Alaskanomics

Resource Development Council Hosts Annual Conference

Earlier this month, the Resource Development Council (RDC) hosted its 37^th Annual Resources Conference. It’s the time of year when the resources industries come together to celebrate the accomplishments of the past year and look ahead to the coming year. Conference organizers took a new approach to the sessions with panel discussions and it was a great change. Instead of hearing from each presenter individually, the moderator led a facilitated discussion and asked questions relevant to each specific area. This provided a well-rounded discussion on current events and a look to 2017 and beyond.

This year’s presentations provided a cautiously optimistic look towards the future of resource development in Alaska. Recent years have been tough for oil and gas, mining, and forestry. Fishing and tourism have had good years, but also see a lot of regulation and federal overreach.  This year, speakers noted that with the shift in federal administration, there could be some hope for a change federal overreach and regulations that have crippled the industry in recent years. There are still a lot of unknowns, but most are hopeful for a favorable adjustment to way the State of Alaska and the Federal Government interact.

The area where the optimism faded was when the state’s fiscal situation was discussed. For many, the lack of a sustainable budget plan causes angst and uncertainty. This topic has been a headliner at the conference for the past couple of years and while attendees hoped that things would be better next year, they were realistic to the fact that difficult decisions were needed to maintain any sort of sustainable budget. Many stated that while they were hopeful for a solution, they knew that hope was not a good strategy and real work must be done to move the state forward. Numerous legislators were in the audience throughout the conference and speakers reminded them of their responsibility to make difficult decisions to maintain a functioning state government.

The team at RDC always puts on a great conference, with detailed information on the happenings throughout resource development, networking opportunities and a chance to plan for the future of Alaska. Presentations and videos of each session are saved at RDC’s website.

Resource Development Council Conference Wrap-up

The Resource Development Council hosted its 36th Annual Alaska Resources Conference on November 18 and 19 in Anchorage. Each year, members of the resources industry gather to discuss the past year’s accomplishments as well as look to the future of tourism, fisheries, oil and gas, mining and forestry.

Governor Walker opened the conference with a few words about his desire to make sure that there is more oil in the pipeline for all Alaskans. He was encouraged about the exciting time in the mining industry and the good steps being taken in the AKLNG project. The Governor also noted that he would be soon releasing his plan for a more sustainable budget and it would be without sacrificing Alaska. He assured attendees that he would not shy away from the tough decisions that are part of his job description. He also noted that he would stay strong in his message to Washington DC and that Alaskans need more access the natural resources in our state.

The conference continued with the updates from the industry, including an overall update from State of Alaska economist, Neal Fried. Presenters shared a lot of what attendees already knew and gave a sense that while there are struggles with the resource development industry, that there are also things to be excited about and there are opportunities available.

News from the oil and gas industry was understandably less optimistic as it has been in past years. Presenters from ConocoPhillips and BP discussed the work being done to progress the AKLNG project. Both companies want to continue the momentum that was gained during the special legislative session. All parties must be aligned to assure success for the project.

The Arctic, Federal overreach, Pebble Mine and Point Thomson rounded out the day’s discussions. Due to the United States’ Chairmanship in the Arctic Council for the next two years, the world is focused on Alaska. Many different interests throughout the state and the rest of the US are competing for the attention of the Arctic Council and the world.

Day two of the conference started with a session titled, “Real Solutions to Alaska’s Budget Crisis”. It included a presentation about the necessity to look at state spending and how it relates to a sustainable budget. Everyone agreed that there were no easy answers when it comes to the State budget. Spending and new revenue will need to be part of the equation and the speakers agreed that something would have to be done sooner, rather than later. Today’s budget crisis is much different than the last one the state faced. A concern is the fact that we are depleting budget reserves without anything to refill those reserves on the horizon. Using the earnings from the Permanent Fund while keeping the dividend, buys time to work on a more sustainable solution. Not doing anything in 2016 damages the ability to come out of this crisis in the future. Speaker Mike Navarre, Mayor of the Kenai Peninsula Borough, noted, “There is no perfect plan and we cannot be crippled while waiting for the perfect plan”.

