How Gov. Parnell squandered development of Alaska's natural gas

ALASKA DISPATCH - October 31, 2010

The race that will have the greatest impact on Alaskans is not the much ballyhooed Senate race, where the winner will be one of 100 legislators, but the governor's race.

With the trans-Alaska oil pipeline (TAPS) now running 70 percent empty, the need for Alaska to have an additional source of revenue to prevent economic collapse is critically important. Why? Alaska is 90 percent reliant on revenue from an oil pipeline that is now 70 percent empty. The U.S. Department of Energy projects that TAPS throughput will decline to less than 500,000 barrels per day within five years. That is the consequence of a continual 6 percent average annual decline in TAPS throughput. Only high oil prices as part of the consequence of our invasion of Iraq, and the disruption of their significant oil output, in 2003, have saved Alaska from financial collapse.

Building a gas line brings Alaska new revenue and critically needed affordable energy for Alaska. Gov. Sean Parnell favors the AGIA process wherein a gasline gets built when Big Oil decides it is best. Ethan Berkowitz, his Democratic opponent in the gubernatorial race, favors Alaska taking charge of our destiny by building the All Alaska Gas line on our time schedule -- as a sovereign state must. It is a horrible betrayal of Alaskans for a governor to place our future in the hands of large, multinational corporations that always act in their own best interests because of his own idealogical reasons. (Parnell: "I am a private-sector guy.")

So how do Parnell and Berkowitz differ with regard to the Alaska Gas line Inducement Act, or AGIA? Parnell favors the status-quo. Berkowitz would scrap it. Parnell will not release the results of the open season (completed this summer) until after the November election. Why should he? If Alaskans knew the truth about how badly the costly process has failed, they would revolt, and that would be bad for Parnell's reelection chances.

So what is wrong with AGIA? Here's some history:

The Palin/Parnell administration accepted a proposal from TransCanada even though the TransCanada proposal did not comply with the requirements laid out within the state's bid requirements. Other bidders, or potential bidders, witnessed sabotage of their applications or did not participate due to the corruption they saw in Alaska. Mid American's CEO Bob Sokol stated this in his candid letter to then-Gov. Sarah Palin, explaining why his company dropped out.

The confidential portions of the Canadian proposal were made available to all legislators. Legislators were required to visit a secure data room to view the information. From the sign-in sheets we know only eight legislators bothered to try and view the information. Only eight out of 60 legislators even made the effort to fully read and understand the proposal before they signed off on a $500 million deal that exposes Alaska to treble damages. Incredible.

So where are we today?

The price of natural gas has collapsed. Today the Henry Hub spot price is $ 3.29 per MM/BTU.

ConocoPhillips is closing gas wells in the Lower 48 due to a massive abundance of natural gas, according to CEO Jim Mulva. ConocoPhillips is also making plans to export gas as LNG from the Lower 48.

ExxonMobil Corp. purchased a shale gas company, XTO Energy. This $40 billion acquisition has answered the question of where Lower 48 gas customers will get their gas. Exxon could have spent $40 billion on a gas line from Alaska to the Lower 48. But the project is wildly uneconomic. For example, a gas line requires compressor stations to chill and compress the gas. In theory -- for the purpose of using an extreme example to make a point -- if one builds a gas line long enough, no gas will come out of the far end of the pipe. As gas is withdrawn from the pipe to run compressor stations there is less gas moving through the pipe after each compressor station.

Canada is preparing to export LNG out of Kitimat, British Columbia. They see what the All Alaska Gas line advocates like Bill Walker and Ethan Berkowitz see. The best value for Alaska's gas is found by placing it in the premium, world markets. The 250 trillion cubic feet of estimated North Slope reserves are worth over $3 trillion if sold on the world markets -- and worth less than a third of that value if sold in the depressed U.S. market (if the massive transportation costs and other problems are discounted).

ExxonMobil is pursuing other LNG projects out of Australia and Papua New Guinea. Both will serve the premium Asian markets and compete with Alaska. Sadly, the Australia project is less economic than the All Alaska project.

The Parnell administration has greatly undermined the All Alaska Gas line project for reasons of either gross incompetence or corruption. Parnell claims that he supports the "Valdez option." But why did his administration revoke the state gas line right-of-way for this project? For all the rhetoric we hear from Parnell about standing up to the federal government, it is not the federal government stopping the project -- it is Sean Parnell. The federal government issued both the final environmental impact statement, as well as the export license for the voter mandated All Alaska Gas line.

Merrick Peirce is a board member and CFO for the Alaska Gasline Port Authority. AGPA has a voter mandate to build, or cause to be built, the All Alaska Gas line to Valdez, where the gas is to be liquefied and shipped to world markets. His opinions are his own.


Merrick Peirce | Oct 31, 2010