Economist: State must shore up finances to support AK LNG
A senior economist with a leading U.S. policy think-tank told an Institute of the North audience June 23 that the state had best get its financial house in order because an instability could undermine the Alaska LNG Project.
Alaska has a big opportunity with its proposed large natural gas pipeline and liquefied natural gas export project but there’s a lot of competition in the world of LNG and the success of the Alaska LNG Project is not a sure bet, said Dr. Margo Thorning, vice president and chief economist for the American Council for Capital Formation.
The council advises Congress and federal agencies on macro U.S. economic policy including energy. Thorning spoke June 23 at a natural gas outlook conference in Anchorage sponsored by the Institute of the North.
In her conference talk, Thorning outlined economic challenges facing Alaska as it grapples with a significant budget deficit, an aging population base and declining oil and gas revenues responsible for nearly 90 percent of the state’s budget.
“Alaska needs to be aware and to think globally. It’s true, you have a lot of natural gas and companies experienced at producing up here, but you have to think about the time it takes to get the gas to market in order to lock in those contracts,” Thorning told the conference. “You have a wonderful opportunity, but it’s very important how you move forward and that you don’t increase uncertainty for the project.”
Alaskans should also be wary of talk of a state-sponsored large pipeline as an alternative to the big industry-led project.
“There are three major companies involved (in the Alaska LNG Project) and all will have to look at potential cash flow and risk and whether the project is ultimately something they can commit to,” she said. “But if you look at the alternative, you look at countries with state-owned oil and gas companies and you see places that have not been efficient managers of their resources. If I’m the state of Alaska, I’d rather have the management in the hands of the private sector.”
Thorning elaborated on this in an interview.
“There is uncertainty about the state’s commitment,” she said.
This has largely been created by talk of a state-led pipeline that could compete with the larger, industry-led project, she said. This is not a good course for Alaska. State-led energy companies mostly fail, she said.
“They tend to under-invest, they do not have access to the latest in technology and there is often graft and corruption. It’s a bad model for Alaska,” she said.
Thorning reviewed the state’s current economic situation in the interview, and warned that Alaska could easily go the way of Michigan, a state that enjoyed prosperity and robust manufacturing in the 1960s and 1970s but was complacent and failed to heed international forces undermining auto manufacturing, its key industry.
The threat that could undermine Alaska is the unexpected revolution in shale oil and gas in the Lower 48 states and the increasingly fierce competition that is developing in international LNG markets.
“What happened in Michigan could happen in Alaska if you’re not far-seeing,” Thorning warned in the interview. “I sense a false feeling of security. You can’t just assume this lifestyle can be sustained. People need to be talking a lot more about this, on television and cable channels. Alaska faces some real challenges.”
Alaskans may feel secure, but “your job growth is very slow and your population is aging. The one bright spot is growth in oil and gas jobs. This is a very high-wage industry, and one you should focus on,” she said.
New developments like shale oil and gas are transforming the U.S. energy industry and although there are environmental problems, shale producers are solving these, for example by reducing their use of water, Thorning said in the interview.
Despite the sharp decline rates in shale wells, and low prices, shale reserves keep going up. The nation now has a 50- to 60-year supply of gas mainly due to shale development, she said. On the LNG export front, the competition is getting fierce.
“Australia has four LNG export projects and is building five more. There’s also Malaysia, Qatar and east Africa. China (a major customer) is working on developing its own gas resources and is buying pipeline gas, and may be less of an LNG customer.
“The question for Alaska is whether we can get a piece of the market. Can we get our project up and running in time?”
Another speaker at the conference, state natural resources Commissioner Mark Myers, said a key to the success of the gas project will be gaining public acceptance for decisions the state will have to make as a partner in the Alaska LNG Project.
“This is the third gas line variation, in the last decade, that I’ve worked on. Key to success will be continued public outreach by the state and better educating of the community,” Myers said. “We’re going to ask Alaskans (through the state partnership) to put a lot of money in this project at the same time we have a significant budget deficit.
“All the parties will have to align, and one of the challenges with this project has always been the long lead time. And we are being asked to take those risks in an uncertain market, 10 years in advance. It’s a lot to ask of the Alaska public in the coming years.”