The day continued with discussions about oil tax credits, the progress being made in Cook Inlet, mining and a wrap-up on work on the AKLNG project. The increased production in Cook Inlet has allowed Southcentral Alaska to have a needed gas supply. It was also stated that discovered but not-developed fields could bridge the gap until the AKLNG project comes online in the mid-2020s (if approved).

AKLNG is moving forward and the project received the right to export to both free and non-free trade countries. The Alaska Oil and Gas Conservation Commission (AOGCC) has supported gas offtake and carbon dioxide reinjection. Both of these are good steps in moving forward to a successful project. While there are many more steps to take and hurdles to overcome, the many are hopeful that the project will proceed and be a success. At the end of the day, we all need to do what needs to be done to ensure a successful project to serve Alaskans for many years to come.

For complete conference information and presentations, visit http://www.akrdc.org/november-conference

Alaska LNG Update- Summer 2015

By Tim Bradner

Alaska community and business leaders are closely watching developments on the big Alaska LNG Project this summer. North Slope producing companies and the state of Alaska, which are in a partnership on the project, are engaged in preliminary engineering and environmental work, and key decisions are pending late this year and in early 2016.

Alaska LNG really encompasses three mega-projects rolled into one: a large natural gas conditioning plant on the North Slope, an 800-mile, 42-inch pipeline from the slope to Nikiski, on the Kenai Peninsula south of Anchorage, and a large liquefied natural gas, or LNG, plant at Nikiski. An earlier cost estimate is $45 billion to $65 billion, but that is being updated as part of the engineering studies now underway. The revised cost estimate, which could be available late this year, is obviously very important to the future of the project.

A fourth project now under construction will also be part of Alaska LNG if it proceeds. This is the $4 billion Point Thomson gas and condensate production project currently under construction about 60 miles east of Prudhoe Bay, on the slope. The Prudhoe Bay oil field holds about 24 trillion cubic feet (tcf) of gas and would be the “anchor” gas supplier for Alaska LNG but Point Thomson’s reserves of about 8 tcf will also be needed to support the pipeline and LNG project. Construction at Point Thomson will be finished in early 2016 and will initially produce 10,000 barrels per day of liquid condensates through a new 12-inch liquids pipeline that has been built from Point Thomson. If the big gas project proceeds, Point Thomson’s facilities will be converted to conventional gas production.

The preliminary engineering now underway, called Pre-Front End Engineering and Design, or “pre-FEED”, will set the stage for a decision by the partners to begin final engineering, Front End Engineer and Design or “FEED”, is expected sometime in 2016, although under the partners’ agreement the decision can be stretched into early 2017. Gov. Bill Walker hopes the decision can be made as soon as possible, possibly mid-2016, after completion of pre-FEED. The FEED decision is very important because it will be expensive, with cost estimates ranging from $1.5 billion to $2 billion, and requiring the first substantial investment by the partners. The state’s share of the FEED costs has been estimated at about $500 million. The pre-FEED costs are less, in total about $500 million, with the state’s share of about $100 million. This has already been funded.

The FEED decision is also important because it will be a major indicator that the project’s economics are favorable and that the decision planned in 2018 to actually build it, the Final Investment Decision, is likely. We’re told that very few large projects that reach the FEED stage do not wind up being built.

However, there are important decisions involving the state of Alaska’s partnership role that must be decided later this year. The state is a party to several project operating agreements that are needed among the partners, and the Legislature will have to approve some of these. Most important, the producing companies and the state have to reach agreement on fiscal (tax and royalty) terms on gas production and a way to lock in these terms for a period of years, most likely the terms of LNG sales contracts with buyers (the buyers will insist on stable fiscal terms). There are legal issues involved in this and Governor Walker has said that an amendment to the state constitution is likely to be necessary. The earliest this can occur is the November 2016 state general election. The deal on fiscal terms is necessary for the project and legislative approval is needed, but if a constitutional amendment is required a positive vote of the public will also be required.

