Frank Murkowski

OPINION: Time for Alaska to consider alternative to gas pipeline

Alaskans join together in congratulating our new Governor-Elect Mike Dunleavy and our Legislature. The challenges ahead bring great opportunities to unify our efforts to stabilize our States economy for the development of our abundant resources, and to sustain the unique quality of Alaska’s lifestyle. Therefore, I believe it would be timely to review just where we have been and where we are going with regard to marketing our Arctic gas reserves An old Irish sage made the observation that “you never really know where you are going until you get there, but you had better look closely at the signs along the way.” In a recent release, Royal Dutch Shell announced plans to construct a liquefied natural gas facility in Kitimat, British Columbia, at the cost of $14 billion. ExxonMobil is in the process of approving a multi-billion dollar LNG project in Mozambique next year. At the same time, Russia’s $20 billion dollar Arctic LNG-2 in partnership with France’s Total is under construction. The oil industry is betting on natural gas as the fuel of the future. Estimates indicate both Shell and BP will be producing more gas than oil by 2025. In Germany there is another first: a new cruise ship, the Aida, will be powered by LNG. It’s time to candidly evaluate our efforts to market our Arctic gas reserves in light of the dramatic expansion of the LNG markets worldwide and to look for those signs along the way that show where Alaska can fit in. As governor I had the opportunity to negotiate a natural gas contract in 2005-06 with ExxonMobil, BP and ConocoPhillips, who held gas leases on the North Slope. The contract covered the building of a ($37 billion-plus) natural gas pipeline to Alberta, Canada, to supply gas destined for the U.S. markets. Within a year-and-a-half, the project was scrapped because of the discovery of the huge shale gas reserves found all over the US. Our market changed almost overnight from the idea of supplying the U.S. market with Alaska natural gas to switching to LNG focusing on Asia as our major market. Ironically, Alaska had been supplying LNG shipments to Japans Tokyo Gas and Electric for 40 years from the former ConocoPhillips plant at Kenai. Today the plant stands empty, as does the urea plant. Why are these two plants closed? The answer is both economics and administrative. Factually, exploration is focused on oil, which is the main revenue source. Our Cook Inlet gas has really only one market and that is Hilcorp, which has the franchise for the Anchorage Bowl. If new gas is found there is virtually no market. Any gas found, is in fact, stranded. Why have we not come up with proposals to determine just what the Cook Inlet reserves might be so that we can incentivize gas exploration and identify markets. I would hope our regulatory officials would rectify this imbalance. It is clearly not in the state’s best interest. Today we continue to look at our relationship with China to market our gas. We have expended millions of dollars promoting the China Alaska partnership, yet China has still not formalized its interest either with an equity or contractual commitment. In the meantime,our nation is in a dispute with China over our trade imbalance, with threatened boycotts on both sides. Just last month China said it would impose a 10 percent tariff on U.S. LNG against the Trump Administration proposed tariffs of on $200 billion of Chinese goods. You don’t build a gas pipeline on these kinds of threats. If China really wanted to reduce their trade imbalance with the U.S., they could start with a long-term contract for Alaskan gas, but the Chinese are not going to buy our gas at a market premium. The trade imbalance issue and the rumor that the Chinese plan to hold off major projects in the U.S. until the Trump Administration is gone does not bode well for our LNG prospective partnership with China. The LNG market is passing Alaska by. LNG tankers from the Russian Arctic are carrying LNG to both Asia and Europe and bypassing the Suez Canal, saving transit time. Back in the 1960s, ExxonMobil proposed shipping North Slope oil through the Northwest Passage. I was aboard the tanker Manhattan for a day. The ship made the trip through but it was uneconomic because of ice conditions. That was more than 50 years ago, the Arctic has changed and the Russians are taking advantage of this. Arctic alternative Does Alaska have a viable alternative? I believe we do and in my view one of the only ways we can be competitive in today’s market. We must reevaluate the feasibility of shipping our gas directly off the North Slope in ice breaking LNG carriers as the Russians do. One proposal is to again reexamine the Barrow Trench off Prudhoe Bay and assess the water depth. Another is the Cross Island proposal, which may be the best alternative. Icebreaking LNG tankers could be utilized from an Alaska Arctic loading port to a seasonal storage facility for transfer to the world market, especially Asia. We know for a fact that the Asian market wants more than one supplier and Alaska could be that source. Let’s invite the holders of the North Slope leases back to negotiate this new approach. ExxonMobil, BP and ConocoPhillips still hold the gas leases and are interested in marketing their gas, but marketing Alaska gas has to be competitive. Alaska’s pipeline is the only project that has to amortize a $47- to $60-billion cost to move its product to market, which makes the Alaska project in today’s market non-competitive and uneconomic. It is time to face up to the reality China simply won’t pencil out. Some Alaskans would rather not face up to the fact that if the economics are unfavorable, the project will not be built until they are. Some want a pipeline, the tax base and the jobs. But if you cannot be competitive in the market, our gas will be stranded and the last gas to get to market. I suggest a new approach with the state coming in with the producers. Our one-eighth royalty can be structured as the state’s equity component. I suggest calling on the produces to pool their expertise and take a good long look at what the Russians are doing to market their gas in both Europe and Asia. Our state Legislature must resolve the issue of fiscal certainty. Alaska gas will not be marketed without it. It’s time to face hard facts. As an old banker, I can tell you that the dollars go to the highest return with the least risk. And speaking of risk, the Trans-Alaska Pipeline System was to come in at $1 billion, and actually came in around $7 to $8 billion. And that’s high risk. Cost overruns are a real threat. The Northern sea route which runs along the Russian Arctic coast and the coast of Arctic Alaska and on to Japan is open from July until November for shipping. Moscow is now promoting the Northern sea route as the shortest distance from Asia to Europe. A recent sailing of Maersk lines, the Venta Maersk, from Vladivostok to St. Peterburg using the Northern sea route cut off 10 days sailing time compared to routing through the Suez Canal. Can it be done? So can Alaska become a player in this emerging transportation route? What is lacking for Alaska is the availability of a transshipment port to allow the efficient transfer of LNG as well as container traffic during the winter months when the Northern sea route might be closed. The idea of Alaska becoming a transshipment location has been around for a long time, and was recently suggested by Interior Secretary Ryan Zinke, who identified Adak as a possible location. Adak was built as a military post designed to support, supply and defend the U.S. in case of any threat from an aggressor in the Pacific and Asia. Adak has major port facilities, a world class runway and a protected anchorage. When the U.S. Navy operated Adak there were nearly 6,000 personnel there. The community had schools, churches, a swimming pool, and yes, even a McDonald’s. I have been there a couple times and did see the Golden Arches. Alaska has an opportunity to become a major player in the marketing of Arctic gas. The new state administration should seriously look at alternatives to move our gas from Prudhoe Bay to a loading facility perhaps at Cross Island which has a water depth capable of supporting medium-draft LNG tankers comparable to what the Russians are already using. Cross Island, which would require a nine-mile causeway, could also support a gas liquifaction facility, even perhaps on a barge as the Russians have done. The LNG could supply a major storage facility at Adak. The larger tankers could move the LNG to the growing worldwide markets. Depending on conditions on the so-called “shoulder season,” fall and spring might be extended. This idea of transshipment of LNG is in fact already in place in Singapore and other LNG ports. The new administration should take the initiative of first evaluating the potential of leasing Adak in a partnership with ExxonMobil, BP and ConocoPhillips. (Some say the Adak weather is difficult, but the military found it operational) and second, the state, along with the holders of our North Slope gas leases and the Department of Defense, work on a cooperative plan for how to proceed with Adak. That could begin now with Zinke and our congressional delegation. Gov. Bill Walker has done his best to market Alaskan gas, but the facts indicate that the price of the pipeline necessary to amortize the cost of shipping simply makes Alaska gas non-competitive in the world market place. That is why the holders of the Alaska gas leases, the producers, have said they are willing to sell their gas but not build the line. I believe Alaska gas will remain stranded until we can restructure our approach to make Alaska gas competitive in the current market place. The time to begin is now. Russian Arctic gas is moving now to the Asian market that we had established more than 40 years ago. Alaska and Russia share the Arctic. If they can make it work, why can’t American ingenuity be put to work? We have the opportunity, but do we have the conviction to be a major player? I believe we can and must. Frank Murkowski was a U.S. senator for Alaska from 1981-2002, and governor from 2002-2006.

