Thursday, June 22, 2006

Alaska Natural Gas Pipeline - a new radical proposal

I'd like us to look at the long term picture and make a radical proposal or two. This is a bit longer than most of my blogs, but worthy of the extra time (so says I).

Alaska has proven to be a gross resource repository during its recorded history. The Russians exploited the sea otters and the Aleuts to near extinction before selling it to the United States in 1867. When gold was discovered, those resources were extracted with haste and the resulting boom and bust left a mess behind, as did so many gold rushes. Timber was treated as a free resource to supply the transportation, commerce and residential sectors. Other minerals, including coal, and exploitation of fishing resources followed. Over time, government has stepped in with some environmental mitigation and regulations, but they are always under attack by industry.

With the discovery of oil in 1968 in Prudhoe Bay came another boom, delayed by the need to settle native and State of Alaska land claims and also allowed the passage of the National Environmental Policy Act without which the Trans Alaska Pipeline would have been a much more in the line of past boom time projects that paid little heed to consequences. Even Alyeska consultant Jack Roderick warned against a serious misjudgment over lack of engineering respect for the challenges of building a safe pipeline across permafrost. There was also formal hold on permitting due to the 1966 declaration of Interior Secretary Stewart Udall to first deal with the native land claims. Congress passed the pipeline authorization act and President Nixon signed it in 1973.

During this time, the legislature was brought into special sessions to decide on permitting and taxation, learning a lot about the oil industry, much as the just completed special session around oil and gas. It is important for Alaska negotiators to understand the industry and for their advisors to know at least as much if not more than the oil and gas industry with whom they negotiate.

Without the oil discovery and promise of great riches all around, it may have been that those claims would still be outstanding. Instead, the parties agreed to establish a corporate structure system for native entities. This proved to have about a 50% success rate, as half of the 12 established native corporations and many of the tribal corporations went bust in fairly short order, due to their inexperience with this form of management. In fact, the Alaska Congressional delegation created a tax break system, whereby profitable corporate entities could purchase native corporation losses, thus depriving the U.S. Treasury of tax revenues, while those that wasted or pilfered the native corporations’ resources got off pretty much without consequence. It might be valid to consider that the oil companies didn’t care about the total cost of the pipeline (witness the buried D-8 cats and other examples of wanton waste on the project) as they were entitled to recover all of it as part of the transportation cost. This is a good example of why any natural gas taxation scheme must be based upon gross and not net.

The State of Alaska, in accordance with the U.S. Reclamation Act of 1902, was entitled to receive 90% of the federal receipts of oil royalties. Under § 35 of the Mineral Leasing Act (MLA), certain western states receive directly 50% of revenues. An additional 40% goes to those states indirectly through the construction and maintenance of irrigation projects under the Reclamation Act of 1902. These percentages previously were 37 ½% and 52 ½% respectively. Because the territory of Alaska did not benefit from the Reclamation Act, it initially received only a 37 ½% share of federal leasing revenues. Before enactment of the Alaska Statehood Act, Congress amended the MLA to provide that the territory of Alaska would receive an additional 52 ½% share, thereby putting Alaska on the same footing as the other states, receiving a total of 90% of revenues from leasing under the MLA. Section 28(b) of the Alaska Statehood Act again amended the MLA to change the references from the territory of Alaska to State of Alaska. It was later found in court to be amendable by Congress, so Alaska only commonly asserts the same 50% share that other western states get. However, in some form or fashion, we managed instead to settle for 12.5%. Maybe someone could explain that one?

All that being said, when royalties and severance taxes began flowing, it was like bears eating salmon at McNeil River. The Permanent Fund was proposed, developed by Jim Rhode, to put away a portion of the vast revenues coming in, with longevity based dividends to Alaskans, differentially meant to benefit those who lived through the tough times as well as to build a constituency for preserving the corpus of the Permanent Fund. A quick court suit (3 years) using the Interstate Commerce Clause decided that all Alaskans were entitled to the same amount of dividends. Time marches on and most Alaskan think the purpose of the Permanent Fund was to give dividends to Alaskans.

So here we are, nearly 30 years after the oil started flowing. Oil has been pumped out as fast as possible from every corner of the world to maximize short term profits regardless of worldwide prices and we are now on the downswing of production and reserves. Generous tax benefits were given to the oil companies to recover heavier and deeper oil deposits and the oil companies have taken such advantage of these benefits so that, even during record oil prices, they pay little or no tax to the Alaska treasury on profitable fields. At the same time, the oil companies and consuming industries have fought tooth and nail quite successfully against any attempt to mandate more efficient use of this non-renewable resource.

