Last week the Anchorage Daily News published an article written by Bill Walker, a candidate for governor. The piece was centered around the idea that Alaska needs to build a large liquid natural gas (LNG) line from Prudhoe Bay down to Valdez, an idea which Walker has been pushing for some time.
On the surface it sounds like a great idea, bringing in new tax revenue, jobs and cheap gas for the state.
Like most political platforms, however, the devil is in the details.
First off, in order to build a line of this magnitude you need shipping commitments from large commercial users. The problem with this is that, logistically, our options are limited. There are two choices: the lower 48 (most likely to an existing LNG plant in California) and the Asian markets.
Two choices quickly become one when you look at the shipping costs to the states. The reason for this being The Merchant Marine Act of 1920. The law states that any ship carrying goods from one U.S. port to another must be made in America and fully crewed by Americans. Simply put this means it costs roughly three times as much to ship LNG in America than anywhere else in the world.
So now we are left with Asia, which it just so happens is in need of natural gas, great news right? Not so fast. Contrary to what some believe, Alaska is not the only region of the world that produces oil and gas.
In the past eight months alone Australia has committed to shipping over 5.8 million metric tons annually to China, for the next 20 years. This was done in two deals totaling an estimated $120 billion.
Can someone say competition?
Let’s put the competition argument aside for a moment and assume Asia is ready to buy all the LNG we can send, finally a scenario that works. Sorry folks, no such luck.
The roadblock in this instance would be FERC (Federal Energy Regulatory Commission), which would have to give its stamp of approval before one drop of gas could hit the pipeline.
Walker and the supporters of this line would have you believe all these permits and environmental impact statements have already been completed and the project is approved. However these permits and studies are not only dated, but were done under different administrations and before our most recent energy crisis.
Some might come back with the argument that we have been exporting natural gas to Asia for the last 40 years, and they would be right. Since 1969 a small amount of LNG has been shipped from Nikiski to Japan, but comparing these two projects would be like comparing apples and oranges. It’s one thing to allow a small amount of export, but when you allow 4.5 billion cubic feet per day that can change the prospective very quickly.
Furthermore it is widely known the only reason the export license has been allowed and renewed, is because without that LNG plant in Nikiski all the surrounding communities would either be without gas or paying the same those in bush Alaska are forced to.
As it stands now, this project will cost anywhere from 10-12 billion dollars just to build.
Where exactly is the money coming from? There are only two state bank accounts with the ability to fund this project: the CBR (constitutional budget reserve) which has about $10 billion in savings and the PFD with about $32 billion in savings.
Now unless Walker is attempting to commit political suicide I doubt the dividend will enter the conversation.
So in essence, this project would be financed by the only buffer we have in place between declining oil production and an $8 billion operating budget.
Is it just me or does the risk/reward on this seem off?
If all the evidence above still doesn’t have you convinced, I will leave you with this:
If this project is as economically sound as Walker proposes and all the work has already been done for the permitting and Federal approval, why hasn’t the private sector built it?