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Gas credits not likely to kick in But federal report also says Alaska gas could cost other producers billions of dollars Larry Persily Petroleum News Juneau Correspondent
A federal analysis of proposed tax incentives for an Alaska natural gas project finds that such a large supply of gas to North America markets could likely push down prices and squeeze some Lower 48 gas out of the market at least initially, but that prices likely would remain high enough to save the U.S. treasury from ever paying the price-based credits.
Even if the government does not ever have to pay the credits on Alaska gas, it’s still a useful feature in the energy bill, the report said. “The production tax credit provision provides the necessary insurance that the producers will be able to sell their gas in the Lower 48 states and earn a profit, even if prices are low,” said the report issued at the end of September by the federal Energy Information Administration.
The new gas supply would save consumers billions of dollars, but also would cost other North America producers many billions more in lost revenue from lower prices and loss of market share, the report said.
“The introduction of Alaska gas to the Lower 48 states results in reduced domestic production in the Lower 48 states, reduced imports and increased consumption,” the report said. Half of the estimated loss to import suppliers would come from Canada, with the other half coming out of the pocket of LNG projects.
Report to help conference committee The energy office prepared the report at the request of Sen. Byron Dorgan, D-N.D., a member of the Senate Energy and Natural Resources Committee. Dorgan asked for the analysis July 31 to assist the House-Senate conference committee in its deliberations over a natural energy policy bill. The state of Alaska is pushing for several federal tax incentives in the legislation to encourage North Slope producers to build a $20 billion pipeline for moving Alaska gas to North America markets.
In addition to studying the possible effects of the gas project tax credits, the report also looked at opening Alaska’s Arctic National Wildlife Refuge to oil and gas exploration, the nation’s energy use, coal, electrical and ethanol issues covered by the energy bill.
The report looked at two possibilities for an Alaska gas project: gas coming to market in 2020, or federal tax incentives and higher market prices moving the project ahead to full production in 2011. The key tax incentive would give producers tax credits of up to 52 cents an mcf whenever the wellhead value of North Slope gas drops below $1.35 an mcf.
The earlier start-up for the Alaska project is predicted to reduce Lower 48 production between 2010 and 2025 by 7.7 tcf, or 2.2 percent, the report said. Gas imports during that same period would be almost 10 percent less, or 9.9 tcf, if Alaska gas came into the market. Market prices could drop In addition to displacing production from other suppliers, the report said, 4.5 billion cubic feet of Alaska gas coming to market all at once would knock down prices for several years. “The early introduction of the pipeline results in a 27 cents per mcf reduction in the average Lower 48 wellhead price in 2011. This price reduction diminishes slowly through 2019.”
By 2020, however, Lower 48 gas prices could be slightly higher than if the Alaska pipeline had not started in 2011, the energy office said. The additional gas in the market could dissuade Lower 48 producers from investing in new production until it’s needed after 2020, pushing prices up just a bit until supply meets demand again.
Putting an estimated price tag on the cost to Lower 48 producers vs. the savings to consumers involves several assumptions, the report said. Assuming the tax incentives move the Alaska project ahead to full production in 2011, assuming the federal incentives prompt the producers to expand the line’s initial capacity to 5.5 bcf per day, and assuming the federal agency’s price and supply and demand projections come true, U.S. consumers could save $15.8 billion (2001 dollars) from lower gas prices between 2011 and 2020. Report estimates $58 billion loss to other producers Lower 48 producers, however, could find themselves short $58 billion (2001 dollars) in revenues from lower prices and lost market share over that same period.
Opponents of the tax credits say they would distort the market and hurt Lower 48 and Canadian producers. Alaska’s response has been that demand will quickly pick up to consume the new supply without much harm to other suppliers, and that the tax credits would likely never kick in.
The report notes, however, that high pipeline charges or low market prices could trigger the tax credits for North Slope producers.
The report also cautions that assumptions and the numbers from those assumptions are always iffy. “The projections in the reference cases used in this report are not statements of what will happen but of what might happen.” The authors also added a word of warning: “Recent data have indicated that EIA’s past projections of natural gas prices may be optimistic.” Industry group says more gas needed In the same week the federal report made the news, the National Petroleum Council released its own report on the nation’s gas supply. The council said gas prices could top $7 per mcf by 2025 if the country does little to plan and mostly reacts to the gas supply problem. But if the nation responds quickly and decisively to open up areas for exploration and develop new supplies, the price could return to $3 an mcf.
At $3, gas prices would be below federal estimates and far below what North Slope producers say they need to develop the Alaska project. The federal energy office stated in its report that producers would need an average wellhead price of $3.48 per mcf (2001 dollars) for the project to be economically viable.
Even at that price, with construction costs estimated at $20 billion and lead time of seven to 10 years for planning, design and construction, “the risks associated with such an undertaking are significant,” the report said.
The National Petroleum Council used the announcement of its report to again urge Congress to adopt enabling legislation for the Alaska pipeline, though the group did not address whether Congress should grant the tax incentives sought by the state.
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