Separately, the state will have to decide on whether to change its current partnership with TransCanada Corp., a pipeline company. Under the current arrangement TransCanada would finance and build, and own, the state’s 25 percent share of the pipeline and North Slope gas conditioning plant. The state would separately finance and own 25 percent of the LNG plant through the state-owned Alaska Gas Development Corp. Even this is a big financial undertaking for the state because the LNG plant represents about half of the total capital cost of Alaska LNG. Gov. Walker and the state gas team are considering keeping the current arrangement with TransCanada, ending it and having the state own (and have to finance) all of the 25 percent share of Alaska LNG, or exercising an option to buy into TransCanada’s share of the pipeline and gas plant. This decision will have to be made by the end of the year.

Negotiations are currently underway among the partners on all of these issues and the status is confidential. It is known, however, that the governor has asked for certain changes, such as an increase in pipe diameter to 48 inches; a Cook Inlet crossing on an alternate eastern route to one the project is now focused on, and a change in the way the project would market LNG and the state’s share of that. How the industry partners are responding to these requests is unknown at this time.

While there are still many unknowns, it is known that Alaska LNG is very important to future state finances and the continuation of oil production on the North Slope. After it is operating–2025 is the expected startup–the project would result in several billion dollars a year in new revenue to the state from sales of the state’s share of the LNG. As for continued oil production, the availability of a gas pipeline will encourage exploration on the slope for gas and, inevitably, new oil discoveries will also be made.

 

Tim Bradner is a natural resources writer for the Alaska Journal of Commerce

Governing Alaska in a Time of Low Oil Prices

Commonwealth North hosted Governor Walker at lunch on Wednesday to hear his vision for Alaska and the status of important issues concerning the state budget, natural gas pipeline, and Medicaid expansion. The Governor kept his introduction light and tried to warm-up the crowd. He seemed to want to maintain a sense of optimism throughout his presentation. He outlined the cabinet retreat that was held after his election to set priorities for the administration. The cabinet walked away from the retreat with a mission statement, core values, and a vision for the Governor’s term in office. At the heart of the three sections was how to improve the lives of all Alaskans.

Getting into the meat of his presentation, Governor Walker discussed his actions regarding LNG and the state. He reassured everyone that his priority is getting Alaska LNG to market. The work done by the Parnell administration and the companies working on AKLNG is the priority, but the Governor is not comfortable moving forward with only one option in the LNG field. He noted that if there is only one project being worked on, negotiations will be very difficult and he would like to leave his options open for getting Alaska’s gas to market. Many times throughout the presentation, Governor Walker reiterated his desire to have a viable solution to the natural gas issue. The work being done by the Alaska Stand Alone Pipeline (ASAP) is not to be seen as competition to AKLNG, rather as a backup. It is not a new project, rather one that was started in 2010 and the Governor feels it is a viable option for the future.  

Governor Walker then switched gears to Medicaid expansion and reform. He hopes that the Medicaid bill will get through the Legislature before the end of the session, as he believes the expansion is vital for the health of uninsured Alaskans. There would be significant savings on the cost of health care and lead to a reduction in uncovered health care costs and other social problems.

Even with the fiscal and policy issues being faced by the state, Governor Walker felt that there was a silver lining, and that was the fact that we can make the necessary changes to the way government functions in Alaska, in relation to the state budget. The spring forecast will be released and while it will not be good news, it should not be a surprise to anyone. The Governor stated that when it comes to the budget, it is a back and forth process. It is not pleasant, but it is absolutely necessary. He continued by saying that a reduction in spending is necessary before going to citizens for revenue sources. When it comes to budget cuts, everything will be on the table and will be carefully reviewed for the best possible outcome.

It was clear that Governor Walker wanted to remain optimistic about future of the state. He noted that Alaska is full of opportunity and was told last week that Alaska doesn’t have a wealth problem, it has a cash flow problem. Alaska is rich with natural resources and we must determine the best way to get the resources to market. The Governor has a tough road ahead and seems to be up to the task, but only time will tell what the future holds for Alaska. The deficit must be dealt with soon because the longer it goes unchecked, the harder it will be to solve. Governor Walker is willing to put in the work and seems confident that the Legislature is also ready to do what is best to improve the lives of all Alaskans.

