Repeating history on the gasline?

Building a gas pipeline to the Lower 48 has been a dream of Alaskans for over 30 years. I have been involved in or observed the efforts to bring that dream to reality during most of that time. There is a common thread that has run through those efforts that is present again today. We should be concerned.

The common thread is that market conditions in the Lower 48 at first create a great deal of excitement around Alaska gas. In short order, a proposed gasline is scoped to bring Alaska gas to the Lower 48. The project in due course then runs into political problems, which delay progress until, finally, the conditions in the Lower 48 gas market evolve to the point that Alaska gas is no longer needed and deferred to “another time.”

The first time this sequence occurred was in the 1970’s and early 1980’s. In the early 1970’s, the Lower 48 began experiencing severe natural gas shortfalls. During the winter of 1976, industrial plants and even schools closed periodically during the winter months as demand outstripped supply. Moving Alaska gas from the newly discovered Prudhoe Bay field to the Lower 48 became a national priority and Congress ultimately passed a law paving the way.

Rather than seizing the moment, however, the effort became enmeshed in political problems. At first, several companies competed against each other for regulatory approval. Rather than allowing the market quickly to decide which proposal worked best, Congress authorized the President to pick a “winner.” Because they perceived the gasline would go forward regardless, the Congressional legislation and the President’s decision required that the winner accept several conditions.

Those conditions, however, burdened the gasline with additional costs and complexity that slowed it down to the point that, by 1980, still no earth had been turned.

By that time, the Lower 48 gas market had begun to change. Other developments, including technological advances in drilling techniques and further Congressional action permitting producers to achieve higher prices for their gas, resulted in a surge of Lower 48 gas supplies.

Ultimately, by the mid-1980’s, the financial markets concluded Alaska gas was no longer needed and work stopped. While subsequent efforts in the 1990’s attempted to revive it, each time political challenges slowed it down to the point that the gasline ultimately faltered in the face of market changes.

Now, as we approach 2010 we are deep into the same cycle.

As in the 1970’s, companies are competing against each other for regulatory approval. As in the 1970’s, government – this time, Alaska’s government – has tried to pick “a winner.” As in the 1970’s, in the process of picking “a winner,” politically driven conditions have been imposed that raise costs, create substantial complexity and slow progress.

And, finally, as in the 1970’s, market conditions in the Lower 48 are evolving. According to a recent report from respected Barclay’s Capital, today is beginning to look like “1985 all over again” in terms of the surge in Lower 48 gas supplies. The Potential Gas Committee -recognized experts in the field – recently estimated that over 500 Tcf of additional, largely shale gas resources have become available in the Lower 48 since 2006 largely because of new technology.

There are three lessons that we should take from earlier experiences.

First, the gasline projects should move forward as quickly as possible. Delay inevitably results in the Lower 48 market finding other solutions to its problems. If the project this time is not yet beyond the window of opportunity, it is at the ragged edge.

Second, the market should decide which entity builds the line, not government. We have been down that road before, and it ends in failure.

Finally, Alaska should remove the AGIA conditions that currently burden the project. History has proven government can condition the gasline into oblivion. Instead, we should adopt the approach a long-time Alaskan I know is fond of repeating – “government’s role is to be a gentle breeze at the back of industry; not a gale force wind in its face.”

As oil production from existing North Slope sources rapidly declines, Alaska faces a highly uncertain future. The gas pipeline is not the total solution, but it helps.

In the next Legislature, Alaska must eliminate the conditions it imposed on the gasline and move forward now. If not, Alaska as we currently know it economically is in deep, deep trouble.

Reprinted from Alaska Dispatch, Talk of the Tundra (Oct. 19, 2009) (http://www.alaskadispatch.com/voices/tundra-talk/2431-repeating-history-on-the-gasline).