The Arab Oil Embargo in 1974 caused our nation and the world to embark on exploration for renewable energy and conservation techniques to minimize our consumption of fossil fuels. Once demand fell and the embargo ended, so did our efforts. This was followed by a period when overproduction in the Middle East drove the price of oil down from $36 a barrel at the peak of Alaska's oil boom in 1980–81 to $13.50 a barrel in 1988, causing another bust in Alaska. Cheap oil again killed any incentives toward conservation, even as high consumption sport utility vehicles, treated liberally as “trucks” from the standpoint of fuel efficiency, became 50% of the auto transportation market in America.

Some sensitivity to the damage that careless production of fossil fuels might cause was demonstrated by the Exxon Valdez oil tanker running aground in Prince William Sound and spilling 11 million gallons of crude along hundreds of miles of coastline. It cost Exxon several billion dollars to clean up as best they could. Keep that figure in mind when you consider my radical proposal later in this paper.

As we now are at what most would call “peak oil” production, more effort is being expended to seek alternatives to oil. Consumption has risen, developing nations, especially China and India, are expected to demand more. At the present, the most efficient and least environmentally non-renewable resource is natural gas, still quite abundant throughout the world. It could be said that natural gas resources are about parallel with what oil resources were 100 years ago.

Natural gas is more environmentally friendly due to less CO2 emissions, which as we now mostly believe, are causes for concern in the upper atmosphere and resultant disruption of our fairly balanced delicate world climate. This being said, we would be well within reason to suggest we stop consumption of any fossil fuel in favor of environmentally well sited renewable energy and only use natural gas as a bridging fuel while we re-structure the world’s energy economy to renewable energy.

An aside here as some would suggest we need more nuclear power to get us off non-renewable energy. One of the problems with a consumptive society is that we use some item, but that it comes with packing and inherent waste that must be taken care of when we finish consuming whatever that item is. Nuclear energy falls into the latter category in spades with deadly waste that lasts many thousands of years. Some arrogantly think they can bury it some place where it won’t bother anyone, but to guess 100 years down the road is considered pretty far thinking (believe me, I’ve been ragged for thinking too far term). So to assert that we know 10,000 years is lunacy. If we are to use nuclear energy, we need fusion, which will leave no harmful waste. That appears to be not feasible, at least unless we capture the fusion energy from our sun. Solar energy is suggested here.

The design of capitalism, now the dominant economic system worldwide, is to benefit the shareholder and corporation. Government is considered a hindrance to the free market and urged to get out of the way with reduced regulations. Externalities, environmental and otherwise, are not part of the equation. At the same time, the political system in many places is overwhelmed with special interests and the corporate lobbyists have the most access, as they have the funding from commerce. To represent mankind’s long term interest instead of short term “economic development” is considered incredibly naïve and one would be considered a flaming socialist or rabid environmentalist at best. It is hard to get elected without money and the political system is heavily stacked against anyone that would not align with monied interests. The Soros’ and Laurence Rockefellers are few and far between. Some now believe, much like local communities and states going around the Bush Administration’s refusal to implement Kyoto Treaty standards for the country by just doing it at their governmental levels. I might just agree.

So at the current juncture in Alaska, the main political debate is how to get a gas pipeline from Prudhoe Bay in order for the State of Alaska to guarantee the money train from our pitiful portion of the resources the oil companies extract on the North Slope.

The oil company perspective is that it would be most economical to go across the Arctic National Wildlife Refuge with a pipeline into Canada and tie in the with the proposed gas pipeline from the Mackenzie Valley. Congress with the support of the State of Alaska saw otherwise, believing wisely for once that such a pipeline might bring royalties, but no benefits of natural gas energy to Alaska markets. Jobs for construction and maintenance would not benefit Alaskans near as much as if it were built in Alaska.

If that is settled, then the issue becomes whether a pipeline should be built along the Alaska Highway through Canada to Midwest U.S. markets or down the Trans Alaska Pipeline System (TAPS) corridor to Valdez, liquefied and shipped to LNG terminals. Besides the long lead time before completion that either project would require, there are other factors that create uncertainty.

There have been quite a number of economists and other experts testifying one way or the other to the Alaska Legislature. Gov. Murkowski asserts that his draft contract with the major oil companies for the Alaska Highway route is the only way the majors will build it but only if Alaska offers so many incentives to the oil companies that Alaska loses quite a lot, including the chance that the pipeline would even be built.

The Alaska Highway route has numerous impediments to construction. It is a very long and costly route. Canada and its provinces and territories are far from being able to fully permit the pipeline. First Nations still are awaiting a legal settlement from the National Government. If and when such a pipeline did get constructed, delivery of such huge quantities of natural gas would probably cause the price to drop substantially, further impacting the economic viability of the project. The project also assumes 1/3 more natural gas reserves that currently estimated. I’ve seen no indication where those extra reserves will come from.

