OPINION: No wonder why pursuing Alaska’s LNG project is a waste of money

Has been updated: 49 few minutes ago release date: 49 few minutes ago

There are two ways to transport natural gas to market: onshore pipelines and offshore liquefied natural gas (LNG) transport. If you have a choice, shipping per mile will be cheaper than plumbing, but only after a certain point. To offset the high cost of liquefying gas, it must be transported over significant distances.

The rule of thumb is that at any point in time, the distance-to-market trade-off favors LNG over pipe, depending on fuel and steel costs and other factors. However, there is never a rule of thumb that it makes sense to do both. So Alaska’s problem is the only project in the world that would have to spend billions of dollars on 800 miles of pipeline to get to the point where all other LNG projects start. This makes commercialization of North Slope gas uncompetitive.

The economics of pipelines live or die by economies of scale. Remember high school geometry? The volume of gas in a pipe increases exponentially as the circumference increases. To lower the cost per unit, you need a lot of gas in the pipes. Therefore, the pipeline portion of the project must be very large.

This raises two additional problems. Large quantities of gas need to be brought to market in a short period of time, rather than the usual way of entering the market in stages as demand increases. If you can’t do that, your rate of return will decline. And while buyers shy away from them, it takes a ton of long-term contracts to keep investors happy.

This, combined with the experience of the Aggressive Petroleum Tax (“ACES”) enacted in 2008, created one of the highest tax systems on the planet. This was after a multi-billion dollar production infrastructure was put in place. (This was fixed six years later.) Couple this with his two subsequent (unsuccessful) ballot plans to send oil taxes back into the stratosphere. Investors will be very reluctant to spend billions of dollars because of the risk that the value will be seized by increased taxes after the project is built.

Twenty years ago, natural gas was considered clean, but that is no longer the case.

Against this backdrop, the governor is seeking $4.5 million in funding for the Alaska Gas Line Development Corporation (AGDC) this year. There’s a good reason gas pipelines weren’t built and probably never will be. Given the state’s dire state of education, roads, and parks, this money could be put to better use.

Roger Marks I’m an economist practicing in Anchorage. From 1983 until 2008, he served as Senior Petroleum Economist for the Alaska Division of Revenue and Taxation.

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