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February 17, 2006
The Alaska Gas Pipeline: A Critical Analysis
Part One of a Two Part Series
by Brian Yanity, insurgent49

     Talk of a North Slope natural gas pipeline in Alaska dates back to the discovery of gas in the late 1960s. Recently, natural gas prices have reached record highs and the price is expected to rise in the years ahead. According to the U.S. Department of Energy’s Energy Information Administration (EIA), natural gas prices nationwide averaged around $5 per thousand cubic feet during 2003 and 2004, and increased to over $6 during 2005. The EIA predicts that the price nationwide will only increase over the next few years.

     All of this means that many people across the continent will be willing to pay more for Alaska’s natural gas. As described in the September 2005 edition of the Alaska Oil and Gas Reporter Quarterly: “It’s one of those once-a-generation issues, ranking right up there with Alaska statehood, the Alaska Native Claims Settlement Act, the trans-Alaska oil pipeline, and the federal Alaska National Interest Lands and Conservation Act.”

About Natural Gas

     Natural gas is colorless and odorless; made from the compressed remains of life that died millions of years ago. It is the gaseous form of hydrocarbon but was formed with much greater heat and pressure than either petroleum or coal. Natural gas is primarily made up of methane gas and also contains ethane, propane, and butane. The advantages of natural gas as a fuel are the result of its high energy density coupled with its high hydrogen to carbon ratio. Natural gas is the cleanest form of fossil fuel, both in terms of carbon emissions and overall pollution. It is important not to confuse natural gas with gasoline, which is often referred to as ‘gas’ in the U.S. despite being a liquid product refined from petroleum. Most of the world calls gasoline petrol for this reason.

     The main uses for natural gas include heating, generation of electricity, industrial processes, chemicals, as well as cooking. Like all hydrocarbons, natural gas can be used to make a wide variety of petrochemical products. Natural gas is used in the production of brick, tile, cement, ceramics, glass, iron and steel, paper, textiles, and most fertilizers. Specially built trucks and buses have been running on compressed natural gas (CNG) for years.  This includes municipally owned vehicles in Anchorage.

     Natural gas was first used by people thousands of years ago in China. The first commercial use of gas began early 1800s for lighting. Today, natural gas accounts for roughly one-third of the energy used in the U.S. and 25% of global energy usage.
While petroleum oil has been a global commodity for almost a century, gas has remained local or regional in its distribution. This is due to the physical characteristics of gas that make it less economical to compress or liquefy for transport in cargo ships or barges. Distribution systems for natural gas resemble electric utilities more than petroleum-fueling station networks.  Consequently, they tend to be closely regulated.

     World gas reserves are estimated to be somewhere between 6,000 and 7,000 trillion cubic feet (Tcf) with 1,000 to 1,500 Tcf of this classified as ‘stranded’ or uneconomical at the present time to produce or transport. The ten nations with the largest proven gas reserves include: Russia (1,700 Tcf), Iran (971 Tcf), Qatar (910 Tcf), Saudi Arabia (240 Tcf), United Arab Emirates (210 Tcf), the United States (193 Tcf), Nigeria (180 Tcf), Algeria (160 Tcf), Venezuela (150 Tcf), and Iraq (110 Tcf). The Russian Federation and the former Soviet republics of the Caspian Sea region, alone hold almost a third of the world’s proven gas reserves.

     The Alaska Department of Natural Resources (DNR) estimates the discovered or proven gas reserves on the North Slope to be 35 Tcf. The U.S. Geological Survey (USGS) estimates that Alaska as a whole has roughly 150 Tcf of undiscovered gas with 143 Tcf of this being on the North Slope. However, such USGS estimates have proven to be much greater than what is economically recoverable.

     It should be noted that Alaska’s North Slope has no more than three percent of the world’s gas reserves, but this is most likely closer to one percent. Many Alaskans might not be aware of the fact that U.S. natural gas production peaked in 1973. U.S. production in 2000 was 10 percent less than 1973 levels. While the North American gas market has been noted for its volatility, gas prices will most likely remain high for the next several decades as U.S. and Canadian reserves diminish and imports increase. Doug Reynolds, a UAF economics professor hired by the state as a consulting economist on gas development, stated in a December 2005  interview with the Anchorage Daily News that the year 2007 will most likely see the peak for North American gas production.

Cook Inlet Gas

     Cook Inlet is the only region in Alaska currently producing gas for commercial use, although gas is used on the North Slope by oil producers for on-site power generation and other oil field uses. Natural gas was first discovered in the Cook Inlet region in 1958 by Unocal, and a year later Unocal and Marathon Oil discovered the important Kenai gas field. Commercial gas production began on the Kenai Peninsula in 1961 with offshore production starting in 1965.  Other key Cook Inlet gas finds during the 1960s included the Sterling  in1961, Beluga River in 1962, and Beaver Creek in 1967. The Phillips and Marathon companies opened Alaska’s first Liquefied Natural Gas facility in 1969 and began shipments of Kenai LNG to Japan.
   
