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Shame on Alaska and Governor Frank Murkowski

Damning Revelations Surface in Alaska State Pipeline Negotiations

Michael C. Ruppert

© Copyright 2006, From The Wilderness Publications, All Rights Reserved. This story may NOT be posted on any Internet web site without express written permission. Contact May be circulated, distributed or transmitted for non-profit purposes only.

March 3, 2006 0800 PST (FTW) - ASHLAND - Five paragraphs into a February 23 New York Times story about negotiations between the State of Alaska and three “big energy companies” for a proposed $20 billion natural gas pipeline, an epochal statement lurks.

“The announcement came with news of a significant change to the oil royalty system that provides most of Alaska’s state budget revenue. Under the plan, the system will be one based on net profit rather than volume of production.”

In other words, if the gas runs out or depletes seriously then Alaska will make more money as prices rise.

In other words, Alaska has just admitted that its gas reserves are running low and that shortages are imminent. There would be no reason to change the revenue system otherwise.

In other words, the State of Alaska now has a direct financial interest in seeing natural gas prices rise. Every Governor or statewide elected official will be compelled to increase (or maintain) state revenues by promoting an increase in the price of natural gas and encouraging more, rather than less, consumption. All politicians who want re-election want to be able to boast that they left the State’s coffers fuller than when they got there.

The implications are staggering.

Alaska is financially choosing to make of itself a semi-socialist state. It will have no choice. As more and more of its residents are impoverished by energy prices, unemployment, or the general collapse looming over the American and world economies, the state will have more funds available to subsidize citizens who will certainly need it. Since the construction of the Alaska pipeline in the 1970s the state has been known for its annual subsidies to citizens from oil and gas revenues.

But how long could this apparent bonanza last? According to Julian Darley of the Post Carbon Institute and Global Public Media who also authored 2004’s High Noon for Natural Gas, “The US is currently consuming 22 trillion cubic feet (Tcf) of natural gas per year. The 35 Tcf Alaska claims to have is probably there. On its own, however, it would not supply the US for even two years. If they just started pumping like crazy to drive natural gas prices down in order to keep the global markets going a while it would just continue our addiction to hydrocarbons.”

Then what?

There is abundant recent history to indicate that this is what will happen. In 2001 a huge British Columbia natural gas field, Ladyfern, was drilled, pumped and exhausted to feed American consumers in less than two years. Instead of being properly managed, which might have extended the field’s life and increased total ultimate recovery, the field was sucked dry as quickly as possible and geologic structures inside the reservoir were damaged to the point where further recovery became nearly impossible. The field collapsed.

There are two positive things Alaska might do. I am not optimistic.

One is that, having recognized the dangers of this revenue change, Alaska will deliberately choose to ration out gas slowly instead of accelerating an energy collapse. (Every time energy prices drop, people consume more.) The answer to that will be revealed in the final contracts when Alaskans see whether or not the energy companies have any restrictions on how much they can extract, how quickly.

The second is whether Alaska’s financial managers will view these new terms as a means of softening a bite that must hit everyone, everywhere rather than as a windfall to permit a few more years of consumption-as-usual in Alaska (no worse than the rest of the US) and the resultant environmental damage it will bring.

Alaskans, with a deep affection for their natural wonder understand these issues, probably better than anyone. Whether Alaskan elected officials do or not is another matter. And if they do, I don’t know if they would be able to act independently of their only real constituency, the political/economic system that put them there.


What is most offensive about Alaska’s pricing decision, touted by Republican Governor Frank Murkowski, is the fact that as a result, the global tapeworm economy and the state of Alaska will have validated the now-legendary statement made by Dutch economist Martin Van Mourik who told the 2003 ASPO (Association for the Study of Peak Oil and Gas) conference in Paris, “It may not be profitable to slow decline.”

Alaska’s future oil and gas revenues (and their source) will have a decided impact on the State’s bonds and many other financial derivatives like pension funds, medical plans, etc. Fund managers will have a vested interest in maximizing state revenues to protect liquidity and that will only be accomplished by making natural gas prices rise.

Here will come into play Catherine Austin Fitts’ infamous “Pop” or Price/Earnings (P/E) ratio.

Increasing net profits from gas sales will multiply through the P/E ratio in amounts roughly equal to the P/E for each of the securities involved. For example, if a publicly-traded Alaskan bond fund has a P/E of 15:1 then every dollar of net profits flowing through it will generate approximately $15 in share value. This is a direct incentive for some in Alaska to become fabulously wealthy as they commit both suicide and murder. It is exactly the scenario facing the planet I described in one of my own favorite essays of the last three years, GlobalCorp.

Until you change the way money works you change nothing.

To understand the insidious power of “The Pop” I strongly recommend FTW’s newly digitized version of “Wall Street’s War for Drug Money”, a lecture I gave for USC’s School of International Relations in December, 2000. It remains the best basic primer on what’s wrong with the current monetary system I know of and it is mandatory viewing for all new FTW writers and staff.


Buried 16 paragraphs into the New York Times story is another damning quote.

[University of Alaska] Professor [Arlon] Tussing estimates that North American gas reserves are now about 9.5 times annual production.”

In other words, from Mexico to Canada there’s only enough natural gas (assuming these estimates are not inflated like almost every other statement of reserves from official sources) left for 9.5 more years. As FTW has written so many times, natural gas behaves differently than oil in that, as a gas, it just gets pumped until there’s not enough pressure to push the gas out and then it stops. So rather than a decline after peak, natural gas tends to fall off a cliff.