Commonwealth North Annual Assets Review

Commonwealth North hosted its 9^th annual Alaska Assets Review on February 18. The program recognizes that as shareholders of “Alaska Inc.” the citizens of Alaska need to be informed about how the assets of their company are performing. This year Northrim Bank President and CEO Joe Beedle and former Lt. Governor Mead Treadwell presented the performance review.

A bit of a history lesson on the reason Alaska has the wealth of assets that it does. During the statehood debate, it was recognized that the state’s population would likely never have the critical mass to finance government through conventional means employed by other states, primarily per capita taxation. In recognition of the need for Alaska to have means to produce its own revenue, the state was granted 104 million acres of land and mineral rights to significant acreage on federal lands. From this, it was felt that Alaska could build and sustain an economy and pay for necessary government services. The annual program tracks the performance of Alaska’s assets, including natural resources, financial assets and enterprises.

The full report and presentation can be found at www.commonwealthnorth.org. A few highlights of the discussion are below.

Alaska's natural resources are abundant and a large part of Alaska's economy.

• The tax revenue from fisheries has increased and the industry is strong, but there is a potential challenge ahead because not all of last year’s harvest has been sold.
• Within the Division of Mining, Land and Water, Alaska’s land position is strong. The state had 100.4 million acres in FY2014, which does not include the 65 million acres of submerged land acquired at Statehood.
• There are five area wide oil and gas lease sales a year. At the most recent sale in November 2014, 300 tracks were leased for $60 million. There is encouraging development occurring on the North Slope and in Cook Inlet.

Financial assets are an important topic of discussion because of the budget issues being seen in Alaska.

• The Permanent Fund Corporation is strong. In FY2014, the fund saw a 15.5% return, which was only slightly lower than the 15.7% benchmark. There are many investment opportunities that are doing well and the corporation is looking to expand into real estate outside of the United States.
• The Constitutional Budget Reserve is one of the options that could be used to bridge the budget gap. It currently holds $12.8 billion.
• Alaska Mental Health Trust Authority is utilizing their land well and making dividends. The state is served well by their investments.
• Alaska Industrial Development and Export Authority has paid $350 million in dividends to the state since its inception.
• Alaska Housing Finance Corporation paid $30 million in dividends to the state during FY2014. Energy and low income housing programs have benefitted Alaskans around the state.

The state’s enterprises are facing challenges, but are working to stay strong.

• The Alaska Marine Highway operates in the red, but is essential for Southeast Alaska.
• Alaska Energy Authority is also operating at a loss but the situation has not changed significantly in the past few years.
• The Alaska Railroad shows a small net revenue, but is facing some major challenges in federally mandated safety regulations. Its income from freight is strong and will continue with increased activity on the North Slope and in Cook Inlet.
• The International Airport System faces challenges, but the fact that Anchorage has the fourth largest cargo airport in the world helps add revenue.
• The Alaska Aerospace Corporation is also challenged, but lawmakers understand its strategic importance and will continue to fight for its survival.
• The University System has a strong endowment and the investment is doing better than recent years. The system has some challenges ahead but will continue to be a priority because additional human capital is necessary to grow Alaska.

To wrap up, Alaska is challenged, but it is also well funded and well endowed. Many people are working on ways to find solutions to the state’s fiscal problems. Commonwealth North has produced a report for Alaska’s leadership. This report highlights some opportunities to work through the fiscal problems and ways to fix the budget gap. This report, Alaska’s Operating Budget: Critical Crossroads, Choices and Opportunities will be presented in Anchorage on February 25 at a lunch hosted by Commonwealth North.

