Alaska's AGIA Gamble: Looking Smarter Every Day

When the state of Alaska elected Sarah Palin to be its governor more than one year ago, she promised a tougher, smarter stance in dealing with oil producers in America’s 49th state. Specifically, she vowed to jumpstart the process of bringing down billions of cubic feet of stranded gas from Alaska’s North Slope to local customers, and beyond. Industry insiders publicly expressed doubt that she could succeed where the previous governor had failed. A year later, her landmark Alaska Natural Gasline Inducement Act (AGIA) has allowed the state to set forth on a path which will eventually produce a gas pipeline to bring domestic energy to market.

In late December, various news outlets began reporting that integrated energy giant ExxonMobil had been denied permission by Russia's Industry and Energy Ministry (or was dictated unfavorable financial terms) to construct a gas pipeline connecting the Sakhalin-I project to China. The news, if true, is significant in many ways. Relative to the AGIA process, however, Russia’s position is simply huge. With oil producers sitting on vast deposits on the North Slope for decades, one of the primary excuses not to bring these supplies to market was the immense cost of doing so and the uncertainty of energy prices that might support the effort. Beyond this, energy producers routinely opted to put their resources in other places around the globe where the terms of doing business were deemed more favorable to their bottom line. It was a strategy that, until recently, had worked rather well.

This week, crude oil prices reached a record $100 per barrel, and seemed likely to stay in that vicinity given escalating violence in Nigeria, a weaker U.S. dollar and the view (by some analysts) that global demand for oil will outstrip supplies. Last year also saw Venezuela’s leftist president, Hugo Chavez, all but expel oil developers from the South American country. Those who do not capitulate to renegotiated deals eventually will have to leave billions of dollars of investments on the table there. That painful and public process is well underway. The latest news that Russia did not agree to terms with a major integrated energy company for the building of a gas pipeline there is also more than telling. Suddenly, it looks like Alaska’s AGIA gamble may begin to pay big dividends.

The Palin Administration maintains that if the major North Slope producers choose not to participate as applicants to build the project, they will still be compelled to ship gas when the time comes to do so. Indeed, the leases afforded the big three in Alaska come with responsibilities to the State of Alaska. Eventually, and even though these oil majors have declined to participate in the AGIA process, the state will move the project forward and the stranded gas will be monetized and shipped. There’s no doubt any longer that the gas represents a good deal for all concerned, no matter whose terms under which it is shipped. It could well be that the best energy deal in the world today is sitting right here in the United States.

The AGIA evaluation process is now underway, of course. With five viable candidates already filing to build the pipeline, the likelihood of this happening -- sooner rather than later -- increases daily, especially as current events dictate a favorable climate for doing so. Eventually, the oil producers will be part of that equation and they’ll participate under conditions that will be favorable to their bottom lines, but within the parameters set forth by the State of Alaska. The conditions under which that could happen, unimaginable just two years ago, are now present.

The plethora of natural gas poised to be liberated in Alaska has implications for all of us. On the water, the very significant possibility of a spurline to Valdez through which vast quantities of this energy could be shipped to the U.S. West Coast -- maybe even on U.S. bottoms -- has awakened the possibility of an invigorated U.S. merchant fleet. Along with this goes the natural result of reducing (however small that effect might be) our dependence on foreign energy, a marked decrease in our trade deficit and the infusion of thousands of jobs and the tax dollars that go along with a project of this magnitude into the domestic economy. I can’t think of a more worthy project to kick off the New Year.

A gasline from Russia to China might very well happen and an oil major could be in an integral part of that effort. But, if you were in charge, where would you want to put your money on the table at this point? Russia? No, thanks -- I’m still smarting from my market losses in the Yukos debacle. Venezuela? As I type this article, there’s billions of dollars being left on the table down there. Nigeria? Please. No, the smart money is in Alaska now. Maybe it always was. -- MarEx

Joseph Keefe is the Managing Editor of The Maritime Executive. He can be reached with comments on this or any other piece in this e-newsletter at jkeefe@maritime-executive.com.