Four years ago when I went to vote for the Fairbanks North Star Borough initiative to create a gas line port authority, I believed that a state natural gas authority to build and own a liquid natural gas (LNG) project was a good idea. I voted for it. I thought it was a good plan to jump start development. I also thought it would have assured gas producer competition, but now the situation has changed.

The reason the situation has changed is not because the port authority didn't do a great job. It came up with a good plan, it tried to get that plan implemented, and it contacted the oil producers in order to get an agreement for gas sales. Unfortunately, the oil producers did not go for it. Now I think that a window has closed.

Why was a gas authority a good idea back a few years ago but not now? The simple answer is that markets have changed. Back then there was a greater expectation that Japanese and Chinese gas demand would increase; but no one expected a substantial increase in Lower 48 demand. But now the reverse is true. Japan and China have both faced relatively slow growth. In fact they are moving to flexible free market gas options where Alaska cannot compete.

Japan for example has endured a 10-year economic stagnation. This has forced it to open up its energy markets to flexible contracts, where once it had fixed contracts in order to assure energy security. Japan is hoping that this will lead to cheaper energy in order to help their economy recover. Alaska would not be able to offer flexible contracts due to the tremendous fixed costs any Alaska LNG project would entail. Other LNG competitors including Indonesia, Qatar and others have more flexibility and lower costs. That means Alaska will have a tough time competing on the Pacific Rim market.

On the other hand, the Lower 48 market is on the verge of a massive gas shortage. The price of gas reached $10 per thousand cubic feet (MCF) not two years ago, where usually it is $2 to $3 per MCF. That is a strong signal that supply problems are on the horizon. Every six months the U.S. Energy Information Administration seems to increase its forecasted price for Lower 48 gas. The latest forecast indicates a price of over $3.25 in 2000 dollars for the next 20 years. Likely it will be higher than that, particularly if Atlantic Rim LNG producers cut production via cartel agreements. Therefore Alaska can sell its gas to the Lower 48 and receive top dollar.

Another market for Alaska gas is California, where the Alcan route is the cheaper supply route compared to LNG, and Alaska would earn more revenue.

Passing an LNG initiative does not change who owns the gas leases. These are currently owned by the oil producer companies. Unless the producers sell their gas to Alaska, the gas line will not receive any revenue. The oil companies can make more money selling their gas to the Lower 48 than to the Pacific Rim. There is no incentive for them to sell to an LNG project.

Unless Alaska legally takes away that gas somehow, the producers are going to sell the gas where it makes the most money. Alaska can easily get tied up in millions of dollars of legal wrangling, feasibility studies, and permit fights if the state tries to force the issue. There are also other costs that Alaska may be forced to bear such as putting up pre-construction capital investments to obtain engineering plans and permits.

There are many options to provide gas supplies to Southcentral and rural Alaska. One would be to build a dedicated gas line from the North Slope directly to Anchorage once gas is finally needed there. The LNG initiative does no more to assure Southcentral gas supplies than does an Alcan pipeline. Furthermore, an LNG initiative does not assure greater economic growth nor increases in new industries anymore than the Alcan option. We tried the port authority option, and it didn't work. It was a good try, but now we need to move forward. All the market indications are for a strong Lower 48 demand for Alaska gas. I think we need to concentrate on that option and let go of LNG.

Dr. Doug Reynolds is an associate professor of oil and energy economics at the University of Alaska Fairbanks. He can be contacted at ffdbr@uaf.edu.