Alaska's Leaders Stand Strong Against Proposed ANWR Designation

On Sunday, January 25, President Obama and Interior Secretary Jewell announced a plan to ask Congress to declare much of the Arctic National Wildlife Refuge (ANWR) as wilderness, including the coastal plain. If the President succeeds in changing the area’s designation, exploration and production would forever be prevented on the coastal plain. Alaska’s congressional delegation and Governor were quick to react to the announcement, saying the statement “declared war on Alaska’s future.”

All four had strong words against the President’s call to designate the additional area in ANWR as wilderness. Governor Walker stated that the move was “a major setback toward reaching that goal,” referring to the goal of increased production in Alaska to rebuild the state economy.

Senator Murkowski believes that the bid will not pass the Republican-led Congress but does bring the environmental issue back into the minds of the nation. Senator Murkowski is the chairman of the Senate Energy and Natural Resources Committee and the Interior and Environment Appropriations Subcommittee, which together have oversight of the Interior Department’s underlying legislative authority and budgets.

Senator Sullivan pledged to “stand united with Senator Murkowski, Congressman Young, Governor Walker and the members of the Alaska State Legislature to vigilantly safeguard and defend our fellow Alaskans’ interests, and I pledge to do everything in my power to fight back against this assault on Alaska’s economic future.” Congressman Young was quoted saying, “Every time the President undermines the law of the land, he breaks his oath of office and weakens the nation we love.”

ANWR has been in limbo for the past 35 years when the Alaska National Interest Lands Conservation Act expanded the Arctic refuge from 9 million acres to 19 million acres. The 1980 law requires congressional action to open the land to development or close it off, permanently.

It is clear that Alaska’s leaders will work to block this plan and work to protect Alaska’s economy. Industry groups are also rallying behind the delegation and expressing their concerns with closing off more of ANWR to exploration and development. Alaska Oil & Gas Association (AOGA) President and CEO, Kara Moriarty said, “It is offensive to put the remaining 8 percent of ANWR off limits when more than 90 percent is already permanently protected.” She continued by saying, “No one is better equipped to drill safely in Alaska’s Arctic better than Alaskans. We have proved over the course of decades that Arctic oil can be produced safely and responsibly for the benefit of all Alaskans.”

The proposed action takes away Alaska’s right to set its own course and determine the best way to develop Alaska’s resources. Alaska’s leaders agree that even though the act is being labeled as protection, it is really an assault on Alaska’s sovereignty. Alaskans must stand together and not allow Washington to set policy that limits our ability to build a strong economy.

To read the full press release from Governor Walker visit, http://gov.alaska.gov/Walker/press-room/full-press-release.html?pr=7063

Alaska’s Oil Reserves Decline for Third Straight Year; Gas Reserves Down Sharply

By Blythe Campbell

On December 4, The U.S. Energy Information Administration (EIA) issued its annual report on U.S. Crude Oil and Natural Gas Proved Reserves for 2013. “Proved reserves” are estimates based on existing economic and operating conditions.

U.S. proved reserves of crude oil increased for the 5^th year in a row, to 36.5 billion barrels, with 5.5 billion barrels of new discoveries exceeding adjustments and production of 2.9 billion barrels. North Dakota’s proved reserves have passed the Federal Gulf of Mexico, and are now second to Texas among the states.

For the third year in a row, Alaska’s crude oil and lease condensate reserves declined, with 186 million barrels of production, and significant downward revisions. There were 123 million barrels in positive changes due to upward revisions, acquisitions and field extensions, but no new field discoveries or new reservoir discoveries in old fields. However, Alaska still is in 4^th place (behind Texas, North Dakota, and the Gulf of Mexico) at 2.9 billion barrels of proved reserves, or about 8% of the U.S. total.

U.S. natural gas proved reserves increased significantly – to a new record of 354 trillion cubic feet – with 96% of new discoveries coming from extensions to existing fields. EIA says that an increase in natural gas prices contributed to the increase in reserves. Pennsylvania and West Virginia accounted for 70% of the increase in reserves this year with continued development of the Marcellus shale gas play. Shale gas now makes up more than 40% of the U.S. natural gas reserves.

