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Alaska’s North Slope and LNG

North America’s energy bridge to Asia

The views expressed herein are the authors’ own and not those of Samuel International and/or the University of Alaska.

When the first modern shale well was drilled a couple of miles north of Fort Worth, Texas, in the late-1990s, few would have believed what a global energy market game-changer it would turn out to be barely a decade removed. At the time it was anticipated the United States would be, during the first half of the 21st century, one of the largest global importers of liquefied natural gas (LNG); today the U.S. domestic natural gas market is oversupplied and prices barely a fraction of that which they fetched just a couple of years earlier.

It is now foreseen that increased production of natural gas (and oil, as the U.S. is slated to dethrone Saudi Arabia soon as the largest producer of black gold) will make the U.S. energy self-sufficient, on net, within 25 years. Along the way, it is expected to provide a foundation for a domestic manufacturing renaissance, supply billions of dollars in revenue to federal and state governments, lessen the pressures on the current U.S. account deficit (via reduced oil and gas imports) and provide upward support to the value of the dollar. Broader geo-political benefits are also likely to accrue.

 

Persisting Global Demand

Meanwhile, on the global demand side, as per the International Energy Agency’s most recent World Energy Outlook 2012, natural gas is expected to be the only fossil fuel for which global demand is anticipated to persist—in fact, increase—in any-and-all policy scenarios and contingencies over the next 25 years. Unconventional gas (particularly shale gas) will fulfill nearly half of this increase in demand, much of it arising from Asia’s seemingly unquenchable thirst for energy to fire its unstoppable economic engine.

During 2000-2011, more than half the increase in demand for liquefied natural gas came from Asia with imports from China and India growing as much as 30 percent and 52 percent, respectively, in 2011. Active policy support and regulatory reforms are expected to ensure that China’s consumption expands from its current 130 billion cubic meters (bcm) to 545 bcm in 2035. In the interim until 2020 though, Japan is expected to be Asia’s leading importer of LNG, due to its need to find a quick and dependable substitute fuel source in the wake of the Fukushima disaster and the subsequent and continuing nuclear plant shutdowns.

Furthermore, a key driver of Asia’s demand dynamics arises from its need to secure diversified fuel choices and sources. Disproportionate amount of current Asian energy consumption is concentrated in greenhouse gas-intensive coal and oil-based sources—an environmentally unsustainable proposition in the long run. Equally, Asia remains overly dependent on the Middle East for oil and on regional production (from Australia, Indonesia, Malaysia and the Russian Sakhalin Peninsula) in the case of LNG. Contracts for LNG further tend to typically be of a long duration and price-inflexible variant. The appearance across of the horizon of seemingly inexhaustible North American shale oil resources thus embodies the latent potential for Asia to significantly improve its energy security, even as it diversifies supply sources, pricing formulas and contractual terms.

Clearly, a demand-supply “match-made-in-heaven” scenario between North American production and Asian consumption beckons on the near horizon—one that is mutually stable, remunerative, and in the long run economically integrative. For Alaska, these developments could not have arrived at a more opportune time. Foremost among its continental peers, Alaska stands poised at the forefront to become North America’s energy bridge to Asia and reap the profits of this reciprocally beneficial trans-Pacific relationship.

In 2009, an updated study by the U.S. Department of Energy (DOE) assessed the discovered technically recoverable natural gas resources on Alaska’s North Slope to be to the tune of approximately 35 trillion cubic feet. Geological evidence suggests that gas fields of sufficient size are available to support economically and environmentally viable extraction. Because a pipeline to carry the gas to (export) market had hitherto been missing, in recent weeks, a consortium of energy companies including Exxon Mobil Corp., ConocoPhillips Co. and BP PLC have signaled their intention to build an 800 mile-long such pipeline from Alaska’s North Slope to its coast. For good measure, a gas liquefaction plant is also envisaged at shore which will enable the consortium—and Alaska—to profitably arbitrage the huge price differential that currently exists between the Asian and North American gas markets.

 

Too Good to Be True

If this all sounds too good to be true, well, that is indeed the case in some ways. Issues ranging from land access to marine mammal protection, especially the bowhead whale which is on the Endangered Species Act list, to water and gravel availability to construct roads and production facilities, have the potential to stymie the development of North Slope oil and gas resources. While some of these hindrances are amenable to solutions, including further advances in technology, an altogether more troubling stumbling block is the existence of an archaic and unnecessarily retrograde federal law that has been on the books since the late-1930s. However, it is prudent to remember the somber uncertainties to Alaska’s prospects of having its LNG in the market by 2023 also emanate from exogenous factors, such as: whether Japan restarts its nuclear plants and relies on LNG for power; Russia builds new pipelines to move gas from East Siberia to the Pacific; if efficient LNG tankers costs less than the cost of building the 800 mile new pipeline from the North Slope; if shale gas can be exported as LNG; and if China expands its LNG imports.

