My Turn: Alaskans cannot afford to gamble on the gas project

Posted: Sunday, October 27, 2002

On Nov. 5, Alaskans should soundly reject Ballot Measure 3 because it is bad public policy that puts our most important state resources at risk.

Ballot Measure 3 creates a new state bureaucracy to build and operate a natural gas project so financially risky no private company will touch it. In fact, private industry has already spent many years and millions of dollars and still has not found a way to make this project pencil out.

Ballot Measure 3 compels the state to spend hundreds of millions of dollars to restudy a project already shown to be unfeasible. This is money Alaska can ill-afford to waste.

Ballot Measure 3 threatens the Permanent Fund because there is no alternative source of investment money. In fact, Alaska's entire savings account could be jeopardized given the enormous scope of this project and the potential for cost overruns due to permit and construction delays.

Ballot Measure 3 derails work on a real project to bring North Slope gas to market. At a minimum, it could sidetrack an alternative project by at least 24 months and could jeopardize much needed national incentives.

Here are some facts to evaluate:

There are three proposed routes to bring North Slope natural gas to market. None is economically viable right now. The route mandated by this initiative is the most financially risky of the three. It requires a huge natural gas conditioning plant on the North Slope, an 800-mile pipeline from Prudhoe Bay to Valdez, a liquids extraction plant in Valdez, a spur pipeline to Southcentral Alaska, a liquefaction plant at tidewater, a new tanker terminal and a fleet of tankers. Projected pricetag is $18 billion or about 80 percent of the value of the Permanent Fund.

At present, there is no market for this gas. Analyses show that the Pacific Rim LNG market is greatly oversupplied with lower-cost LNG through at least the end of the decade. Currently there are between 60-75 metric tons of LNG per year chasing 20-40 metric tons of new demand. This oversupply recently resulted in the first downturn of prices into Japan since LNG first entered that market.

The economics to California are no better. A Department of Revenue analysis found that it would cost more than $4/million cubic feet (mcf) to move gas from the North Slope to the West Coast where it would compete with gas that presently costs $3.50/mcf or less.

These market conditions turn a risky project into a financial nightmare. Capital costs for an Alaskan LNG project will be at least double that of competing new supplies, rendering this project financially unfeasible well into the next decade - if not forever. The Department of Revenue concluded that there would "never be any revenue to the state from this project because Alaska LNG cannot compete in either the Asian or California market."

The only ready source of financing is the Permanent Fund. Initiative backers talk of issuing revenue bonds. Yet those bonds would be little more than junk bonds given the risk and size of this project, the lack of assets and the fact that the bonds would not be backed by the state.

Alaska has no business trying to compete with private business, particularly in a commodity market as volatile as natural gas. We've tried both direct and indirect investment before - with embarrassing results: $60 million lost to the Alaska Petrochemical Co., millions and millions more in the Delta Barley Project and related grain cars and storage facilities, the Point Mackenzie Dairy Project and the Alaska Seafood Center.

It will be costly to put this initiative to bed. A vote yes sets off a work plan that largely replicates what private industry has already done and costs upwards of $200 million, according to the state. It makes no sense to waste hundreds of millions of dollars when we cannot afford to maintain our state roads and parks or adequately fund our schools.

Passage of this initiative will delay legitimate efforts to bring our North Slope gas to market.

For these and many reasons more, I ask you to join me in voting no on Ballot Measure 3. Alaska cannot afford this initiative.

Gail Phillips of Homer served 10 years in the Legislature, including four years as speaker of the House.

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