Alaska’s natural gas proved reserves declined from 9.7 billion cubic feet to 7.4 billion cubic feet – a 24% decrease. Production of 289 billion cubic feet was dwarfed by downward revisions of 2.4 trillion cubic feet. EIA attributes this significant reduction to a decline in “associated-dissolved natural gas proved reserves, the result of deteriorating well performance in certain crude oil fields.” On the positive side, though much less significant, acquisitions and extensions added 366 billion cubic feet, and there was 1 billion cubic feet of new reservoir discoveries in old fields.

The EIA’s data in this report is based on a 12-month, first-day-of-the-month average West Texas Intermediate crude oil spot price of $97.78 per barrel, and a natural gas spot price at the Louisiana Henry Hub of $2.66 per MMBtu. Production data are estimates.

Resource Development Council Conference Part 1

The Resource Development Council hosted the 35^th Annual Alaska Resource Conference this week. Over the next week, Alaskanomics will highlight the presentations from the conference.

The two-day event allows the resource industry to gather and look back at the past year, while planning for the coming year. There were many things to celebrate at this year’s conference, but participants and speakers were decidedly cautious about the State’s fiscal future.

As is the tradition, the conference started out with an outlook for the coming year by Alaska Department of Labor Economist, Neal Fried. With the exception of 2009, the Alaska economy has been growing for the past 25 years. The growth has not always been by leaps and bounds, but it has been moving in the right direction. In 2014, it is predicted that there will only be about 900 new jobs in Alaska, which is only 0.6 percent. This is not as strong as many would hope and there will be a breakdown of the employment categories in January when the annual wrap up is published. Fried continued with brief updates of the various resource industries.

• Timber has had very little change and is down with record lows
• Mining is largely unchanged as well and has slowed and growth has flattened out
• Fishing grew in both processing and harvesting this past year
• Oil keeps hitting new highs, North Slope employment has doubled in the past decade
• The Visitor Industry is up for the third year in a row

Alaska earnings have grown since a dip in the late 1990s and we currently have the second highest household income behind Maryland. The population grew in the past year, but the growth is starting to slow down.

Kara Moriarty of the Alaska Oil and Gas Association gave the update for the oil and gas industry. She shared the usual numbers that more than one third of all Alaska jobs are tied to the oil and gas industry and for every one industry job, 20 other jobs are generated through industry spending. The oil industry paid $6.9 billion in taxes and royalties and luckily the current tax policy generates more revenue at low prices than the old regime. This is very good since the price of oil has dipped below $80 a barrel. There has been a lot of new development on the North Slope and in Cook Inlet. Moriarty finished with the reminder that while we cannot control the price of oil or Alaska’s high cost environment, we could all be “Resource Proud”.

Stephanie Madsen of the At-Sea Processors Association shared that the fishing industry continues to grow and is currently the number one private sector employer in the state. The value of Alaska’s fisheries fluctuates because of the global market. The industry continues to be challenged by environmental non-governmental organizations (NGOs) calling for protected areas. Madsen continued by noting that Alaskan fisheries historically have been managed conservatively and are continually adapting to the varying definitions of sustainable.

Keith Coulter with Koncor Forest Projects gave the update for the timber industry, which by far has seen the largest decline of other resource industries. He noted that both fishing and forestry are sustainable and renewable and are not mutually exclusive. Rural communities that have lost timber are having a hard time replacing the jobs and income that were seen with the timber industry. Coulter shared that he felt that Federal Forests should be managed in the same way that private forests are and Alaska should resist efforts to adopt federal forest practices. He warned that changes to the Alaska forest practice should be informed by contemporary science. Coulter also urged the need for reform of federal overreach in the Tongass and elsewhere through fewer environmental regulations and restrictions.

