Alaska's Hard Lesson in Energy Policy
By Glenn Williams
RealMoney Contributor
5/5/2011 2:08 PM EDT
Alaska's Southcentral region is running out of natural gas. The problem originated from a liquefied natural gas (LNG) export facility and a nearby fertilizer manufacturing plant that consumed volumes of natural gas as feedstock. The State of Alaska was complicit; it failed to intervene and was eager to extract fees for the natural gas. But the real culprit was the failure to develop any energy policy or plan.
The nation's only LNG export facility has been operating since 1967 and is jointly owned by ConocoPhillips (COP - commentary - Trade Now) and Marathon Oil (MRO - commentary - Trade Now). The fertilizer manufacturing plant was owned by Agrium (AGU - commentary - Trade Now). The LNG export facility will retire in a couple of months, and the fertilizer company is already shuttered.
Like its LNG neighbors, Agrium exported its products. In effect, Agrium was another natural-gas export facility, only it was exporting not LNG but another natural gas product.
How the Well Ran Dry
Context is important. In 2005, proved and probable gas reserves for Southcentral Alaska were about 1,700 Bcf. Colorado School of Mines' Potential Gas Committee (PGC) estimates that there are additional "probable, possible and speculative" Cook Inlet region natural-gas resources. The LNG facility was depleting about 10% of the reserves each year. The state's largest utility, Chugach Alaska Corporation, along with Anchorage Municipal Light & Power and others, also had their straws in the pool. It appears that about 75% of proved and probable reserves have been consumed, leaving Southcentral Alaska with only 400 or 600 Bcf to power their utilities, heat their homes and fuel their commerce.
There is not enough natural gas left, so conservation and alternative energy sources are needed and needed soon. PGC's "probable, possible and speculative" sources would be helpful right about now. It their absence, one potential solution is to import LNG. That's right: The very same energy that had been exported will now have to be imported.
Agrium was the first to feel the effects of the depleting gas wells. It purchased its Kenai Fertilizer Plant in 2000 with the intention of running the plant at full capacity. At full capacity, the plant would consume about 53 billion cubic feet (Bcf) of natural gas per year. But Agrium could not secure enough natural gas, so it was forced to reduce production. Gas consumption in 2002 was reduced to 47 Bcf, a reduction of 11% from full capacity. From 2003 to 2005, gas consumption was further reduced to about 40 Bcf, a reduction of 25% from full capacity. In 2006, gas consumption was further reduced to 21 Bcf, a 60% reduction.
Because of continuing and worsening gas supply shortages, the entire Kenai Fertilizer Plant was shut down on Oct. 24, 2006, and it remains shut down. Southcentral Alaska lost 264 local jobs and $42 million annual personal income and saw massive write-offs for Agrium.
Chugach was the second to face the effects of depleting gas wells. Chugach is privately owned by about 2,200 shareholders who are of Aleut, Eskimo or Indian heritage. Chugach is heavily dependent on the use of natural gas produced on the Cook Inlet for the generation of electricity. In 2008, Chugach had no alternative or backup source of fuel of any significant size. Chugach currently consumes about 26 Bcf of natural gas per year. It already has "unmet gas needs" going forward. Further, there has been significant uncertainty regarding volume and deliverability after 2011.
While the local utility and the local fertilizer company are struggling to survive, the LNG export facility has applied for a license extension from the U.S. Department of Energy (DOE) to export even more natural gas. The owners of the LNG facility export 109 Bcf per year to Japan, and it consumes an additional 16 Bcf for LNG facility fuel.
Wasted Energy
From a macroeconomic perspective, Southcentral Alaska's natural-gas journey seems absurd. Exploration-and-production companies found the natural gas and fed some of that gas to the local communities, but they exported the bulk of their reserves for some quick cash. In order to export their gas, ConocoPhillips and Marathon had to build costly compression and refrigeration facilities and contract specialized ships. Lost in the production process was all the energy needed to compress and refrigerate natural gas to reach LNG standards-- an unnecessary step if that gas was consumed locally.
Soon, somebody has to build a costly LNG import facility to "regasify" foreign LNG so it can be integrated into local pipelines. Worse, the cost of the foreign LNG will be prohibitive: Suppliers will expect a delivery price that is indexed to fuel oil, because that is how natural gas is priced in the Pacific Rim.
That means Alaskans will pay four or five times more for their natural gas than their fellow citizens pay in the lower 48 states. Had they not exported it in the first place, they would have had abundant sources for decades, they would not have had to build a costly LNG export facility, they would not have had to pay again for a costly LNG import facility, and they would not have lost so much natural gas that was used to compress, refrigerate and regasify LNG.
To make the absurd ridiculous, consider that on the other side of the same state are natural gas reserves the size of an ocean. It is so close, yet so far away: The cost to pipe it to the region is cost-prohibitive. So far, the only answer is to have the federal government subsidize a new pipeline. And everybody knows that idea is not going anywhere in the U.S. Congress.
Costly Alternatives
Consider also that all these facts were known years ago. Everybody knew that by 2011 there would be a problem for Alaska's major population center. This includes the DOE, the U.S. Federal Energy Regulatory Commission (FERC), the State of Alaska and the communities in Southcentral Alaska. There were public hearings and time to comment. In the end, only Agrium and Chugach objected, and Chugach warned of future difficulties. The DOE, FERC and the state of Alaska allowed ConocoPhillips and Marathon to continue exporting, continue depleting natural gas and watched gas-starved Agrium shutter its Alaskan operations.
This is not to paint ConocoPhillips or Marathon as villains; they are not. The natural gas they discovered and produced was their gas, and they are free to do with their property as they see fit. The fact that they profited from this legal and open enterprise is also not an issue; they are in business to make profits.
The villain is the lack of a regional, state and federal energy policy. The lack of any energy policy resulted in short-term gains for oil companies, the state and the local community at the expense of long-term security for Southcentral Alaskans.
Those same Alaskans are now looking at new options. According to the Alaska Journal of Commerce , local utilities are scrambling to find ways to conserve what remains by considering alternative energy sources, such as importing fuel oil, using wind energy, geothermal, anything to stretch out supplies.
Alaska offers a valuable lesson for the nation at large. An energy policy was needed in Alaska, and an energy policy is needed for the nation. Our grandchildren are depending on this generation to act responsibly with their resources. To get there, our leaders need to think beyond the next election cycle.
As in Alaska, a national energy policy is unlikely to emerge until a serious problem is staring us in the face. As in Alaska, a national response will come too late.
As an alternative, buy stock in Exxon Mobil (XOM - commentary - Trade Now), Chevron (CVX - commentary - Trade Now), ConocoPhillips, Marathon and other integrated energy companies. Give those stocks and any remaining dividends to your grandchildren so their families can pay their energy bills. |
