Walter Hickel used to say, "State government cannot be run like a business." He gave two reasons: first, government requires too much accountability by the public; and second, political leaders seek re-election for their support, not profits from the venture.
Alaska is about to once again jump into an agreement on a gas line project that will cost significant sums of money. The problem is the state no longer has the money to waste on low-probability projects that drain its cash reserves.
There is sufficient engineering data to prepare a preliminary economic feasibility study on the proposed "producer" project. It is important to note that the producer project and the in-state gas line project are basically the same project. If the state and producers were to combine their engineering data, with some updates for current prices, a feasibility study could be produced at a cost of less than $75 million and be ready for review by the next Legislature. The state's share of the study would be significantly less than is currently proposed.
It is extremely important to understand the motivation of the producers. It is clear they want to develop the gas, as long as it is profitable. Market conditions change and there are windows when the project could work and others when the economics do not work.
For a major gas line project to move forward, the producers have to get the agreements with the state and federal governments out of the way. Once they have those agreements, it then just becomes a question of when the market window is right for the project to move forward.
The investment of significant sums of money now by the producers is money well spent, particularly if the state foots a portion of the cost. When the agreements are in place between the producers and state and federal governments, then the project can be set aside and wait for the right time for development. That may be five years, or it may be 50 years. There is no downside for the producers because they have many projects around the world and think long term.
The problem is that the state is entering into an agreement now that will tie its hands for a long period. Please consider the impact of the last big deal, AGIA, and how much that cost the state. It will be spending funds now on a study (for a project that is most likely 15 to 50 years away) rather than investing in infrastructure projects that could produce jobs for Alaskans in the near term.
For example, if the state were to help the Donlin Creek mining project move gas to the Bethel area, it could spur the development of a major mine that could produce 500 jobs per year and, at the same time, if done properly, bring low-cost energy to a large part of Western Alaska. There are a number of smaller such projects that could fundamentally help the Alaska economy as it attempts to diversify from oil. The problem is that the political leaders do not find these projects nearly as noteworthy as bringing home the "gas line."
The state no longer has the expertise to negotiate the scale of deal that the governor is proposing. In addition, it does not have enough information to make a proper investment decision on the governor's deal with the producers. If time was that critical, the producers would be doing the feasibility study in parallel with getting government agreements.
Every Alaskan should want a gas line to move forward, the question is can the state continue to throw money and time at these projects. The past five governors (including Gov. Sean Parnell) have spent an inordinate amount of time and money trying to move this project forward. There is nothing to show for the effort. There is also no foundation for the Alaska economy, billions have been spent on projects and operating budgets but without oil, there is no backstop for the state. Very few dollars from this year's budget are going into actual infrastructure that will upgrade Alaska's economy. The state can only build so many bike paths, tennis courts and swimming pools.
A way forward
Limit the agreement with the producers to a prefeasibility study using existing data (plus updates for current prices) to clarify the potential cost to produce LNG (one year worth of study). Take a hard look at what the market may be 10 to 15 years from now to determine whether the project will be completive. Have the state office that will be responsible for marketing the state's in-kind share of the gas report back to the Legislature as to how specifically it will do that and what it will cost. The producers could argue that this level of study is not sufficient to make an investment decision. However, the producers will not be borrowing $2.5 billion from their savings account to pay for day-to-day operations.
The engineering and cost work done by the state, to date, has not been in sufficient detail to answer the questions proposed above.
Alaskans should understand what the business the state is getting into, take time to get some data and quantify the deal the governor is proposing. Next year will not be an election year.
Harry Noah was commissioner of the Alaska Natural Resources Department under Governor Walter Hickel, senior manager of the Yukon Pacific LNG pipeline project, and preceded Dan Fauske as manager of the in-state gas pipeline project known as the "Bullet Line."
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch, which welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.