Karen Matthias with the Council of Alaska Producers gave the update for the mining industry. She was proud to share that both Red Dog and Greens Creek Mines were celebrating their 25^th anniversary of operation. She said the industry needed to do a better job at sharing success stories from around the state. An example is that Usibelli Mine has been in operation for more than 70 years and is mining responsibly. There are more than 5000 direct mining jobs in Alaska with an average annual wage of $100,000. Donlin Gold is in the permitting process and other mines could bring many new jobs to the state. Alaska is number one in the world for pure mineral potential and holds incredible potential in the mining industry. It was no surprise to conference attendees that permitting is consistently the biggest challenge in mining and is a very slow process. The outlook is bleak right now, but the industry can redouble efforts to fight against those trying to block responsible development and educate the public on the positive impact of mining so that things might improve.

Gideon Garcia with CIRI Alaska Tourism wrapped up the year in review with the tourism industry update. This past year, Alaska saw 1.96 million visitors, who spent $3.9 billion. The tourism industry adds 46,000 jobs for Alaskans. The projections for the 2015 season look good. Cruise traffic is predicted to have a 2.8 percent increase and overall visitor traffic is expected to jump 2-3 percent in 2015.

The year in review and 2015 outlook is a staple to the RDC conference and while presenters were proud to share accomplishments within their individual industries, it was obvious that the challenges of federal overreach, commodity prices, and regulations weighed heavy in the room.

Alaskanomics will continue to highlight the conference with Investment in Action by Trond-Erik Johansen of ConocoPhillips Alaska and Investing in Alaska’s Future with Janet Weiss of BP Exploration (Alaska).

Resource Extraction 10-Year Project Projection

The Anchorage Economic Development Corporation released its annual Resource Extraction 10-Year Project Projection report on October 16. The report is sponsored by Northrim Bank and the research is supported by Petroleum News and North of 60 Mining News. The projection is in its 10th year after originating in 2004 from a request to the Kenai Peninsula Borough Mayor’s Oil and Gas office from the University of Alaska sponsored Workforce Development Conference. Its goal is to give perspective on what the future might hold for resource extraction projects in Alaska. The original projection spurred a more detailed projection that could be updated annually. This year’s projections focus on the State’s ongoing effort to bring North Slope natural gas to market, as well as other projects in various stages of planning and execution.

2014 has been a big year for Alaska’s resource extraction industry. The enactment of SB21 and the voters electing to keep the tax structure in place has resulted in more clarity of future conditions in the industry. There is optimism throughout the industry that the climate is good for development and production projects. Cook Inlet has already seen an increase in production. Since fiscal year 2010, production in Cook Inlet has nearly doubled going from 8,900 barrels a day to over 16,000 barrels per day in 2014.

The report predicts that the North Slope could see similar results in the coming years. With the stability for the future of the oil and gas industry, there is new hope that the decline in the production curve will flatten out. There are many proposed projects that are now moving forward towards new production on the North Slope.

It’s not all rosy for the oil and gas industry. There are still major issues for projects in the Outer Continental Shelf. With the current federal conditions, it is not likely that increased production will be seen in the near future.

The mining industry has had good progress with the momentum behind the Bokan Mountain and Donlin Gold mines. Both of these projects bring new investment and opportunity to mining in Alaska. There are still significant concerns for the progress of the Pebble Project. There is great uncertainty for the future of this major project.

The industry as a whole is driven by the effort to bring North Slope natural gas to market. The potential for an Alaska gas pipeline is a huge project and will bring significant investment and jobs to the state, both inside and out of the oil and gas industry. There have been substantial investments in this project, which bring hope that the pipeline may be a reality in the next 10 years.

The report shows that there is a potential for roughly 20,000 jobs at peak construction and $68 billion of private sector investments in 14 extraction projects that are proposed for Alaska in the next decade. The Resource Extraction 10-Year Projection outlines projects that are producing units, active drilling and exploration sites, projects in early stages and mining resources. The full report can be read at: http://aedcweb.com/images/10_15_2014_Resource_Extraction_Report-FINAL.pdf

Alaska’s big gas project make progress, but key decisions, uncertainties loom

By Tim Bradner

Progress is being made on a large North Slope natural gas project after years of effort. However, important decisions must made in 2015 and 2016, and the project, actually several “megaprojects” rolled into one, still faces big challenges in the marketplace.

