An Either/Or World

At times in Alaska’s history individuals saw a vision of what Alaska could be and committed themselves to the success of that vision. The purchase of Alaska from Russia, the discovery of gas in Cook Inlet, Alaska Statehood, the discovery of oil at Prudhoe Bay, the creation of the Permanent Fund; each took vision, each took commitment, each took leadership, each took work, each carried a substantial amount of risk of success, and each resulted in a significant change to Alaska’s future. Each was a decided break with the past. Sometimes in history choices need to be made. Sometimes a specific direction needs to be taken. Sometimes decisions need to be made. If those decisions are not made, opportunities escape. Sometimes life really is an either/or world.

It is time to either develop a strategic plan to develop and produce Alaska’s resources or muddle along and see Alaska’s future dwindle away.

It is time to either choose a direction and develop a plan for an Alaska Gas Pipeline or allow the opportunity to pass Alaska by.

It is time to either address Alaska’s long term fiscal needs or inherit the results of indecision 20 years from now.

If Alaska wants a gasline; if Alaska wants to see continued production; if Alaska wants continued oil and gas exploration and development in its future; if Alaska wants future generations to inherit a strong stable economy, it is time for action.

But merely taking action without evaluating what action should be taken is irresponsible. Those who want do something because it is better than doing nothing at all are misguided. Change must be based on rational analysis. A good strategic plan will analyze the State’s resources and strengths. It will analyze the impediments to success, and it will develop a plan to move forward that hopefully increases the likelihood of success and reduces the likelihood of failure. So what are Alaska’s resources and strengths? What are its weaknesses? And what would a viable strategic plan look like?

Alaska’s strategic resources

1) Prudhoe Bay/Kuparuk – North Slope oil production has provided Alaska with substantial wealth in the past and can continue to be the base upon which Alaska builds its future. The goal regarding Prudhoe should be to create a fiscal environment where the producers have incentive to:

a. Maximize the production from currently discovered reservoirs

b. Encourage exploration for satellite fields close to development

c. Encourage development of heavy and viscous oil

2) Alpine/Colville River/Eastern NPRA Development – Discoveries have been made here but development of additional reserves has been stalled due to permitting delays. The goal for this development region should be to:

a. Work with producers and state and federal agencies to bring these known resources to market and to develop the infrastructure to encourage additional exploration.

b. Northeastern NPRA is one of the few areas onshore North Slope where there is still potential for finding significant oil reserves. Work with the various stakeholders, including the North Slope Borough, the village of Nuiqsut, and the federal and state agencies to develop an environment where cultural values are protected and development can still occur.

3) NPRA in general – encouraging exploration of the rest of NPRA is somewhat a waste of time until and unless the gas pipeline issues are resolved. A recent report by the USGS titled “2010 Updated Assessment of Undiscovered Oil and Gas Resources of the National Petroleum Reserve in Alaska (NPRA) makes it clear that the largest potential for undiscovered oil lies in northeastern NPRA and the largest potential for nonassociated gas resources is in structural plays in southern NPRA. If the gas pipeline issues are resolved, NPRA exploration will once again become viable.

4) OCS Beaufort Sea/Chukchi Sea – OCS development will not add much to the State general fund because the state receives no royalty from OCS development and it does not have the power to tax that development, but oil discoveries from the OCS will extend the life of the TAPS oil pipeline. And if a gas pipeline is built, exploration for gas in the OCS will also increase. The North Slope Borough is currently opposed to all exploratory drilling that cannot be done in the winter from an ice island or from a bottom-founded drillship. They oppose all summer exploration that must be done from a floating drillship because of concerns about oil spills and how those spills might affect the bowhead whale and other marine mammals. The state needs to work with the North Slope Borough to see if there is a way that exploration can move forward in open water without their opposition. If a way cannot be found to resolve the North Slope Borough’s concerns, OCS exploration and development will probably not occur in the near term. And if it does occur, it will happen only after costly and time consuming litigation.

5) Point Thomson – enough has been said about Point Thomson in previous posts. It is time for the State and ExxonMobil to resolve their differences and move ahead with this project.

Alaska’s strengths

1) Alaska has the ability, given the proper leadership, to respond to circumstances and change course quickly. This is one strength that most other states are incapable of. Most other states take years to make minor changes to the direction they have taken, but Alaska is unique in that it can recognize circumstances that require a change in course, and it can respond quickly to take advantage of opportunities that may present themselves.

2) Alaska has funds in reserve. Alaska has its Permanent Fund and billions of dollars in savings. Revenue in reserve always provides options.

