The Gas
28 April 2006This is the fourth blog in a series. Please click here to view the previous blogs.
The gas pipeline negotiations are complex. The complexity and confusion are heightened by the fact that Governor Murkowski won’t show the gas pipeline contract to the Legislature. Here are some of the highlights of the gas pipeline considerations.
The Gas
In 1998, the Legislature passed the Stranded Gas Act. This Act allowed the State to make concessions and offer incentives for corporations to harvest the natural gas and bring it to market. The Act was created because it was not economical for the producers to harvest the gas. Most of the gas which has been found on the North Slope has been found while exploring for oil.
For the past several years, Governor Murkowski and his administration have been negotiating with the oil producers (BP, ConocoPhillips, and ExxonMobile) to agree on a contract to harvest the gas. Last October, many of the top officials from the Department of Natural Resources quit, stating that they could not support the direction in which the negotiations were moving.
The Money
Natural gas prices have risen dramatically in the past few years. This has increased the interest in building a natural gas pipeline, harvesting the gas, and selling it on the open market.
However, there will be huge upfront investments to build the pipeline. The gas pipeline is estimated to cost approximately $20 billion. However, construction of the oil pipeline in the 1970s cost approximately ten times the original estimate.
The Debate
There are debates about several aspects of the gas line negotiations. Here are a few:
1. Which route should the gas pipeline take? Some groups promote a gas pipeline which runs along the Alaska Highway. Others advocate for an “all-Alaska pipeline,†which would run along the current oil pipeline route, from Prudhoe Bay to Valdez. The gas would then be liquefied and shipped by sea.
2. Should the State invest in building the pipeline? If the state becomes a partner in building the pipeline, Alaska would receive royalties from any gas shipped through the pipeline. The State would not, however, be able to ship gas for free. Any entity sending gas through the line, including the owners of the pipeline, would need to lease space within the pipeline. This is a mandate of the Federal Energy Regulatory Committee. The risk, then, is that the pipeline would not be working at full capacity, and the State would not receive an adequate return on the investment.
3. Should the State have to take part of the gas royalties in-kind? This would mean the State could sell them in a competitive market, potentially for more than we would receive if we took the royalties in cash. However, with energy crises around the state, it is likely that the state would be pressured to sell the gas at below-market value to in-state consumers. Even if the state were selling on the open market, Alaska would be competing against huge corporations with experience in selling oil and gas. Would the State really be able to compete?
4. The Legislature hasn’t even seen the contract. All of these debates are taking place before the Legislature has even seen the proposed contract. Governor Murkowski will not release the contract until the new oil tax has been passed.
5. Is the gas still stranded? The Stranded Gas Act was passed because it was not economical for the oil producers to bring the gas to market – it was stranded. However, with the recent increases in natural gas prices, the question arises: Is the gas still stranded?
This is only an overview of what is happening with the natural gas issues. Here are some great sites to find more information in plain English about what is happening and the possible consequences:
ISER’s Understanding Alaska Policy Brief: The Alaska Natural Gas Pipeline- What’s It All About?
As noted in a previous blog, Senator Kim Elton highlights some of the concerns with the gas line negotiations in his newsletter, off the record.
-kt