The “Alaska LNG Project” includes a giant gas conditioning plant at Prudhoe Bay, an 800-mile pipeline from the North Slope to Nikiski, on the Kenai Peninsula, and one of the world’s largest liquefied natural gas (LNG) plants at Nikiski.

If the project is built the $4 billion Point Thomas gas project, now under construction to produce liquid condensates and to recycle gas, will also be expanded to support conventional gas production.

Here is what has been accomplished this year:

• The state Legislature approved state participation in the project with North Slope producers BP, ConocoPhillips, ExxonMobil and Trans-Canada Corp., a pipeline company. State participation is vital in achieving alignment on commercial terms, the producing companies have said.

• The consortium, now called the Alaska LNG Project, has begun pre-Front-End Engineering and Design work, a $500 million commitment to more advanced engineering and updated cost estimates.

• Two regulatory initiatives are underway: The consortium has filed for a U.S. Dept. of Energy LNG export license and the DOE has said the Alaska application will get a streamlined review; the group as also made a “pre-application” to the Federal Energy Regulatory Commission, which basically starts the Environmental Impact Statement process.

Here is what must happen next:

• The state must negotiate a transportation agreement with TransCanada to ship state-owned gas though TransCanada’s part of the gas conditioning plant and pipeline. This is a long-term “take or pay” contract needed by TransCanada to finance its share of the project. It is a multi-billion-dollar financial commitment by the state, but it is critical to sales of the state’s LNG share and future state revenues. The contract must be approved by the state Legislature.

• The state must also negotiate an agreement with the three gas producers to assure stability of production tax terms. The Legislature must also approve this. The agreement will cover only the gas production tax, not state corporate income taxes paid by the producers. Oil production taxes are not affected.

The state administration has said that a special session of the Legislature will probably be held in late 2015 to consider both the TransCanada contract and the tax stability agreement. These are “must haves” for the project to proceed.

 

In early 2016, the results of the pre-FEED work will be complete along with updated cost estimates. If the results are favorable the project will proceed to the full Front-End Engineering and Design, a step that requires a commitment of about $2 billion. The revised cost estimate is crucial to this decision.

If the project does go to full FEED it will demonstrate confidence in the project and an increased likelihood that the project will proceed to construction. The FEED would be complete in 2018, and A Final Investment Decision, the go or no-go, will be made in 2018 or 2019. Construction would begin then, if the decision is made to proceed. Construction would be complete by 2024.

Key challenges facing project include total cost, cost-control during construction, and market competition.

Updated cost estimated from the pre-FEED will be important. If costs escalate beyond $65 billion, the upper range of the current conceptual estimate ($45 billion to $65 billion) the project may face difficulties. In cost-control during construction, a critical factor will be the availability and cost of labor. The labor demands of three (actually four, including Point Thomson expansion) large industrial projects being built simultaneously will be significant.

Market competition is also a major challenge. There are many planned LNG expansions and new projects aimed at capturing the growth in the Pacific market. Some of these projects face problems, such as a long shipping distance from the Persian gulf (and desires by Asian LNG importers to not be too dependent on energy from this volatile region), large cost escalation of projects in Australia, permitting and supply uncertainty for projects in British Columbia, and political challenges (LNG export approvals) as well as long shipping distances for proposed LNG export plants on the U.S. gulf coast.

Alaska’s main advantages are the confirmed large gas resources on the North Slope, and proximity to Asia (shorter shipping). The North Slope is also very prospective for new gas discoveries, so the Alaska project, once built, can be expanded very economically. The disadvantages are the high costs of having to build an 800-mile pipeline and the fact that to be economic the project may have to ramp up quickly to its full 17 million/18 million tons per year production rate. This is a lot of LNG to be placed in the Asia market in a short term. Competing projects may be able to start at smaller volumes and gradually expand.

 

Tim Bradner is a natural resources writer for the Alaska Journal of Commerce and is co-publisher of the Alaska Legislative Digest.