For anyone pinning their hopes on the Alaska LNG natural gas pipeline as a savior for the state’s budget crisis, last week brought tough news. Flanked by executives for oil and gas producers BP Alaska and ConocoPhillips, Gov. Bill Walker held a press conference stating that the continued oil and gas price slump is making the pipeline project’s path to economic viability difficult. The uncertainty, the governor said, makes it unlikely the line’s partners will come to agreement on terms in time for legislators to draft an amendment to the Alaska Constitution that would provide certainty for the natural gas tax structure.
After the back-and-forth over oil production taxes in recent years, such certainty was seen as a cornerstone for progress on the line. Without it, and with natural gas prices at their lowest level in more than a decade, when and if the line’s construction will begin is much more uncertain. While that’s unfortunate for the state, it would be more unwise — and potentially hazardous to the state’s economy — to try to force the completion of an economically questionable project.
When oil and gas prices were riding high a few years ago, the natural gas pipeline’s construction seemed far more assured. Producers were committed to moving forward with preliminary engineering and design, purchasing property on the Kenai Peninsula that would eventually house pipe yards, processing facilities and right-of-way for the pipeline. But the oil and gas price crash that began in late 2014 caused producers to rein in their exploration and development of new resources — and even, in some cases, to shutter fields that were already producing but suddenly cost more to operate than could be made from the sale of the oil and gas they produced. With existing fields being taken offline where all the necessary infrastructure was already in place, the development of a field that would require an 800-mile pipeline to bring gas to a place where it could be taken to market suddenly looked like far more of a gamble.
To be sure, Alaska has a tremendous reservoir of natural gas — one that should prove valuable for the state for decades once it is brought to market.
But even doing back-of-the-envelope math, the challenges facing the state and producers as partners trying to keep the line moving forward are clear: Even if it moved forward on its original timetable with prices as high as they were in 2012 and 2013, Alaska’s natural gas was going to be competing with a host of other producing sites in the Middle East and on the Pacific Rim to supply demand. With gas now selling for about half what it did then, the path toward recouping a $45 billion to $65 billion investment in the pipeline is far murkier.
For producers and the state, pushing forward as though nothing had changed with regard to the economic underpinnings of the project would have been foolhardy.
For Alaska in particular, the budget crisis caused by collapsed oil prices and diminished production means the state has far less flexibility than it once did to take gambles. A 25 percent stake in a $45 billion to $65 billion pipeline being built in hopes prices will recover by the time gas is flowing to tidewater is one heck of a risk.
The acknowledgment that the path forward for the Alaska LNG line is unclear is bad news for the state. But it was inevitable given the state of the oil and gas market, and the state and producers should be credited for owning up to this reality.
Gov. Walker and the oil and gas executives present at last week’s meeting said preliminary work will continue, aiding to move the project along more swiftly if prices turn around or an economic case for the line becomes more clear. That’s an appropriate level of commitment given the situation.
Alaskans have waited since before statehood for North Slope natural gas to be developed. Waiting a little longer to avoid a bad gamble shouldn’t be too hard to bear.
— Fairbanks Daily News-Miner,
Feb. 21