     About 80% of the electricity used in Alaska’s Rail belt region comes from generation plants fired by natural gas. Alaska’s largest electric generation facility is the Beluga Power Plant located next to the Beluga River field on the western shore of Cook Inlet. The plant, owned by Chugach Electric Association, started producing power in 1968 and was expanded to its present capacity of 381 megawatts in 1981.

     Between 1999 and 2003, annual consumption of Cook Inlet gas averaged 0.21 Tcf.  Approximately one sixth of this amount is used for the region’s electricity generation and another sixth is needed for local residential and commercial users. One third of Cook Inlet gas is converted into LNG for export, primarily to Asian markets.

     The Cook Inlet Gas Gathering System consists of two pipelines running from the gas fields to populated areas.  This system is owned by Marathon and Chevron and the collected gas is sold to electric power plants, industrial users, and the ENSTAR Natural Gas Company.

     Gas prices in south-central Alaska have doubled in the past four years, and the Regulatory Commission of Alaska is currently fighting pricing schemes proposed by ENSTAR tied to lower 48 prices. However, gas prices in Southcentral Alaska remain much lower than the national average but will only increase in the years ahead.

      At the end of 2005 there was an estimated 1.43 Tcf of proven natural gas in Cook Inlet.  The U.S. Dept. of Energy estimates that there is 13 to 17 Tcf of undiscovered conventional gas and approximately 7 Tcf of coal-bed methane in the Cook Inlet region. Even if such new sources are developed in the years ahead, the gas from Cook Inlet will never be as cheap as it once was. Industry analysts and state regulators alike predict serious gas shortages in the Cook Inlet region by 2012.

     The Calgary based Agrium Corporation owns the Ammonia and urea fertilizer plant in Nikiski. Originally built by Unocal, the plant consumes almost 20 percent of Cook Inlet gas production and would mostly likely be the first item on the chopping block when local gas supplies become scarce. Next would be LNG exports to Asia as the electrical and heating needs of Alaskans take priority.

North Slope Gas Pipeline

     According to most estimates a North Slope gas pipeline will not be under construction for another five to six years. Furthermore, the Federal Energy Regulatory Commission estimates that North Slope gas won’t be delivered to outside markets until 2016 if construction begins in 2012. A pipeline capacity of 4.5 billion cubic feet per day is planned.

    The two main proposals for a pipeline route include the Alaska Highway route being pushed by the major oil producers and the Canadian gas firm TransCanada along with the all-Alaska route being pushed by the Alaska Gasline Port Authority.  Either pipeline is expected to be at full capacity for 18 to 20 years after which gas production will begin to decline unless substantial new reserves are found.

     The Alaska Natural Gas Development Authority was created as a result of a 2002 ballot measure. Initially, the Authority intended to push for an all-Alaska pipeline and published an All Alaska LNG report in 2004. Over the past year ANGDA has backed off this position due to pressure from the Murkowski administration. A new definition for the word happiness now appears on the ANGDA website: “Happiness is Alaska gas going south.”  This seems to represent a rather myopic worldview.

The negotiations of the Murkowski administration

     The State of Alaska technically owns the North Slope oil and gas fields. However, the Big 3 oil companies - ConocoPhillips, ExxonMobil, and British Petroleum - hold 94.3% of the leases to these proven reserves. The current round of negotiations between the Murkowski administration and these oil producers began in January 2005.

     During the first nine months of 2005, the Big 3 made a total of $54.4 billion in after-tax profits. By comparison the entire Gross State Product of Alaska was $34 billion in 2004. A front page article in the January 23, 2006 New York Times revealed that these same oil firms have been shortchanging the U.S. government by as much as $700 million out of gas royalties extracted from federal lands. This article also describes how, in 2003, a jury in Alabama ruled that ExxonMobil cheated on over $60 million of natural gas royalties from state-owned waters.

     The Murkowski administration claimed that gas line negotiations were coming to an end as far back as September, but this seemed unlikely due to increased public discontent with the administration’s secretive negotiations with the Big 3. At the end of October 2005, the governor fired Natural Resources Commissioner Tom Irwin after he wrote a memo to State Attorney General David Marquez questioning the legality of the governor’s negotiations and questioning how much the state was giving up to the Big 3 unnecessarily. Six other high-ranking officials in the Department of Natural Resources resigned in protest, including Oil and Gas Director Mark Myers. 

     John Havelock, who was state Attorney General when the oil pipeline deal was made in the early 1970s, stated in a December 11, 2005 opinion piece in the Anchorage Daily News that the “state government is in a subservient role to the Big 3 producers.” The Murkowski administration originally proposed a public comment period on the contact for only 30 days, far too short a period for citizens to fully digest what is at stake in a 35-year contract worth tens of billions of dollars. We must remember that Alaskans own the natural gas reserves of the North Slope, not the Big 3. It is in the best interest of our state that any gas line negotiations continue on for as long as possible, or are halted to ensure that we get a fair and transparent deal.


Part 2 of this series will discuss the various gas pipeline proposals and well as the social, labor, and environmental issues at stake.












Brian Yanity is a graduate student at UAA, where he is president of the Palestine Club and the Sustainable Energy Society. Brian resides in an undisclosed location in Southcentral Alaska. He can be reached at byanity@insurgent49.com.
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