As per the Natural Gas Act of 1938, all exports of natural gas from the United States require the Department of Energy (DOE) to make an affirmative determination that the permit to export is consistent with the American “public interest.” As a practical matter, this “public interest” determination is limited to those countries with which the U.S. has not entered into a free trade agreement (FTA). The U.S. however has very few such FTAs in force—only 20 totally, many of them with minnows, and none with a large, dynamic Asian economy (save South Korea).

Such a discretionary, nonautomatic licensing authority is not only an investment-chiller, it might also be noncompliant with the U.S.’ international commitments. International trade lawyers and U.S. Chamber of Commerce officials alike have charged that the requirement to secure government approval to export LNG amounts to a possible export restraint that violates the U.S.’ obligations under the 1994 General Agreement on Tariffs and Trade (GATT). Although GATT rules allow limited exceptions from this general prohibition on export restraints, such prohibitions or restrictions need to be either:

(a) temporary
(b) related to essential products that are in short supply
(c) applied in conjunction with other conservationist objectives, or
(d) made with an express national security objective in mind.

Discretionary nonautomatic export licensing authority (for LNG) interpreted under the guise of being in the “public interest” does not appear to comport to these above criteria—in turn, calling into question the U.S.’ fidelity to international trade law and obligation on this matter.

Regardless of this consistency/inconsistency, protectionist voices in Congress have latched onto this provision to lobby for denial of LNG exports abroad—both, to artificially benefit domestic manufacturing via the differential in (energy) input prices as well as to crimp the broader development of the U.S.’ onshore and offshore gas resources in the name of environmental considerations. However, fully participating in global energy markets is the most appropriate way to reward domestic producers, incentivize investments in economical domestic production, and keep costs low for consumers, while simultaneously encourage the use of off-the-shelf technologies that enhance efficiency and conservation goals. Ultimately, in the absence of development of the North Slope LNG bounty, it is in Alaska—and in lost revenues—where the price will be paid.

 

Reinterpret the Natural Gas Act

Going forward, the offending provision in the Natural Gas Act needs to be reinterpreted in such way that LNG exports are denied to none but the most egregious few rogue state actors. Allies such as Japan, which currently have significantly reduced their intake of Iranian crude in spite of the Fukushima disaster, ought not to be punished by such exclusions, which were written in an altogether different time and age. In passing, it bears noting that even at the height of the Cold War the U.S. conducted agricultural trade with the Soviet Union. Equally, the discretionary authority embedded in the Natural Gas Act needs to be stripped so that predictability and security of tenure to justify the large, capital-intensive investment in a pipeline and gas liquefaction facility can be assured. Federal law ought to embrace such extraction, development, transport and export, so long as it is conducted in a market–friendly and environmentally responsible fashion.

In early December 2012, an ice-class LNG tanker chartered by the Russian oil and gas giant Gazprom traversed the Arctic route to Asia to deliver a cargo of Norwegian gas at the Japanese port of Kitakyushu. The number of such crossings has been on the rise in recent times—the number of vessels making the Arctic passage having risen steadily from four in 2010 to 34 in 2011 to 46 as of December 2012. Russian president Vladimir Putin has vowed to transform this route into a future “international transport artery” in terms of fees, safety and quality. The seemingly unquenchable thirst for LNG on the Asian continent will, one way or the other, be sated. The question is: will it be U.S.—and Alaska-based—capital and producers at the head of this queue? Or will this opportunity be fumbled by way of pious pronouncements that cater—and serve as a cover—to the interest of more protectionist-minded lobbies in Washington, D.C. The road ahead for Alaska, in the years to come, has some detours and riddles.    

 

Sourabh Gupta is a Senior Research Associate at Samuels International Associates Inc., a strategic international trade and political advisory firm based in Washington, D.C. He holds master’s degrees in international security studies and international relations from the Walsh School of Foreign Service at Georgetown University and the Maxwell School at Syracuse University, respectively. He is currently a 2012 East Asia Forum Distinguished Fellow.

Dr. Ashok K. Roy is the Vice President for Finance & Administration/Chief Financial Officer for the University of Alaska system. He is also Associate Professor of Business Administration at the University of Alaska Fairbanks. Dr. Roy has significant experience, at senior management levels, at three other large universities, local government, and in the private sector. Dr. Roy was educated in the USA and India, and holds six university degrees and five professional certifications. He has authored 67 publications in academic and trade journals.

This article first appeared in the February 2013 print edition of Alaska Business Monthly magazine.

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