Alaska editorial: North Slope gas comes without a guarantee

Posted: Sunday, September 17, 2006

This editorial appeared in the Anchorage Daily News:

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If you are among the frustrated Alaskans, angry at the North Slope producers for not jumping fast enough to spend billions of dollars on building the proposed natural gas pipeline, you might point to one day last December. That's when the nation's natural gas prices momentarily spiked above $15 per thousand cubic feet.

That was more than eight times the average of December 1995 and almost three times the price of December 2000. High times were here, and eager Alaskans proclaimed the project as a can't-lose, get-rich, no-risk opportunity. So much so that many were joyful at the governor's proposal to invest state funds in the private project, looking to share in the anticipated wealth.

That was 10 months ago.

Natural gas prices on the New York Mercantile Exchange closed Friday at $5.32, down $10 from December's high. There is a lot of gas stored up for the winter; no hurricanes have damaged the gas supply from the Gulf of Mexico; and buyers are enjoying a significant drop in prices.

It proves once again the ups and downs of natural gas prices.

The drop - which could very well turn out to be a short-term dip, depending on gas supplies and winter temperatures - shows the price risk confronting potential developers of North Slope gas.

If the giant construction project comes in on budget, it will be profitable at $5 gas, no doubt about it. But catastrophic cost overruns, coupled with another drop in natural gas prices, could take the shine right off all that golden gas that glitters in the eyes of Alaskans.

This is not to predict a construction cost overrun reminiscent of the trans-Alaska oil pipeline. Nor is this a forecast of dismal market conditions, with natural gas prices dropping back to the $3 level of 2002. Most market analysts expect prices to stay around $5 long term, and, hopefully, whichever companies build the pipeline will do a good job of controlling construction costs.

This lesson in market prices is simply to remind Alaskans of reality. Yesterday's gas prices are not today's prices and certainly will not be tomorrow's prices. A gas project that looked wildly profitable yesterday may be less profitable tomorrow.

There is a tremendous risk in spending billions of dollars on construction over the next 10 years, to sell gas over the next 30 or 40 years - when no one knows for certain how much the gas will be worth.

Alaskans need to do more than dream of counting future profits; they need to think just like other investors and exercise reasonable caution before committing public funds to a gas line project. Nothing is ever guaranteed.

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