OPINION: It’s no mystery why chasing an Alaska LNG project is a waste of money

There are two ways to move natural gas to market: pipelines over land or shipping liquefied natural gas (LNG) over sea. If you have a choice, mile for mile, shipping costs less than piping, but only after a certain point; you need a lot of miles of shipping to offset the high cost of liquefying the gas.

At any point in time, depending on fuel and steel costs, as well as other factors, there is a rule of thumb as to where the distance-to-market tradeoff favors LNG over pipe. However, there is never a rule of thumb that says doing both of them makes sense. Hence Alaska’s problem: It is the only project in the world where you have to spend billions of dollars for an 800-mile pipeline to get to the point where all other LNG projects begin. This makes commercializing North Slope gas uncompetitive.

Pipeline economics live or die with economies of scale. Recalling high-school geometry, the volume of gas in a pipe increases exponentially as the circumference rises. You need a lot of gas in the pipe to bring the per unit costs down. So, the pipeline part of the project needs to be very large — that is why a small-diameter pipeline solely for Southcentral Alaska use does not pencil out.

This creates two additional problems. You need to market a lot of gas in a short amount of time, rather than entering markets in the usual way, incrementally as demand increases. If you cannot, the rate of return suffers. And you need large volumes of long-term contracts to keep investors happy, while buyers shy away from them.

Add to this the experience of an aggressive oil tax enacted in 2008 (“ACES”), which created one of the highest tax systems on earth. This was after scores of billions of dollars of production infrastructure was in place. (This was fixed six years later.) Couple this with the two subsequent (unsuccessful) ballot initiatives to move oil taxes back into the stratosphere. Investors would be extremely reluctant to spend mega-billions, with the risk of value being expropriated by higher taxes after the project was built.

And while 20 years ago natural gas was considered clean, it no longer is.

Against this backdrop, the governor is seeking $4.5 million this year to feed the Alaska Gasline Development Corporation (AGDC). There are sound reasons why the gas pipeline was never built, and probably never will be. With the sorry condition of education, roads and parks in this state, surely the money could be put to better use.

Roger Marks is an economist in private practice in Anchorage. From 1983-2008, he was a senior petroleum economist with the State of Alaska Department of Revenue Tax Division.

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