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Unintended consequences? Balash: Without exemption cap-and-trade scheme could sink NS gas line Alan Bailey Petroleum News
Without some form of exemption for the planned gas treatment plant at the Prudhoe Bay end of a future gas pipeline from Alaska’s North Slope, current climate change legislation working its way through Congress could add $14 to the cost of every British thermal unit of gas flowing through the pipeline, thus sinking the viability of the pipeline project, Joe Balash, special assistant to the governor for energy and natural resource development issues, told Law Seminars International’s Energy in Alaska conference on Dec. 7.
“That is something that frankly is going to push the project under water,” Balash said. “… At a minimum Congress needs to be sure to address that clearly, and not leave it ambiguous, so as to allow the investors and private sector enterprises to consider that as we move forward.”
Carbon allowances The problem is the cost of any carbon dioxide allowances that the pipeline operator might have to purchase under a carbon dioxide cap-and-trade scheme, if the carbon dioxide stripped out of North Slope gas in the gas treatment plant is treated as a carbon dioxide emission, even if that carbon dioxide is re-injected into field reservoirs for enhanced oil recovery. Prudhoe Bay natural gas typically contains about 12 percent carbon dioxide when it comes out of the ground — most of that carbon dioxide will need to be removed from the gas before the gas can be pumped down the pipeline. And both climate change bills currently in Congress contain cap-and-trade provisions.
A gas pipeline project might also have to face the cost of cap-and-trade carbon dioxide allowances for the gas-powered compressors used for driving the gas down the pipeline — that cost might amount to 15 cents per British thermal unit of gas shipped through the line, Balash said.
“The tolls will go up,” Balash said. “It will become marginally more expensive to move gas, and if that occurs you are adding another level of risk and challenge to the economics of the pipeline.”
Written testimony The state has provided written testimony to Congress with regard to the proposed climate-change legislation; the state supports a transition to a lower carbon economy with renewable energy but is questioning how to reach that low carbon future, Balash said.
“There are potential economic consequences and threats to both Alaska and the nation in the current (climate change) legislation,” he said.
And Balash emphasized the importance of a North Slope gas line as a factor in reducing U.S. carbon emissions.
“We have estimated that if just half of the gas delivered by the natural gas pipeline is able to meet markets in the Lower 48, you could do without 120 to 190 coal-fired plants. The difference in emissions is staggering,” Balash said.
And if natural gas does not come from Alaska people will seek alternative sources, either from overseas of from more expensive domestic production, he said.
Oil industry Cap-and-trade regulation of greenhouse gas emissions could have a major impact on the North Slope oil industry, with its 1970s and 1980s era facilities that emit huge amounts of greenhouse gas. The cost of retrofitting those facilities with more efficient, modern equipment would dramatically impact the economics of producing new Arctic resources, Balash said.
“If retrofits are too expensive, there could be a decision to just live out the useful life that’s left and that would again hurt domestic (fuel) supplies,” Balash said.
Balash also expressed concern that the cost to the Alaska oil and gas industry of carbon dioxide allowances would significantly impact state oil revenues, given that those revenues are in part calculated net of production costs.
“It’s likely that the cost of obtaining allowances, if they were imposed upon producing companies at the wellhead, would flow through our tax system and be felt in the Treasury,” Balash said.
The revenue impact could be anywhere from $600 million to $10 billion over a 34 year period, he said.
And, if the cost of carbon dioxide allowances were to be added to gas pipeline tolls that would reduce the wellhead value of the gas, thus reducing the state’s natural gas royalty and tax take.
Oil refineries Balash also expressed major concern about the possibility of the state’s three oil refineries going out of business as a consequence of the cost of carbon dioxide allowances, under the terms of the current versions of the federal legislation. The Alaska refineries are simple plants that don’t process the whole of the crude oil stream and, thus, are not as profitable as many refineries elsewhere, he said.
“The cost of the allowances to keep those refineries in operation, we’ve estimated, in a mid-case scenario would approach $6 billion over 34 years,” Balash said. “That cost is tremendous, and if those refineries aren’t able to deal with those costs, either through increased pricing for consumers or the failure to attract the necessary capital from their owners to keep them operating, then we face the possibility that they would shut down.”
The shutdown of the refineries would result in fuel having to be shipped to Alaska, with a consequent major increase in tanker traffic to the Port of Anchorage and a need for a huge increase in Alaska fuel storage capacity. Loss of a viable source of jet fuel in Fairbanks could put the international airport there out of business. And the lack of locally available fuel supplies would massively increase the length of the supply chain for fuel for Alaska’s military installations, Balash said.
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