David Gottstein is obviously enamored with exporting Alaska natural gas reserves; so exuberant is he about carting as much gas out of state as possible to maximize profit that his analysis takes a strange detour from the North Slope to the Susitna River when he observes "that a major dam, if built, could eventually allow us to, in the not too distant future, dramatically reduce the need to consume our own natural gas." Thus making it more available for export. In other words, according to Gottstein, the Susitna River dam, if built, will be a two-for-one! Not only will the dam generate electricity from "free" water, it will also free up the gas that would have otherwise been burned by Southcentral utilities to produce electricity. Buyer beware, however.
It doesn't take a utility-rate analyst to see this argument doesn't hold water.
According to Alaska Energy Authority, which would build and operate the 735-foot-high, 600 MW dam, the dam will have a 50-percent capacity factor and generate around 2,800 gigawatt hours annually, which is about 55 percent of what the electricity Railbelt utilities generate annually. Given this amount of generation, the dam would displace about 20 billion cubic feet (Bcf) of natural gas that would otherwise be required to produce the same amount of electricity with gas-fired turbines. Not only does the dam produce the equivalent of about 20 Bcf of gas-fired electricity with the "free" ($0.00) river water, it "frees up" the gas that would have been burned to produce the electricity in utility power plants. (The Susitna dam reduces gas consumption about 25 percent, whether this would constitute a dramatic reduction is subject to debate).
Therefore, when considered from Gottstein's point-of-view, the Susitna dam would have a net energy yield equivalent to about 40 Bcf annually or about 100 million standard cubic feet per day (MMcf/d). In comparison, the Alaska Stand Alone Pipeline (ASAP) would yield about 500 MMcf/d, which is five times as much as the proposed Susitna dam. The Susitna dam would cost about $6 billion, not counting financing costs, while ASAP is estimated to cost about $7 billion, not counting financing costs.
If Gottstein believes that ASAP is a bad deal, by what (il)logic can he possibly conclude that Susitna dam – which would yield about one-fifth of the natural gas of ASAP at an estimated capital cost about 85 percent of that of ASAP – be considered a "good deal?" That Gottstein's reasoning about the dam has gone down the river without a paddle is further apparent when evaluating the cost-of-power from the dam: Alaska Energy Authority's most current estimate of the proposed dam's cost-of-power is $0.18/kwh at the generator (i.e., busbar), which does not include the cost of transmission to the load centers nor the cost of distribution from the transmission system to the consumers. Currently, Chugach Electric Association's average cost-of-power at the busbar is $0.077/Kwh, burning natural gas that costs on average $6.79/Mcf (thousand cubic feet). Therefore, Susitna dam electricity ($0.18/Kwh) is equivalent to Chugach paying an average of $19.40/Mcf for natural gas to burn in its turbines.
Consequently, when Mr.Gottstein extols the dam because it "frees" 20 Bcf of gas for export, he obviously has not surmised that this 20 Bcf of "Susitna-derived" gas has a well-head value of $19.40/Mcf; when pipeline-transportation cost is added, this "Susitna-derived" gas would cost at least $24.00/Mcf before it arrives at an LNG facility. There is no market for this gas when the price of LNG delivered to Asia is currently between $16.00 - $18.00/mBtu (the heat energy of one thousand cubic feet of natural gas is about one million British thermal units). In comparison, the estimated cost of gas delivered to Southcentral by ASAP is $9.75/Mcf (wellhead gas at $2.00/Mcf, gas conditioning at $2.04/Mcf, pipeline tariff at $5.71/Mcf).
So, how is it that Mr. Gottstein condones the dam, at least implicitly, as fiscally responsible, but considers ASAP, which would provide five times more energy at a slightly higher capital cost and deliver gas to an LNG facility at nearly one-third the cost of "Susitna-derived" gas. This makes no sense.
Also, Gottstein urges that rather than build ASAP, the Railbelt should instead import LNG for as long as it takes for the large-diameter pipeline to become viable; the problem is that no one, including Gottstein, knows when that will be — it could be years, or decades for the pipeline to materialize. Thus, the Railbelt would forgo gas at $9.75/Mcf and instead import gas at $16.00-$18.00/Mcf (plus the additional fee for regasification), while betting that the large-diameter pipeline is sooner rather than later. Making such a bet is more than a tad bit reckless.
My disagreement with Mr. Gottstein should not be understood as unequivocal support for state financing, owning, and operating ASAP, but if forced to choose among a $6 billion Susitna River dam, a $7 billion ASAP and a $30-$40 billion large-diameter pipeline, ASAP is the better investment. The large-diameter pipeline poses too great a risk to be considered a prudent state investment, while the dam produces too little energy for the investment compared to ASAP.
The problem with ASAP (and the large pipeline) is the risk is high the pipeline will not operate at full capacity; the less full the pipeline, the higher the price of gas will be to Railbelt gas consumers, while the gas producers still rake in the profit from the sale of gas at the well-head. The other serious concern with these pipelines is that you and I could end up paying much higher costs for gas than advertised in order to keep the price of exported gas competitive.
In short, I do not agree with Mr. Gottstein that his approach of maximizing exports of Alaska's natural gas will ensure the Railbelt energy-supply security and/or stably priced, affordable energy. I do not believe it is a reasonable strategy to kill the two birds of maximizing gas export value and Railbelt energy-supply with one pipeline.
Instead, I would suggest that the small-diameter pipeline proposed by Fairbanks Pipeline Company is the more realistic approach to ensuring gas supply to the Railbelt, albeit the producers will still control gas pricing.
The only way to ensure a long-term gas supply for the Railbelt and to ensure the gas price is stable and affordable is for the state to produce its own Cook Inlet gas resource. I estimate that for an investment of about $3 billion to explore and develop the Cook Inlet gas resource, the gas could be supplied at a cost to the utilities of about half of the current cost, or about $3.30/Mcf.
Before the state spends $6 billion on a concrete plug in the Susitna watershed to develop a relatively small amount of energy, it should explain why it is not developing the Cook Inlet gas resource for less investment and less harm to the local environment.
Jan Konigsberg is an independent energy analyst whose Alaska Hydro Project focuses on hydropower projects under the jurisdiction of the Federal Energy Regulatory Commission with the support of the national Hydropower Power Reform Coalition. His analysis of Railbelt energy-supply options is available online.
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.