Cooperate, don't lead on AK LNG, says economist

A leading U.S. economist says a large natural gas pipeline project is vital to the state’s economic future and that the state should cooperate with experienced large companies in developing the project rather than attempting a plan for the state to lead the project.

The Alaska LNG Project could diversify the state’s revenue sources and strengthen its finances, said Margo Thorning, chief economist for the American Council for Capital Formation, a Washington, D.C.-based think tank, in a briefing following the Aug. 12 release of a white paper by the council on liquefied natural gas export projects.

“Alaska needs to have more eggs in its basket than oil, and the forecasts for oil price recovery are not rosy,” Thorning said in the briefing.

She cited a recent forecast by the World Bank that oil prices could remain in the $70 per barrel range, in real prices, through 2025.

“Who knows how long prices will stay at current levels, which are below $60 per barrel?” she asked.

In the paper, Thorning wrote, “While the oil reserves are still ample, they are finite. Extracting the remaining North Slope oil is likely to be more difficult and expensive in the coming years. This raises questions about how long Alaska can rely on petroleum as its chief source of revenue.

“Ten years from now it is possible that technologies, such as gas injection, could begin to reach the upper limits of their ability to extract oil from Prudhoe Bay. The field has already yielded far more oil than was expected when it was discovered in 1967.”

In the long run, having a major gas project will give the state something other than oil as a major revenue source, she said. Gas production will also help support extraction of the remaining oil in the North Slope’s producing fields and spur exploration for gas, which will ultimately result in more oil discoveries, too.

Thorning also had a warning in her paper, however. Large energy projects led by governments have a history of failure. Alaska’s project, which is the largest infrastructure project in North America, is best left to the private sector to lead, she said.

However, discussions within the state administration to have the state take a larger, even lead, role in the project could raise new uncertainties.

Under a plan previously agreed to with major North Slope producers, Alaska would have a 25 percent share of the Alaska LNG Project with BP Exploration, ConocoPhillips and ExxonMobil having similar, almost equal shares, but with industry leading the project.

The plan also includes TransCanada, an experienced pipeline company, as the state’s partner in its 25 percent share.

Gov. Bill Walker would like to increase the state’s share, possibly to as much as 51 percent, so that it would have a larger role in managing the project. Earlier this year Walker also proposed increasing the scale of a small state-led backup pipeline plan to one that could compete with Alaska LNG Project, but the Legislature refused to provide money for this.

Thorning suggested that the state administration’s desire for more control could raise new uncertainties and might damage the project, currently estimated to cost between $45 billion to $65 billion to build.

“State-run energy projects are not very successful,” Thorning said in a briefing on the council’s paper. “There is a tendency for governments to under-invest. It is preferable to have the private sector managing the project if there are companies available who are willing to put shareholders’ dollars at risk. Why would you risk public dollars when private companies are willing to put their capital at risk?”

Uncertainty over the administration’s position on the gas project is now raising new questions, she wrote in the council’s paper, “The Global Race for Liquefied Natural Gas: Commercializing Alaska’s Natural Gas.”

“The administration announced plans (last spring) to create a team to review the Alaska LNG Project for 45 days. As of this report the administration has not yet released any information about the review’s conclusions,” Thorning wrote in the paper.

The 45-day deadline has long expired and the uncertainties caused by lack of information on the review has increased the odds that many state legislators will engage the administration in a “tug-of-war” over needs for the project laid out in a Heads of Agreement signed between the companies and the state and endorsed by the Legislature in 2014 through Senate Bill 138, Thorning wrote.

Uncertainty is the enemy of large infrastructure projects; it could erode big advantages held by the Alaska LNG Project, one of which is that three large, experienced companies are involved that have a history of successfully completing large projects.

Academic studies by the Aspen Institute and Stanford University, Thorning wrote, show a strong negative correlation between uncertainty and capital investment by corporations, and that uncertainty raises the cost of “risk premiums” companies will include in their economic and financial analyses of projects.

Despite all that, Alaska is well positioned to take advantage of a growing demand for liquefied natural gas in Asian markets, Thorning wrote in the paper. Shipping distances to Asia are closer than Australia and the Persian Gulf, or the U.S. Gulf of Mexico, she noted. However, western Canada is emerging as a potential competitor to Alaska that will enjoy some of the advantages of Alaska, Thorning wrote in her paper.

Meanwhile, the state of Alaska will badly need the new revenues and large gas pipeline and LNG export project will provide, as well as the stimulus having a market for natural gas will provide to the existing North Slope oil and gas industry, Thorning wrote.

The state’s economy is slowing due mainly to the collapse is oil prices, with almost no job growth seen in 2015 compared with gains of nearly 5,000 jobs per year between 2010 and 2012 when oil prices were high, she wrote.

Continued strong oil and gas employment is one bright spot in the state’s economy, with a projected increase of 1.4 percent in 2015, Thorning wrote. That offsets declines in other parts of the workforce, such as government.

Also, population growth may have peaked, for now. The latest population estimates, for 2014, show a slight decline from 2013, and it is the first time in 25 years that Alaska’s population showed a decline, however small.

“A declining population means fewer workers contributing the state’s Gross Domestic Product,” Thorning wrote.

She also cited the aging of the population, and workforce, as shown in Alaska Department of Labor and Workforce Development data.

11/20/2016 - 11:39am