Plan B, if the Big Line fails

There is no doubt that the long-desired pipeline to carry gas from Alaska, through Canada, to the Lower 48 — the so-called “Big Line” — is in significant trouble.

To be sure, the Parnell administration has attempted to convince Alaskans otherwise to justify the state government’s continued $500 million subsidy of TransCanada’s project under the Alaska Gasline Inducement Act. However, the observations of as diverse a group as the highly respected Potential Gas Committee, the federal Energy Information Administration and long-time and widely regarded consultant (sometimes to the Alaska government) Daniel Yergin clearly demonstrate the gravity of the situation.

In a November article in The Wall Street Journal that summarized the effects of what Yergin terms the shale gas “revolution,” he concluded, “[a]t current levels of demand, the U.S. has about 90 years of proven and potential supply — a number that is bound to go up as more and more shale gas is found.” Against those numbers, is it realistic to think that producers will risk the $25 billion to $30 billion necessary to build an Arctic pipeline to attempt to penetrate an already oversupplied Lower 48 market? Not really.

So what happens to North Slope gas — which is almost as important going forward to the Alaska economy as incentivizing continued development of Alaska oil — if the Big Line fails (or to use the EIA’s gentler term in a November study, if it is “significantly deferred”)? Because the groundwork is in the process of being laid now, Alaskans should focus on — and ask those who propose to lead them — what is “Plan B?”

Three scenarios — all led by various government components — are materializing. The first two focus on other methods for developing a market for Alaska’s North Slope gas. Oddly, the third scenario goes in reverse, and proposes steps that undermine monetizing Alaska’s North Slope gas.

The two that develop a market for Alaska’s gas are the Alaska Gasline Port Authority’s Valdez liquefied natural gas project, which is the centerpiece of Bill Walker’s campaign for governor, and the North Slope to Southcentral bullet line, most recently in the news as a result of Harry Noah’s resignation from the Department of Natural Resources.

Of these, the bullet line clearly creates the best future for Alaska in a Plan B world.

Why is the bullet line the best? That is easy. The bullet line bundles a number of markets together in one project, and by doing so achieves the lowest cost for all users. It supplies gas to Fairbanks — which needs a cleaner fuel to address the area’s increasingly worrisome environmental issues. It brings gas to Southcentral — which even the Parnell administration is now beginning to admit needs new gas supplies to offset declines in Cook Inlet production.

The Bullet line also creates the potential for a value-added industry in Alaska, such as the proposed, large scale gas-to-liquids project, which depends on the Cook Inlet’s depleted oil and gas reservoirs to store the carbon dioxide produced from the process. The bullet line additionally brings a supply of gas to the Pebble Project, which because of the size of its demand for gas, would significantly reduce the transportation costs borne by other Southcentral consumers. Also, the bullet line provides a means for monetizing Alaska’s North Slope gas on a large scale by moving it to tidewater (albeit the Cook Inlet), paving the way for an LNG export project.

By bringing all of these requirements together, the bullet line produces the lowest cost transportation option for all users, and, in doing so, creates the greatest potential that each project it touches clears its economic hurdles.

The Valdez LNG project only serves two of the requirements, supplying gas to Fairbanks and bringing gas to tidewater. Of course, Bill Walker argues otherwise, suggesting that the project additionally can serve the Southcentral projects through a spur line built from Glennallen. The spur makes economic sense, however, only as an add-on to the Big Line.

Harry Noah’s work makes clear that if there is no Big Line, then going first down the Richardson Highway and then doubling back to Southcentral (as proposed by Valdez LNG supporters) adds nearly $500 million to project costs. That cost will largely be borne by Southcentral consumers and industry. There is no economic reason to burden Alaska’s consumers and industry with that additional cost where an LNG export facility can be built as easily in Southcentral as Valdez.

The third scenario clearly is the worst. Instead of pursuing an alternative means for monetizing Alaska’s gas, the plan endorsed by the Alaska Energy Agency in its recently circulated draft Integrated Resource Plan covering Railbelt electric utilities actually takes a step backwards. The AEA recommends moving away from using Alaska’s gas for future Railbelt needs and instead, focusing on the capital-intensive Chakachamna hydro project.

Because AEA’s proposal reduces the demand, and thus, the economies of scale associated with either the bullet line or the Valdez LNG projects, it makes each — and the projects they would serve — less economic. This decreases the likelihood that those projects will be built and Alaska’s North Slope gas developed. In short, if Alaska does not use its own gas in a Plan B world, it is less likely others will as well.

When do Alaskans need to focus on Plan B? The answer is this coming year.

Because of the lead times involved in a project of this scale, Alaska’s direction in the Plan B world largely will be set in the next two years. The AEA has proposed legislation for this upcoming session that starts down the path toward Chakachamna. If elected, Bill Walker proposes to direct all of Alaska’s efforts toward the Valdez LNG project. For reasons that appear to tie back to their increasingly quixotic pursuit of the Big Line, the Anchorage Daily News editorial page reports that the Parnell administration’s leaders continue to undermine the bullet line.

As a result, if Alaskans wait to focus on Plan B until after the open seasons for the Big Line fail, we may find that the state’s Plan B course has already been decided — and not on favorable terms.

James Carville constantly reminded the Clinton campaign in 1992, “it’s the economy, stupid.” In Alaska, especially in this coming decade, “it’s the oil and gas, stupid.” Alaska needs to come together on a Plan B, it should be reflected consistently throughout all levels of government and it should be relentlessly centered on preserving and expanding markets for Alaska gas. Alaska candidates should be tested on their positions.

Reprinted from Alaska Dispatch, Talk of the Tundra (Jan. 5, 2010) (http://www.alaskadispatch.com/voices/tundra-talk/3514-plan-b-if-the-big-line-fails).

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