Welcome to the Alaska Support Industry Alliance’s 23rd annual “Meet Alaska Energy” conference, where we will spend the day looking out the window.
This year’s theme, “Global Energy Markets: Alaska’s Window of Opportunity,” might sound trite and shopworn but we believe it highlights two key realities of energy production today.
First, today’s energy markets truly are global, with worldwide competition for capital dollars. Assets, capital and investment can move virtually overnight to areas of the globe where investment risk is minimized and the prospect of project success is high.
Second, the “window of opportunity” is not a metaphor for some market opportunity here today but gone tomorrow. Rather, it suggests an Alaska opportunity that has come of age due to the significant imbalance in supply and demand in the world’s largest natural gas market, North America.
The tension between North America supply and demand is reflected in higher gas prices. The U.S. Energy Information Administration’s “2004-2005 Winter Fuels Outlook” says wellhead natural gas prices are expected to average $6.04 per thousand cubic feet this winter, up nearly 23 percent from last winter’s $4.92. This bodes well for Alaska’s abundant supply of natural gas.
Why the high prices? Drilling in North America has been at historically high levels for the past several years without a corresponding emergence of new gas supplies. Additionally, there is a new and emerging pressure from Asia on Western energy companies for oil and gas.
And, to add even more pressure, energy companies in India and China want bigger slices of the global oil patch and are aided by the political and financial might of their governments, spurred on by the need to keep their billion-person economies moving.
North America’s natural gas market must look to unconventional and other non-traditional sources of gas: Mackenzie Delta, imported LNG and Alaska supplies. We will not be able to keep pace with demand — and keep prices affordable — without these new sources.
In any developed economy, especially North America’s, a prolonged limit in commodity supply, which means a prolonged period of high prices, leads to demand destruction, with industry closing down or moving overseas to get closer to cheaper feedstock sources.
The pending Agrium plant closure on the Kenai Peninsula is proof of that demand destruction. Agrium cannot find a dependable, affordable supply of natural gas, which is leading to the plant’s closure. High prices and lack of supply have destroyed that demand. More importantly, it has destroyed jobs.
Unfortunately, it is those same high prices that may finally lead to construction of the North Slope natural gas line. Projected higher prices are providing an opportunity for big expensive projects like the commercialization of North Slope gas.
North America’s growing demand cannot be filled by existing production wells in the Lower 48 and Canada, but high prices can pay the bills to open up vast known reserves across Canada and Alaska. This is our window.
Thanks to the work of our congressional delegation, Congress passed Alaska natural gas pipeline authorizing legislation last year, providing a federal loan guarantee, tax incentives and permitting certainty for the project. It was not the final step toward building the project, but it was one heck of a big step.
Meanwhile, producing companies that own the gas are exploring construction cost reduction methods in materials and technologies, looking to shave whatever they can from the estimated $20 billion price tag.
We anticipate that sometime during the legislative session ending in May the governor will present to lawmakers a contract outlining fiscal terms and conditions between the state and producing companies under provisions of Alaska’s Stranded Gas Development Act. The terms of this contract, after approval by the Legislature, would govern state tax and royalty payments from the project for up to 35 years.
Across the border we anticipate a Canadian regulatory process that will compliment the U.S. regulatory process, allowing for efficient environmental and permitting approval.
Is Alaska really open for business?
Is Alaska really open for business? Or has tax increase changed that?
Momentum is building and progress is being made, and clearly the state of Alaska is open for business.
Or is it? The recent oil production tax change announced by the governor will serve as industry’s poster child for the need of a clear and durable gas line fiscal contract. Unfortunately, yet again the state has proven it is willing to arbitrarily change its interpretations of tax law, sending a chill over the industry.
These actions are particularly damaging to projects the size of the gas pipeline that require enormous up-front investment and long-term payback periods.
State officials and the public need to remember companies must invest their shareholders’ money wisely. Corporate officers look for opportunities where they can make a reasonable profit for their shareholders, without undue risk. They look for windows and try to get through them before competitors or market forces can take away the opportunity.
High gas prices, growing demand, constrained North America gas supplies from existing fields, investor confidence in companies willing to take well-measured opportunities to bring on new supplies — all these factors are in Alaska’s favor for developing its North Slope natural gas reserves.
This is a window with a view we can enjoy for decades to come.
