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This Week in Energy: April D-Day for Alaska’s Massive Gas Plans

Alaska stands at an interesting energy crossroads, with the State Legislature considering the fate of a massive liquefied natural gas project that would be an economic boost for the state and a new supply boost for Asian markets hungry for US LNG. The State Legislature session ends on 20 April and approval is by no means a foregone conclusion: Some Alaskan lawmakers don’t like the deal, which they say panders to oil companies at the expense of the state.

The project will cost between $45 billion and $65 billion and is backed by giants Exxon Mobil, BP and ConocoPhillips. It envisions transporting Alaskan North Slope gas 800 miles across the state to a new LNG plant on the south coast. The pipeline project is hoping to be green-lighted in full in 2018, but first it has to get past the state legislature. As the plan stands now, the state will take a 20-25% stake in the project and as such foot the bill for $10 billion of the project’s cost, with TransCanada potentially putting up half that amount.

Under the plan the state would commit to take its one-eighth royalty share of gas production in kind or in the form of gas for the duration of the project and also take state production taxes as a share of the gas.

Related Article: Alaska’s Largest Refinery to Close Down

The massive pipeline will run from the North Slope to the Kenai Peninsula south of Anchorage   and its total cost is seven times more than Keystone XL, whose approval is still languishing in Washington where it requires a presidential sign-off because of its cross-border element. The Alaskan pipeline project is more than a pipeline, though; it includes harbors, roads and gas liquefaction facilities.  

One of the biggest bolsterers of this project has been Alaska’s recent oil and gas tax reforms, which pave the way to tap into over 8 trillion cubic feet of gas in Alaska’s North Slope. This is one of the world’s largest reserves, so there is much at stake.

These tax reforms are also the origin of the bulk of criticism of this project. Oil companies provide around 90% of the state’s unrestricted revenues, and the oil tax reform passed last year and taking effect in January 2014, removed some of the bigger fees oil companies had to pay before. There is plenty of public opposition to these reforms and a referendum to repeal the new system is scheduled to be held in August.

Economically, for Alaska the new pipeline/LNG project could be up to $3 billion more in revenues annually by 2024 and thousands of jobs. It would also mean more energy stability for Alaskans and afford them an opportunity for lower heating costs as the pipeline would have five offtake points to provide gas to Alaskans.

Legislators are now examining the details of the proposal, which would give TransCanada, the Canadian pipeline giant, a the right to invest in and own a share of the North Slope gas treatment plant and pipeline, while the state would invest directly in, and own a share of the LNG plant in sufficient to convert the state gas into LNG for sale. The state would the option to purchase all or part of TransCanada’s share of the project at certain points. What the state needs to decide by April is whether it is going to participate in the project at all, what the level of participation should be and what the next steps are. If the state legislature approves the “enabling legislation” in April, a longer-term “Precedent Agreement” between the state and TransCanada could be the next step.

Related Article: More Trouble in the Arctic for Shell

In an exclusive interview this week with Oilprice.com, Adam Sieminski, administrator of the US Energy Information Agency (EIA), says that Alaska just might surprise us. (coming out on Monday)

“We think the economics ultimately will favor construction of an LNG facility in Alaska that would allow the production from the associated gas in the North Slope of Alaska,” Sieminksi said.

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By James Stafford
Editor, Oilprice.com

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