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Needed virtue: Persily: state should be patient on big gas pipeline

Posted: Tuesday, October 19, 2010

The Lower 48 is awash in cheap natural gas, true enough. But Alaskans shouldn't get discouraged about prospects for a large-diameter gas pipeline, to the point that they write a check from the state treasury for a smaller pipeline from the North Slope to Southcentral Alaska.

That's the advice Larry Persily, the federal gas pipeline coordinator, gave Alaska Support Industry Alliance members at the group's annual meeting Oct. 7.

"I know Alaskans are frustrated and tired of waiting for something to happen (on the large gas pipeline). And some are ready to write a multi-billion-dollar check to subsidize a small, uneconomical in-state line from Prudhoe Bay to Fairbanks or Anchorage, a line so small it would not spur new oil and gas exploration and development, so small that it wouldn't add but a few percentage points to state general fund revenues," Persily said in a speech to the Alliance.

"Some people say the hurdles (for the large pipeline) are too high, that Alaska needs to build something smaller on its own, even if it needs a state subsidy. I believe a big line, with all its benefits, is possible. The mistake would be to give up," Persily said.

The state is studying a possible 24-inch bullet pipeline that could be built from the North Slope if it appears the large gas pipeline will be seriously delayed or not built. A new state corporation, the Alaska Gas Development Corp., or AGDC, has been formed to finish a feasibility study and present a report to the Legislature next July, along with a plan to build the 24-inch pipeline.

Dan Fauske, CEO if the AGDC, has said he doesn't believe the project can be built without a large one-time state cash injection.

Persily said Alaskans would be better off if the state took the same amount it would pay for a bullet line and see if there were some way a state investment could help the big pipeline.

"The big line to the Lower 48 states would give Alaskans the lowest natural gas prices of any project under consideration. It would do more to spur new exploration and development on the North Slope. Even with the massive gas reserves at Prudhoe Bay and Point Thomson, a large-diameter line would need new discoveries to keep the pipe full," Persily said. "That means billions in exploration spending and thousands of jobs. And where there is gas there is oil. Alaska needs more oil production as much as it needs a gas line."

A large gas pipeline would also bring $1 billion to $2 billion per year into the state treasury in new tax and royalty revenue.

Persily admitted that current gas markets would not support an Alaska gas line, which could cost more than $40 billion to build.

"The nation does not need Alaska gas for the next several years. Supplies are up, prices are down, and customers generally are content," he said. "But as the economy recovers, as demand for gas builds and our nation grows there is no guarantee that affordable Lower 48 gas supplies will meet all our needs into the next decade and beyond, and that is Alaska's opportunity."

U.S. electric utilities will increasingly turn to natural gas as a fuel - gas consumption for power generation has increased 70 percent over the last 12 years - and if demand by power plants continues to grow at that rate by 2021, the nation's electric utilities will need new gas supply equal to three Alaska pipelines to feed that growth, Persily said.

"That's on top of new gas supplies that will be needed to cover declining production from older, conventional gas plays," he said.

Shale gas will be in demand, but production will be hard-pressed to meet all of the new demands, Persily said.

"I expect shale will have trouble in the years ahead meeting all of the demand for gas," he said.

Opposition is growing to the shale drillers' use of hydraulic fracturing techniques, which need 3 million to 5 million gallons of water for each fracture operation.

"Many people don't believe it can be done safely, and they are scared for their community water supplies," he said.

Federal and state regulators are working on shale gas issues, but shale gas has a set of environmental problems that may limit its growth, Persily said.

Still, the large Alaska gas pipeline faces its own big uncertainties.

"Will the market (price) be high enough after 2020 to cover the cost to produce, treat and move the gas 3,000 miles to Lower 48 markets? That's a multi-billion-dollar risk," he said.

Alaska state leaders need to recognize the risk in the state fiscal structure for the project, Persily said.

Both competing gas pipeline consortiums have received tentative offers from prospective shippers, but both projects acknowledge that the shippers will need changes in state fiscal system, in taxes and royalties, before they can finalize the shipping contracts with either pipeline.

"Our elected officials need to find a fair and workable balance that can earn reasonable state tax dollars while not putting so much of a burden, so much uncertainty on the project that the business decision goes the wrong way," Persily said. "Politics will not get the gasline built, but politics can hurt its chances of getting built."

Tim Bradner can be reached at tim.bradner@alaskajournal.com.



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