The alternative “All Alaska” route to Valdez is substantially less expensive to build, but has the added challenge of transportation from Valdez and where to land LNG. Currently, U.S. destinations for LNG are only in the Gulf of Mexico, while the demand is on all coasts. Internationally, due to plentiful supply in the ground, many resource rich nations are competing for sales.

In either case, the population base and workforce of Alaska is unable to supply but a small portion of the needed labor to complete a pipeline project of this magnitude. Once again, we would experience the pain of boom and bust, local communities would suffer with quality of life and economically, as they work to provide short term but expensive infrastructure.

I have proposed a radical concept of building a smaller but sustainable All-Alaska pipeline, with a dog-leg to the Anchorage area, and perhaps further, as economics may allow. Several billion dollars, roughly equivalent to what Exxon spent to clean up their mess from the Exxon Valdez spill, ought to be a good start.

  • Construction costs in an existing right of way (TAPS) would be less than a virgin route, thus cheaper. Permitting would be easier
  • A smaller pipeline would require less high demand resources such as steel and labor.
  • A smaller pipeline would cost less overall.
  • It would also give Alaskans an opportunity to build up a technical labor force to accomplish larger projects.
  • Due to the smaller scope of the project, it could be completed more quickly, reducing market uncertainty.
  • The boom-bust impact to communities would be substantially less.
  • Alaskans would benefit from the bridging fuel of natural gas.
  • Anchorage will have a steady supply of natural gas as their Cook Inlet fields diminish.

Three concerns are mentioned to me when I have made this proposal:

  1. The major oil companies may not agree to transport their gas through someone else’s pipeline. I think that, considering all the impediments to the other proposed pipelines, this is an issue that can be addressed, if not through the Stranded Gas Act, by other means, legal or economic. The oil companies have benefited enormously from the profits in transporting oil through TAPS and in their own tankers from Valdez to worldwide markets. But if they can’t afford to take the admitted large risk with a multi-billion dollar project along the Alaska Highway, admit that and work with alternatives.
  2. Who will finance such a project? I don’t have the answer entirely, but I would assume that the Port Authority, who was charged by Alaskans to develop a pipeline, would be a likely candidate.
  3. Where will the exported natural gas be sold? This again is something that will take effort of those who know more about natural gas markets than I. However, logic dictates that, with oil supply peaking and oil demand increasing, the market for natural gas will increase as users seek alternatives to oil.

A second radical concept following construction of this small scale natural gas pipeline system is that Alaska would use a substantive percentage of the proceeds from transporting the gas to fund sustainable alternative energy, especially for those communities that would not directly benefit from access to natural gas. Instead of using natural gas income to pay short term Permanent Fund dividends, we would use it to invest in getting Alaska as much off the carbon consumption track as possible. Instead of an All Alaska Gas Line, it would be the All Alaskans Gas Line. This would allow us to reduce if not eliminate our burning of coal, by far the worst carbon dioxide emitter of all the fossil fuels. Alaska has huge reserves of coal, but to be quite honest, it’s not in anyone’s long term interest to use as fuel. No current technology can scrub CO2. Clean Coal remains an oxymoron. Local citizens could also convert heating plants to natural gas at a relatively small expense.

Developing robust renewable sources of energy for Alaska can alleviate the resource markets’ instability. That being said, non-renewable energy can only increase in cost, unless the world also discovers that they need to get off fossil fuels. And again, Alaska would benefit with such a renewables strategy.

Economic analyses of the various gas pipeline proposals don’t truly incorporate environmental and other externalities. If this project is looking forward 10-20 years into the future, the continued impacts from climate change can radically upset future economic assumptions. For example, imagine the economic impact on a pipeline project if a carbon tax were imposed nationally or internationally.

I don’t pretend to have all the answers, but believe the logic is solid for these two proposals:

1. Human society needs to get off of fossil fuel consumption. They are destroying the habitat upon which we rely for survival. Not to do so will just hasten our own destruction and as a developing species. It will also cost us more to NOT act, as we try to cope with climate change impacts.

2. We can learn from history (maybe) by using the most environmentally friendly non-renewable energy as a bridge to a sustainable renewable energy society.

3. While Alaska can’t change the world, we are blessed with the opportunity and resources to change our state into a model to inspire others, while benefiting our own society. We contributed the concept of the Permanent Fund and other nations and governments now seek to emulate it. Small as we Alaskans are as a society, we can make a difference.


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