dakota’s Department of Mineral Resources has estimated that Bakken shale oil production would only be 35,000 barrels per day higher at the end of 2017 than it is today, even at Brent oil prices above $95 per barrel. Restarting US shale may take much higher prices and much more time than anticipated.
The flood might not last. No one expects shale growth to last past 2025, and many see a peak before 2020. Shell, by contrast, would not have begun flowing oil from Alaska until after 2025.
If we look in decadal terms rather than quarterly, Shell’s visionaries may ultimately be vindicated. Shale, to the best of our knowledge, will not cover us for more than a few more years. In all likelihood, we will need the oil for which Shell is searching in Alaska.
Nor has Shell entirely closed the door. Marvin Odum, Shell’s director of upstream Americas business, has said that Shell “continues to see important exploration potential in [offshore Alaska], and the area is likely to ultimately be of strategic importance to Alaska and the US.”
With oil prices at current levels, however, even three months has become a long time for a company such as Shell. Why was its decision to abandon Alaska announced two days before the end of the quarter? One might speculate that third-quarter financial results would be so disastrous that Shell would want to be able to demonstrate tangible, direct and immediate commitment to reducing expenses and capital expenditures. There is no easier place to cut than Alaska.
Even if everything went well, Shell would not see a dime from Alaska for at least a decade. Terminating Alaska improves the bottom line immediately.
But at what cost? We have allowed the surplus of shale oil to lull us into a false sense of security, that oil has become “cheaper and easier”. And in the short run, it has. But the long run is far from decided.
For now, oil in Alaska is dead. It is dead in Norway and Russia as well. Norway’s Statoil is struggling with costs on its Arctic Johan Castberg project, and Rosneft has conceded that it cannot proceed in Russia’s Kara Sea without its partner ExxonMobil.
Arctic oil, until the shale revolution ends, is in a deep freeze. But this does not mean that we will not need that oil, nor that current oil prices are sustainable.
Rather, the economics of the oil business have become so dire that even the most committed and visionary of companies are forced to abandon their most cherished plans.
- Can TAPS live long enough to support a new round of offshore exploration next decade (with production from any successful efforts therefrom in the decade after that)?
- Did Burger J materially reduce the technical assessment of the US Arctic’s prospective resources? (I have seen no on-line chatter about what the well actually found-out from a sub-surface perspective - in the long run this could be far more important than the regulatory/political issues that have received most media attention).
- Will Washington ever permit 1002 exploration/production and if so would that be sufficient to keep TAPS going until “1” above?
- AKLNG should help TAPS - but how will it fare given gas supply rivals internationally and the surprisingly socialist impulse from AK’s politicians?
My response to our Aussie oil and gas analyst friend: