In 2006, the state negotiated a 457-page contract with the three producers — BP, ConocoPhillips and Exxon — that hold the Alaska North Slope gas leases. This set the stage for marketing North Slope gas and building the pipeline to Alberta or Chicago. There was commercial alignment between the producers and the state because the state took a 20 percent equity interest in the gas and the pipeline, just as Gov. Bill Egan had once proposed we do with the oil pipeline. That 20 percent interest came from the state exchanging its 12.5 percent royalty interest and negotiating its income taxes for 7.5 percent of the gas.
Unfortunately, we were unable to obtain legislative approval of the contract, and North Slope gas has been stranded ever since.
The new Palin administration proposed that a non-producer-owned pipeline was in the state’s best interest, got the Legislature to agree to that concept, and solicited proposals under its Alaska Gasline Inducement Act. A license was awarded to TransCanada along with a $500 million state subsidy to pay for 50 percent of TransCanada’s cost of proceeding to an open season and 90 percent of TransCanada’s costs of seeking a Federal Energy Regulatory Commission permit if the open season was unsuccessful.
That is where things stand today. TransCanada had a failed open season and has yet to obtain a supply of gas, but nevertheless is being paid 90 percent of its costs under AGIA to pursue a FERC permit.
We missed the window that existed in 2006 because of the huge discoveries of shale gas found throughout the United States close to markets, making our gas non-competitive. Gas in 2006 was over $6 per million Btu, and now it is less than $3. That was then, this is now.
Currently, we have interest in the so-called “bullet line,” a small-diameter gas line from the North Slope to Fairbanks and the Railbelt, Anchorage and down to Kenai. The problem is that there is an insufficient market for the quantity of gas needed to amortize the construction of the line. On top of that, TransCanada’s license prevents the state from developing a bullet line with an off-take of more than 500,000 cubic feet of gas per day.
Moreover, opinions vary on the possibility of success of the bullet line for additional reasons:
• Extension of the bullet line to Kenai to supply gas to reopen Agrium’s urea and ammonia plant is unlikely because Agrium must have low-cost gas to be competitive in the world market. It is difficult to project the price, but there is little indication that bullet line gas would be cheap.
• Second, there are a multitude of companies exploring in Cook Inlet — Apache, Hillcorp, etc. — but their focus is on oil. They may find gas, but it is expected to go into the existing pipeline infrastructure to supply the Anchorage Railbelt.
• Any significant increase in gas from Cook Inlet could devastate the bullet line economics and make it non-competitive. The state runs the risk of having to subsidize the gas from the bullet line. The economics of the project are not encouraging.
There is a new and exciting window opening that could result in a viable project to un-strand our North Slope gas reserves. It is LNG to Asia, particularly Japan. As a result of the devastating tsunami, the Japanese government is committed to shutting down all its nuclear plants.
Evidence of this growing market is the reopening of ConocoPhillips Kenai LNG plant to supply Tokyo Gas and Electric Co.
Timing can be everything, as we learned from the huge discovery of shale gas in the Lower 48, which displaced our North Slope gas. The market is Japan, Korea and Taiwan and other Asian countries. The timing is right, but the window is small. We need to act fast.
The state should move quickly by putting our former gas contract back on the negotiating table as an LNG contract. It is my belief that the three producers would be very receptive to such an action and would move promptly to reassess the Asian markets.
The logic is sound. We had an agreement to move North Slope gas to Alberta or Chicago. Changing the contract to an LNG contract still involves North Slope conditioning and the pipeline. The only change is an LNG terminal at tidewater in Prince William Sound or Cook Inlet. The proposed LNG line would run parallel to the trans-Alaska oil pipeline from Prudhoe Bay to Fairbanks and further if Prince William Sound is selected.
It is important to note the original contract provided for four take-off points — the Yukon River, Fairbanks, Delta and Tok. Further, it was mileage sensitive — meaning that transportation cost would be based on distance from a North Slope gas treatment plant to the point of consumption, giving Fairbanks the least-expensive gas in Alaska.
Because of the impediments of the Alaska Gasline Inducement Act, the state would have to negotiate a resolution of TransCanada's license interest. The producers took the position that TransCanada could participate but only if they added something to the project. TransCanada said their permits in Alberta would be a significant contribution. But under the LNG proposal with export at tidewater in Alaska, TransCanada would bring little to the table.
Time is critical. There are numerous other LNG proposals worldwide that could serve Japan while its LNG prices are at premium. Among them are projects in Indonesia, India, Russia and British Columbia.
Alaska's North Slope gas would have the highest transportation cost because of the 800-mile route to tidewater. There are bound to be issues to deal with in restructuring such a proposal. Some in the Legislature would want to first separate pricing on gas from oil. That would eventually be necessary, but it should not take place until we have an assured gas project. The appropriate time is when we have secured a market for Alaska's gas.
There is a group anxious to evaluate LNG from Alaska called Resource Energy Inc. The group includes Japan Petroleum Exploration Co., Idemitsu, Nippon Oil and Energy, Mitsubishi Gas, Nippon Tel, Japan Steel, Itachi, etc. This group is ready to pursue a joint feasibility study of an LNG line right now.
The lesson that we must remember is that in the world of gas marketing, things happen fast and the window in any market is open for only so long. We have learned from our experience with the proposed natural gas pipeline in 2006 that Alaska has to move decisively when the opportunity affords itself, not just when it is politically convenient. We cannot afford to lose the opportunity to market our gas as LNG.
Let's give the producers the opportunity for the same contract we had in 2006. I bet they will take it and finally secure a stable energy source for Fairbanks and Interior Alaska.
The alternative is again to have North Slope gas stranded and perhaps for a very long time.
Frank Murkowski served as governor of Alaska from 2002 to 2006. He previously served in the U.S. Senate for 22 years. This is an edited version of a speech he delivered to the Greater Fairbanks Chamber of Commerce on Aug. 28.