GUEST COMMENTARY: Time for another approach on gasline fiscal certainty

Alaskans have just been told that gasline contract negotiations have not progressed satisfactorily and thus there is no time left to get a constitutional amendment allowing a vote on fiscal certainty on the 2016 ballot. The proposed constitutional amendment would provide the producers with the necessary assurances that the State would not arbitrarily increase the tax rate over the life of the LNG project. The producers have told the state for years that unless they had fiscal certainty on taxes they would not spend the large sums of many (around $4 billion) required for front- end engineering and design, or FEED. Putting off fiscal certainty until the 2018 elections and the resulting delay in beginning FEED should be unacceptable to all parties — both the state and the producers. To suggest that there may be another market for Alaska gas overlooks the fact that a good portion of Alaska gas has been leased to the producers. Any effort to take it back will result in extended litigation and more delay. A few months ago, I proposed a solution which I sent to each legislator and the Alaska media. I believe my proposal has merit and if adopted addresses the two major concerns of each of the parties. Certainly for the producers as well as neutralizing the risk to the state if the pipeline is never built. In 2005-2006 when my administration was negotiating with the producers on the natural gas line fiscal certainty was a major issue and a “must have” for the producers. We did not seek a constitutional amendment regarding Alaska’s tax alienation authority because we were not turning over Alaska’s taxing authority to someone else. We were simply entering into a good faith contract “fixing the tax rate for the life of the project (subject to certain escalation based on inflation) etc. We agreed that the state and the producers could rely on that part of the Alaska Constitution that protects the “sanctity of contracts” and each side would be bound by its terms. In order to avoid the threat of a constitutional challenge to such a contract the Legislature could require that any constitutional challenge would have to be brought directly in the Supreme Court within 90 days of the Legislature’s approval of the contract. Why not agree to similar contract terms and move on? It was satisfactory then, why not now? With the delicate state of the Alaskan economy, we must take advantage of every opportunity to market our resources in a sound and prudent manner in the best interest of all our citizens. It is not in the interest of the state or the producers to delay. Frank Murkowski served as Alaska’s governor from 2002-06, and as U.S. senator from 1981-2002.
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