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Vol. 15, No. 12 Week of March 21, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Arctic Directory: Alaska’s energy resources — a crucial part of the answer to the nation’s energy questions

Tom Irwin

Commissioner, Alaska Department of Natural R

We Alaskans have a very special relationship to our environment. The land is our back yard. We use it for recreation and subsistence. The land has provided our livelihood, for the people and for the state. Alaska is a land of amazing natural beauty, and the resources that underlie that beauty is what sustains our economy.

Responsible development, sustainable yield, and resource stewardship were written into the Constitution and Statutes when Alaska became a state 50 years ago, and have been part of how we have developed our natural resources ever since. When Alaska Statehood was being debated, a major worry of the US government’s was that the new, sparsely populated state would become a financial burden on the federal government. Instead, the new state has gone on to contribute between 14 and 27 percent of the total national crude oil production annually since the trans- Alaska oil pipeline system was finished in 1977.

Alaska holds tremendous resources. Our state is estimated to hold 18 percent of total U.S. oil reserves. At a production rate of 700,000 barrels per day, Alaska is currently responsible for 14 percent of U.S. oil production.

Developing Alaska’s resources is good for the state, for United States and for Canada. Typically, royalty, taxes, and lease payments from oil and gas production provides 90 percent of Alaska’s unrestricted state revenue. But oil production from the aging fields on the North Slope, which have provided our country with a steady stream of oil since 1977, is declining.

As a state, we want to provide affordable energy for our people — and we want to continue to provide police protection, good schools, and a solid road system. To do that, we need to develop the natural gas resources of Alaska. Through a gas pipeline, delivering Alaska’s natural gas to North America, we will be able to provide Alaska with the revenue the state needs to maintain or improve the level of state services Alaskans need and deserve, provide economic energy for Alaskans, and provide North America with a clean-burning energy source.

It’s a great time to be an Alaskan, and it’s a great time to do business in Alaska. We are on the edge of a new era, where, yet again, Alaska holds a crucial part of the answer to the nation’s energy questions. At a time when the nation is moving towards environmentally preferred energy sources and greater reliance on American energy, Alaska holds tremendous supplies of the clean-burning natural gas the nation needs.

Even under the most optimistic forecasts, the US will still depend on oil and natural gas for almost 65 percent of its domestic energy consumption in 2025. Even under the best circumstances, increased development of domestic oil and gas resources will be required to meet the demand.

The good news is that we are well underway to making that happen. There are good reasons to be excited about, not scared of, our energy future.

Just 8 years away

The Alaska Pipeline Project (APP) is moving forward. We have never been this close to getting the Alaskan natural gas pipeline built, and we have come this far because people with a vision and a clear understanding of the challenges have refused to listen to the nay-sayers and forged ahead, with solid footing in science, technology, and thorough analysis of the financial realities of the project.

The cooperation between the state and federal pipeline coordinators’ offices is seamless. We have what I consider the best pipeline company in the world, TransCanada, working together with ExxonMobil, the largest commercial oil and gas company in the world, lending their superior expertise to the project design for the planned North Slope Gas Treatment Facility.

Under the Alaska Gasline Inducement Act, the state of Alaska is investing $500 million of our own resources, and we are not just following the process to the 2010 open season, but all the way to the FERC certification. In exchange for this investment, we are getting provisions that protect our interests – high netback, low risk, diversity of exploration and development, as well as competition and fairness. The most critical commercial provisions ensure

A tariff structure that provides the lowest reasonable cost to transport Alaska gas to the North American market

Expansion capabilities for the pipeline, to allow for transportation for new gas discoveries

Rolled-in-rates (which is the standard in Canada), ensuring that all shippers share the burden of that expansion.

The commercial terms built into the AGIA process encourage new exploration and development, assuring new players that they will be able to monetize their gas with a reasonable rate of return. Low tariffs also benefit the federal government and the state of Alaska, because our revenues are paid minus transportation costs. Together, low tariffs and encouraged competition in exploration and development serve the interest of consumers by keeping gas prices as low as possible.

The Alaska Pipeline Project filed their open season paperwork with the Federal Energy Regulatory Commission as planned on January 29, 2010, with open season summer of 2010. The open season is an opportunity for shippers to make commitments to take the project to the next stage. As the project continues to advance beyond open season toward the more significant milestone of project sanction – the decision to actually break ground – stakeholders, eventually including the state, will work to resolve those outstanding conditions, and establish commercial alignment.

Before firm commitments are possible, there are uncertainties that must be resolved. The project needs to pass through the regulatory process, which will not be finished prior to 2014, the final design of the pipeline must be finished, financial approaches have to be decided, and final cost estimates reflecting market conditions of 2014 have to be developed.

And while this is going on, complex commercial negotiations, both between North Slope producers and between the producers and the pipeline, must be completed.

AGIA moving forward

The framework of AGIA ensures that progress will continue, regardless of the outcome of the open season. With each step forward, the project’s uncertainties diminish. As uncertainties are resolved, the state will become better positioned for any future fiscal discussions. The state can address specific demonstrated project needs, while protecting the long term interests of the state, at the appropriate time. As Gov. Parnell has stated, the road to these discussions goes through AGIA.

Once Alaska’s massive amounts of natural gas are available to the North American market, a clean-burning, American-controlled energy source will be available for the next 100 years. Alaska will be able to provide between 5 and 8 percent of the nation’s projected natural gas needs.

We also need to develop the vast energy sources of the OCS.

Both the Chukchi and the Beaufort Seas hold tremendous volumes of natural gas. Beyond the more than 100 Tcf of gas potential onshore, the estimated potential of the Alaska OCS is over 130 Tcf of recoverable natural gas. These volumes will be extremely important to the nation over time.

Of more immediate importance is the huge oil potential the OCS holds – an estimated 27 billion barrels. By comparison, total oil production from Alaska’s North Slope since construction of the trans-Alaska oil pipeline system in 1977 totals 16 billion barrels. Right now, the declining oil production on the North Slope means trans-Alaska oil pipeline owners recognize the TAPS pipeline will fall below carrying capacity in the next decade. If we let the TAPS pipeline shut down, it will mean the end of oil production from the North Slope. Because of the significant lead time between leasing and production, we need to develop Alaska’s OCS without delay, so the large Alaskan oil resource can be accessible to America.

Clean-burning gas, OCS

Alaska has the resources, the experience, and the capability to bridge the move of North America into a future of more preferable energy sources, lower CO2 emissions, and higher degree of energy independence. The nation needs clean energy. And nobody is more concerned about the Alaskan environment than Alaskans. We have decades of experience in safely extracting oil and gas from our resource basins, including those in the Arctic.

We all support developing renewable energy sources (Alaska has a huge resource potential there, too), but in the meantime, clean-burning natural gas has to be the foundation and reliable base load for a comprehensive national energy strategy that will rebuild our economy and create jobs, diminish our reliance on foreign energy, and transition us to environmentally preferred energy sources.

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