Impediments to Success

Alaska currently has no vision regarding an Alaska Gas Pipeline. Some want an instate line, some want a trunk-line to Fairbanks, some want to export the gas to the Pacific Rim, some want to stick with AGIA, others are rooting for large diameter line through Canada but don’t believe in AGIA. What is clear is that a State divided over this issue will not succeed.

Proposed solution

So how do Alaskans wade through all the options to come up with the optimum outcome. The first question to ask is what does Alaska really want? If Alaskans could choose from all the above outcomes, which one would they choose? Which one would have the greatest benefit to the people of Alaska? Actually, the answer is clear. A large diameter pipeline, if it can be built, would have the greatest benefit for the people of Alaska.

Then what about an AGIA line vs a pipeline to tidewater for an LNG project vs a non-AGIA line? These are actually questions that don’t need to be answered today. A line to tidewater vs a line through Canada are commercial questions that the owners of the gas will decide at the open season. They are questions that don’t need to be decided by the legislature.

Well what about an AGIA pipeline vs a non-AGIA gasline? Are the remaining benefits of AGIA worth $500 million?

First, the 20 “must-haves” of AGIA have either been accomplished or created no additional value when the Act was passed. See the previous article on this blog titled “Analysis of the Twenty “Must Haves” of AGIA” posted September 15, 2010. It is clear that the only remaining value of AGIA is the $500 million in exchange for TransCanada continuing to move the project forward through the filing of the FERC certificate.

Some have argued that the data collected and the documentation created, if the state allows it to be used by the new consolidated group of TransCanada, ExxonMobil, ConocoPhillips and BP, may save the project up to a year in getting to a project sanction decision. Others have said it is just wasted money that should not be spent on useless paper. If there is value to the $500 million reimbursement, this is where you would find it.

With all that said, AGIA doesn’t really matter. Currently there are two competing projects. Ultimately there will only be one project and AGIA will be immaterial to the successful outcome of that project. The key question for the state is what can the state do now to increase the likelihood of success of that large diameter gas pipeline project.

Elements of a successful large diameter pipeline strategic plan

This is the area where the need for a strategic plan is greatest. A disjointed, non-directional plan here will result in failure. A strategic plan for success requires leadership. It requires broad support from affected stakeholders. And it requires specific actions to address specific problems and concerns.

1) A fair gas tax – the issue of a gas tax must be addressed. It is interesting that the oil tax has garnered a substantial amount of energy and effort, but discussion of the tax on gas is non-existent. The idea seems to be that the State will wait for the producers to come to them and tell them what is needed. This apparently will come in the form of conditions for committing gas to the pipeline. This thinking is not logical, and the state will eventually find that the information obtained from a failed open season will not result in a specific proposal from the producers. The producers will only reiterate what they have stated in the past – that the state needs to provide them with fiscal certainty/stability and a fair gas tax. It is time for the state to start the discussion regarding a fair gas tax. Do the research. Acquire the information necessary to make a reasoned decision, and pass a fair gas tax.

2) Fiscal Certainty/Stability – the producers say they need fiscal certainty because they are concerned that if the state is running short on revenue to balance its budget, the legislature will change the tax on gas once the gas pipeline is built, thus changing the economics upon which the producers committed to ship their gas.

Fiscal certainty can take many forms. Certainty can be created by contract; it can be created by an amendment to the State Constitution; it can be created by statute, although the producers have said they are not comfortable with certainty created by statute because the legislature in the next legislative session can change the certainty provided for in the last legislative session. Another form of certainty can be created by making sure that the legislature cannot change the tax on gas in order to resolve its short term financial problems. If the gas tax was not available to the general fund, a certain level of fiscal certainty would be provided to the producers. The producers have not taken a position on this form of certainty and whether it would suffice to meet their concerns, but it is one option that should be considered.


3) Risk Sharing – If the state is truly committed to a large diameter pipeline project, it might consider sharing some additional risk in the construction of the project. The two easiest means for sharing risk are 1) participation in the ownership of the pipeline, and 2) committing to ship the state’s royalty gas on the pipeline. Both of these options have been considered by prior administrations, and there is a significant amount of analysis available to the legislature if it would like to pursue either one of these options.

Summary

In summary, a great opportunity lies before the state. The state can either commit the effort and resources necessary to make a large diameter gas pipeline project a success or the state can prepare for the gradual decline of its resource base followed by a dependence on the Permanent Fund to finance governmental services in addition to whatever taxes the people of Alaska agree to pay. It’s an either/or world, and it’s time to choose.