So how much gas is there really in Alaska? Darley explains why this is so hard to know and why Alaska and all of the US is setting itself up for a rude awakening. “No one’s drilling [so-called] appraisal wells anymore. So no one really knows how to estimate actual reserves. It’s like everyone’s afraid of finding out the bad news.”

Appraisal wells are wells intended to define the boundaries of a natural gas field. You drill near what you suspect are the edges of a field until you start hitting dry holes. The problem is that these wells cost money and, according to Darley and experts like energy investment banker Matt Simmons of Houston, no one wants to spend the money any more. That’s an interesting position since oil company profits are at record levels.

A good part of those record profits are happening because oil and gas companies have slashed their exploration budgets down to almost nothing. Why? They know there’s virtually nothing left to find.

Though the pipeline’s actual construction is by no means certain due to a multitude of environmental and political opponents (possibly including the government of Canada) what we have learned here is that the awareness of Peak Oil and Gas has done nothing to change public policy to either mitigate the crisis or to plan for any kind of sustainability in the future.

No one is asking the one really important question: what is the best-possible use of the little natural gas we have left?

The three companies in negotiations to build (or contract out) the new Alaskan pipeline are British Petroleum, ConocoPhillips and ExxonMobil. According to one financial source Governor Murkowski has rejected a proposal that the pipeline be Alaska owned and operated. That is even more reason to be uncomfortable with Alaska’s decision making process.

The New York Times Story

Tricky Years of Maneuver Ahead for Proposed Gas Pipeline

Published: February 23, 2006

OTTAWA, Feb. 22 — A conditional agreement between Alaska and three big energy companies may be, as Gov. Frank H. Murkowski put it, a milestone toward building a natural gas pipeline.

But significant political, environmental and regulatory hurdles must be overcome before a single section of pipe meets a welding torch.

After prolonged negotiations, Governor Murkowski announced late Monday that Alaska had reached an agreement in principle with BP, ConocoPhillips and Exxon Mobil to build a $20 billion pipeline from the North Slope to the lower 48 states by way of Canada.

As envisioned, the pipeline would move 4.5 billion to 6 billion cubic feet of gas daily and begin operating sometime from 2012 to 2014. Alaska has an estimated 35 trillion cubic feet of gas reserves.

The announcement came with news of a significant change to the oil royalty system that provides most of Alaska's state budget revenue. Under the plan, the system will be shifted to one based on net profit rather than the volume of production.

"These are two historic events," Governor Murkowski said, "ones that will define the state's economy for decades to come."

Almost no one denies that changes to the royalty system, which now provides about 83 percent of the state's revenue, will have a potentially significant effect. But some gas analysts cautioned that the pipeline's future would be shaped by forces well beyond the governor's control.

"This agreement is only one step on the part of one potential applicant to build a project," said Arlon Tussing, a research economist at the University of Alaska, Anchorage, who specializes in gas projects. "The final decision about this is going to be made by the respective regulatory authorities in the United States and Canada, as well as their governments. And there's going to be tremendous opposition."

The plan will meet its most immediate tests in Alaska's Legislature, where Democrats have criticized the governor's decision to reduce proposed pipeline taxes to 20 percent of profit from an earlier plan of 25 percent. The broader overhaul of the oil tax system is also expected to face criticism.

And there is substantial popular support for another proposal in Alaska that would build a smaller pipeline to Anchorage and the port of Valdez, and then ship the gas south by tanker.

Nonetheless, the political maneuvering at the state level may prove easier to resolve than other issues.

The idea of increasing American gas supplies using American sources has obvious political and national security appeal, particularly given that the fuel is increasingly used as a substitute for coal in electricity-generating stations.

André Plourde, an energy economist at the University of Alberta in Edmonton, said that the world's largest known gas reserves were concentrated in countries not known for political stability, notably Iran and Russia.

"Given the Bush administration's focus on what it considers to be energy security," Mr. Plourde said, "Alaska is going to get a favorable hearing."

But if natural gas prices drop from their current levels, as many expect, economic concerns may outweigh the emphasis on security. If the forecasts of Professor Tussing and others bear out, gas piped from Alaska will have a difficult time competing with gas shipped by tanker from low-cost producers overseas.

Professor Tussing estimates that North American gas reserves are now about 9.5 times annual production. Reserves elsewhere, by contrast, are 88 times production.

"That means it is a lot easier to increase production almost anywhere other than North America," he said. "We have pretty much wrung out the continent."

A preview of some regulatory issues facing an Alaska pipeline might be found in more advanced efforts to build a gas pipeline from the Canadian Arctic. That project, with investors that also include Exxon Mobil, has been repeatedly delayed, in part because of issues surrounding land claims by native groups along the route. The Alaskan project will encounter similar issues over permission to dip into the Yukon Territory and parts of Alberta.

Climate change may also complicate environmental reviews. Antoni Lewkowicz, a professor of geography at the University of Ottawa, worked on permafrost issues surrounding an Alaska pipeline plan more than 20 years ago. A pattern of warming weather in the Arctic today, he warned, will make engineering the current proposal difficult and costly.

"One of the things that killed the pipeline back in 1982 was the expense of the permafrost accommodations," Professor Lewkowicz said. "Today, it's going to be very difficult to come up with a design that can deal with current conditions and the climate changes that will occur over the next 30 to 50 years. It's a significant and very costly engineering challenge."

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