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Alaska's Natural Gas Crisis: America Held Hostage by Big Oil

Published Jan 12, 2011 8:20 AM by Joseph Keefe

Lost amid the exciting melodrama being played out down south between ExxonMobil and Venezuela’s state-controlled Petroleos de Venezuela (PdVSA), the record oil profits being declared for the 4th quarter of 2007 and the embarrassing expulsion of oil majors from various countries around the world, is the inexorably slow progress being made in Alaska to free stranded natural gas from its North Slope. The treasure trove of energy represented by dormant natural gas leases on the North Slope now has to rank as perhaps the most painful reminder in America as to why we are so deeply dependent on others for our energy, as well as continually handicapped by a massive foreign trade deficit. Beyond this, the national security implications of not bringing this domestic energy supply into play are plain enough for even the most naïve of observers.

For more than a year, Alaska’s governor, Sarah Palin, has been intent on doing what none of her predecessors could accomplish: deliver plentiful and sustained natural gas to market. To do so, she has opened up a previously secretive - but fruitless - process for all to see, and participate in. Her Alaska Gasline Inducement Act (AGIA) set forth specific parameters under which parties could bid to build a pipeline. The major North Slope producers and leaseholders have so far declined to participate.

Palin’s efforts have elicited a number of bids, but only one which will be officially considered by the state of Alaska. TransCanada is now alone in its bid to build the multi-billion dollar pipeline. ConocoPhillips has also stepped up to make a bid, but they declined to follow the protocol set forth by Alaska. At this point, the strategy by the oil majors seems to be to completely ignore the state of Alaska’s current regime; in the hopes that eventually, they’ll get what they want. And since they are the holders of the leases on the North Slope, like it or not, everything for the time being does revolve around them.

It is an overused word, but there is real irony in the situation in Alaska today. Big oil is being squeezed out of virtually every energy rich country in the world, via renegotiated contracts or worse, outright expulsion. Despite all of that, these oil producers have found a way to deliver record quarterly profits. In fact, the combined profit of BP, ExxonMobil and ConocoPhillips in the 4th quarter alone would probably build an Alaskan gas pipeline, and then some. And could there be a more stable place to do business? Probably not.

I used to think that the AGIA process was going to work, but now, I’m not so sure. It is as if the state of Alaska has thrown a party to announce that they’d like to produce some energy, and everyone decided to stay home. I’m quite certain that things must be pretty good at ExxonMobil, BP and ConocoPhillips if the AGIA process is of no interest to them. 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. But anyone building the gasline also needs assurances that the producers will deliver the gas when the pipeline is complete.

The plethora of natural gas poised to be liberated in Alaska has implications for all of us. On the water, the 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.

The selection of TransCanada as the most likely builder of the pipeline is troubling, on at least two fronts. The chances of a spurline to Valdez have now dimmed considerably. Although there is any number of options on the table, my guess is that it is more likely that TransCanada would be more inclined to build the pipeline through Canada in order to bring gas to the lower 48. That option would not only eliminate the need for the domestic maritime component of the equation, it also places our energy needs at the mercy of a valve in another country. That’s a bad idea. Canada is a pretty good friend in most respects, but these things have a way of turning around in time. The past 7 years come to mind, right about now.

At MarEx, we usually concentrate on all things “Maritime.” Energy issues have a funny way of making it into our newsletters and print magazines, however. From where I sit, a Valdez gas marine terminal makes a lot of sense. More than a year after the initiation of the much-heralded AGIA process, I’m not sure that we are any closer to bringing stranded gas to any market. That’s not Sarah Palin’s fault, though. You have to wonder what the oil majors are waiting for. Healthy balance sheets, tempered by rapidly waning energy development opportunities overseas should, in theory, make trillions of cubic feet of Alaskan natural gas look pretty attractive. Apparently not.

I can’t think of a better time to bring Alaska’s stranded, clean-burning gas energy to our domestic markets, via domestic means. With a possible recession on the near horizon, $100 per barrel oil and a spiraling trade deficit, I also can’t think of better medicine for what ails us. At the end of the day, we may have to give the producers everything they want to get it. And, that’s a shame. - MarEx

Joseph Keefe is the Managing Editor of THE MARITIME EXECUTIVE. He can be reached at [email protected] with comments or questions about this or any other piece in this newsletter.