5.2.23 New Revenues to Fill the Fiscal Gap—Gas Pipeline

Alaska has vast resources of natural gas on its North Slope, estimated at 24 trillion cubic feet (tcf) at Prudhoe Bay, 8 tcf at Point Thompson, and other discovered sources of 35 tcf. Geologists estimate a total of 100 tcf of gas on the Alaska North Slope. According to Roger Marks, a petroleum economist with the Alaska Department of Revenue, a gas pipeline to the Lower 48 with capacity to move 4.5 billion cubic feet (bcf) per day could provide between $400 million and $1 billion a year in public revenue for almost 60 years. At the low end, $400 million in public revenues assume a market price of $2/mmbtu (millions of btus), property taxes of $118 million, no royalty payments, severance taxes of $106 million, and state corporate income taxes of $190 million. The $1 billion high scenario assumes a $4/mmbtu market price, property taxes of $118 million, royalties of $236 million, severance taxes of $163 million, and state corporate income taxes of $470 million.

Exporting gas from the Alaska North Slope to the Lower 48 or Pacific Rim markets is a project of enormous dimensions and also enormous risks.

Shipment of natural gas to the midwest will require a pipeline that could cost $20 billion to build. Investors in the pipeline will require a tariff to be paid to use their pipeline whether or not natural gas is shipped through it. The tariff ensures recovery of the cost of building the pipeline, pays off any debt incurred, and allows a rate of return on their investment.

A natural gas pipeline has a higher profitability hurdle to overcome compared to the existing Trans-Alaska pipeline that transports oil from the North Slope to Valdez, Alaska. The pipeline tariff for North Slope oil moving through the Trans-Alaska Pipeline is only about 25 percent of $20 per barrel oil. Comparatively, the pipeline tariff for natural gas is estimated at 75 percent of the value of the gas when it comes out of the pipeline, or $3 of the current gas price of $4 per million cubic feet (mcf).

If an Alaska North Slope natural gas pipeline were to be constructed through Canada and into the midwest, potential market competition for Alaska gas includes natural gas from the Gulf of Mexico, liquefied natural gas (LNG) from both the Atlantic and Pacific Basins as well as coal-bed methane, and any other new and cheaper energy sources that become technologically feasible. This market is complex and highly competitive.

Another alternative for marketing Alaska's North Slope natural gas is to build a pipeline from the North Slope to tidewater in Alaska—Valdez, for example. After being transported to Valdez, the natural gas would be liquefied and shipped by LNG tanker to Pacific Rim markets. The Department of Revenue estimates public revenues under the LNG scenario (assuming production of 2 bcf/day) at $293 million and costs at $12 billion. Assumptions include a market price of $3.50/mmbtu, property taxes of $132 million, no royalties, severance taxes of $45 million, and state corporate income tax of $116 million.

The problem with this plan is that the market value of the natural gas must be sufficient to cover the cost of moving it 800 miles by pipeline to tidewater as well as all other production and development costs. There are plentiful supplies of natural gas closer to tidewater around the Pacific Rim with which Alaska's natural gas would be competing for market share.

More information: the Northern Gas Pipeline web site provides a constantly updated list of news articles related to Arctic natural gas pipelines.