The arguments for the bullet line come from people who dislike the AGIA but lack a palatable alternative to put before the public. They claim that the gas line will go unused or that the AGIA will somehow drive producers to go elsewhere.
First let's consider the possibility of the line going unused. Does this really seem likely? A substantial state investment will create a strong political expectation that gas will be shipped on some sort of acceptable terms, and the producers know it. Owning a line would put the state in a much better position to negotiate terms.
Consider the highly unlikely worst-case scenario in which producers continue their brinksmanship to the bitter end and build an entire separate line. Even if they find a way to make us pay for their intransigence, we'd still probably come out ahead. The Trans-Alaska pipeline cost $8 billion to build and has delivered 150 billion barrels of oil (source: Wikipedia) at a conservatively estimated average price of around $20 a barrel (source: Illinois Oil and Gas Association). This works out to an annual rate of return of about 21%. Even if the initial cost had been $16 billion, the return would still be about 18% -- a good investment, even assuming historical oil prices that will probably never return. Since much of the cost of construction of a gas line will be wages paid to Alaskan workers, the AGIA prospect looks even better for the public than this rough historical analogy suggests.
What about the oft-repeated idea that the oil companies will take their capital elsewhere? Usually, the people who make this argument don't say where exactly they think the money will go. Venezuela and Russia are effectively renationalizing their oil industries and no foreign energy investment in those countries can be considered truly secure. African oil states are chaotic, to say the least. The middle east is mostly closed to the oil majors. Northern Europe is lovely, but they're better at collecting royalties than we are. Embaressingly for democracy in general and our past state government in particular, Libya and Indonesia also get better rates for their people's resources (source: The Economist, November 6th 2007, Sharing the Spoils). In general the foreign investment opportunities for oil and gas producers have contracted significantly over the past decades and continue to do so today.
So why are the producers so slow to develop our reserves? The short answer is that we've given away too much in terms of promises to allow them to do so at some time of their choice in the future. Oil and gas are indeed some of the most valuable resources on the planet, so its a bit counterintuitive that you have to *force* producers to actually take the stuff out and sell it. But in civilized countries which respect contracts, this is exactly what you must do. The producers don't have the threat of impending chaos or seizure of their property to motivate them to produce today. Since the prices of oil and gas are widely expected to continue to rise, they may not have any other motivation. Furthermore, once production has begun, it is often politically infeasible to stop it again. If leases extend far enough into the future without requiring production, it's theoretically possible that producers wouldn't want to start extraction even if we *paid* them. Our state's past approach of attempting to bribe producers simply doesn't work: in the absence of a stick, no carrot is large enough.
The AGIA and the associated determination of the Palin administration not to extend exploitation rights indefinitely to producers that never produce offer the best hope in a long time for a real gas line. If our representatives really have the best interests of the public at heart, they should support her team's efforts, and be prepared to prosecute the law in court if necessary. At the least, they should refrain from weakening the state's negotiating position by saying in public that they are unprepared to do so.
Britton Kerin, Fairbanks resisdent unaffiliated with any oil, gas, or pipeline interest
Last modified: Mon July 7 11:48:50 AKST 2007