In what may be Alaska’s final attempt to bring its deteriorating energy sector back to life, a $45 billion natural gas project might be just what the doctor ordered…
Like a heavy chain-smoker, the past few decades have not been kind to the Frontier State.
Years of decline in oil production have turned Alaska into a shadow of its former self.
In 1988, Alaska hit its peak of production when it was churned out a record 2.1 million barrels of oil per day.
But bit-by-bit, wells began to dry up, as did new exploration projects.
The thing is however… Alaska never came close to running out of oil.
Experts believe that billions of barrels of crude and trillions of cubic feet of natural gas remain buried in the prolific North Slope region of the state, just waiting to be untapped.
The bigger problem rather, has been taxes.
In 2007 an oil tax structure was imposed which increased rates to as high as 75% depending on the fluctuation of oil prices.
The tax angered a lot of producers who decided to leave Alaska in favor of other, more welcoming energy havens.
Oil output in Alaska now stands at less than 510,000 bpd and looks to be heading lower yet.
In 2012, even tax-heavy and production challenged California managed to overtake Alaska to lock up the 3rd spot for highest producing state in the US.
Alaska has been fourth ever since, with Texas and North Dakota holding down 1st and 2nd honors, respectively.
As Kara Moriarty, Deputy Director of the Alaska Oil and Gas Association (AOGA) warned, “If we don’t change things we’re going to be out-surpassed by Oklahoma.”
But the problem doesn’t end there.
The highly anticipated oil dividend checks that the state government issues to all its citizens every year (including children), have also shrunk considerably.
After a record payout of $2,069.00 in 2008, the distribution has been slashed by 57% to just $900 in 2013.
Now, as America gears up to become the top oil producer in the world, it begs the question: is Alaska being left in the rearview mirror?
Fortunately, Alaskans are a resilient bunch and it looks like the state may be turning the corner.
In a bid to reverse the production slump, Alaska Governor Sean Parnell recently made two major announcements.
First, the state enacted a 35% flat tax on oil revenues, which they hope is enough of an incentive to begin luring producers back.
This strategy looks to be bearing fruit already, as both BP (NYSE:BP) and ConocoPhillips (NYSE:COP) have announced their intentions to set up more rigs in the region.
Next, they revealed plans to build a multi-billion dollar natural gas project smack dab in the North Slope.
It’s estimated that the North Slope contains over 35 tcf of gas — enough to power 35 million US homes for 15 years.
As part of a 5-way partnership which includes BP, ConocoPhillips, ExxonMobil (NYSE:XOM), and TransCanada (NYSE:TRP), the state declared that it will contribute more than 10% of the estimated $45 billion price tag to kick start the venture.
Upon approval, the project will include the construction of:
- a state-of-the-art gas processing plant
- a liquefaction facility and export terminal earmarked for Asian markets
- an 800-mile pipeline to transport the gas between the facilities
But of course, the intention is not to sell to the domestic market.
Alaska’s location makes them the perfect outpost to sell to Asia, particularly with a gas-hungry nation like Japan just across the pond.
But a word of caution to investors. With these two developments, it might be a few years before we see any concrete results.
Assuming no significant production projects come down the pipeline, the government predicts that oil output could fall to 312,000 bpd in ten years’ time.
As for the North Slope gas project, not only is the application awaiting legislative approval from the state, it will then need to submit a permit application to the US Department of Energy and the Federal Energy Regulatory Commission (FERC), where we can only guess how long it would take before it gets reviewed.
On a positive note, the DOE’s approval process has been picking up speed of late, with a handful of LNG projects recently given the greenlight and the majority of the rest now officially classified as “Under DOE Review”.
If more approvals are handed down in 2014, it will greatly up Alaska’s chances of having an LNG export terminal of its own — which could very well be the intervention that the state was waiting for.
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