U.S. needs Alaska natural gas

News Miner, By DOUG REYNOLDS

There is a natural gas shortage. The price of natural gas in the Lower 48 is over $6 per million BTU. That is 200 percent higher than what it was in the late 1990s and 100 percent higher than what it was a year ago. Alan Greenspan, the Federal Reserve chairman, says that this shortage will persist for the next few years.

So what does Greenspan advocate? He wants to get more Russian liquefied natural gas to market in the United States. Russian gas? Why not get Alaska gas to market? It is cost competitive compared with Russian gas and it gives the United States greater energy security.

Congress is on the verge of helping get more Alaska gas to the Lower 48 quickly by giving tax incentives and specifying an Alcan pipeline route within the currently debated energy bill. But those provisions are still in doubt, which is amazing seeing as the Lower 48 so desperately needs our gas. What is Congress waiting for?

One problem is that the Bush administration, some consumer groups, The Wall Street Journal and think tanks such as the National Center for Policy Analysis are opposing the energy bill's Alaska provisions because they are against free market incentives. But that is a mistake. This country needs Alaska gas now, and both the tax incentives and the route specification will help.

Currently, the United States relies on Canadian and domestic sources of natural gas. Domestic gas supplies, though, are in decline and will only continue to be so; Canada's supplies are limited. Therefore the United States is going to need substantial new supplies of natural gas. The less Alaska gas is available, the more the Lower 48 will import gas in the form of liquefied natural gas from such places as Algeria, Nigeria and Venezuela--all members of OPEC. These LNG exporters and Russia can create a gas cartel similar to OPEC's oil cartel.

So if the United States needs Alaska's gas, then why doesn't the private sector just go ahead and build a pipeline without incentives? The problem is forecasting. It is difficult to forecast if gas prices will suddenly fall due to demand changes. There is a lot of volatility with markets. It is a timing gamble too large for the oil companies to deal with considering the size of the investment. The United States as a whole, however, is large enough to offer incentives and reduce the gamble at a very small cost to each consumer. The payoff to the country will be more stable gas prices in the future and lower prices.

Beside the incentive issue with the gas line, there is the route issue--why not go "over the top" through the Beaufort Sea? There are several reasons against this. That route would indeed be much cheaper if both Alaska and Mackenzie Delta gas were put into the same pipeline, but that won't happen because there already is a standalone Mackenzie line planned. Plus a single pipeline for both Alaska and Mackenzie Delta gas could only get 5 billion cubic feet of gas per day. Having two pipelines--a Mackenzie standalone pipeline and an Alcan pipeline--has the potential to produce upward of 9 billion cubic feet per day.

Exxon has already committed to building a standalone Mackenzie Delta pipeline, so the only question left is whether North Slope gas is best transported via the over-the-top route or the Alcan route. It is likely that both routes will cost the same. Greater delays in construction due to granting difficult permits or to lengthy ice coverage in the Beaufort Sea will make the over-the-top route just as expensive as the Alcan route.

In addition, having a pipeline under ice will not easily allow for future pipeline expansion or repairs. The Alcan pipeline will more easily be expandable should demand increase or new supplies be found. It is a mistake to become locked into a one-size pipeline that could not easily be expanded or repaired when needed. We need flexibility, and only the Alcan route gives this.

The energy bill pipeline tax incentives and route specification are necessary simply because they give the United States more energy security. They provide for more flexible gas supplies. And finally, without spending a nickel, it gives the national economy a large economic stimulus that can help increase our gross domestic product--something we sorely need to get just as we are having trouble getting out of the recession. It is a good investment for America.

Doug Reynolds is an associate professor of oil and energy economics at the University of Alaska Fairbanks and is the author of "Alaska and North Slope Natural Gas." He can be contacted at ffdbr@uaf.edu.