Brad Armstrong

I promised you more commentary on this, and here it is. Buckle up, this is going to be a long post. And yes, I will come on your show/podcast if you want me to talk about it. The first question is: why is this announcement suddenly so urgent? There's one obvious reason and one you probably don't know. Let's start with the one you probably haven't heard. Alaska is facing a major in-state energy crisis. Yep, a state awash in energy resources is running out of in-state LNG. Oil extraction takes place on Alaska's North Slope. That oil comes down the Trans-Alaska Pipeline System (TAPS). The natural gas that comes up with the oil has nowhere to go, so it is either burned off or pumped back into the ground. In-state gas comes from wells in the Cook Inlet basin near Anchorage and on the Kenai Peninsula. The in-state wells are literally drying up as we speak, with no plans to re-drill (economies of scale are a problem because the market is relatively small). The area from the Kenai Peninsula through Anchorage, the Matanuska-Susitna Valley, and beyond relies on LNG for heating and electricity generation. Matanuska Electric Association (MEA) has said they already cannot generate enough electricity, and it's going to get worse. They can generate some power from backup diesel generators, and MEA is trying to source LNG from Canada, but calling the situation desperate is an understatement. The state could begin importing LNG, but no import terminal exists, and one could not be built in time to keep the crisis at bay. The first phase of the proposed LNG project would develop an in-state spur line that would get North Slope gas to Alaskans. The optimistic estimate is that it would be flowing in 3 years (good luck), but not soon enough to avert the crisis. The situation is serious, and energy costs are going to skyrocket. This added urgency didn't exist in 2017, when Alaska first tried to make a gasline deal with China. This creates the obvious second reason Alaska is desperate for this project to look like it's happening. It's an election year! Polls in Alaska strongly indicate that Democrats could win both the gubernatorial race and the Senate seat currently held by Republican Dan Sullivan, a key seat that could flip the Senate. But now you know one reason why the GOP may lose those seats. So, what the heck is really going on here? Well, there are a lot of pieces of a deal, most of them non-binding, and none of them are gelling. First, yes, South Korea is looking to fund energy projects in the U.S. as part of a hostage negotiation with the Trump administration. The terms? You pour $200 billion into energy projects that no U.S. companies are willing to fund, and we'll cut your tariff rates to 15%. Do you think energy companies operating in the U.S. are suddenly walking away from great investment opportunities? Spoiler alert: Nope. The only agreement South Korea's minister of trade, industry, and resources says is finalized is a power plant in Texas. They claim the Alaska LNG deal is still being vetted. Will the Alaska deal happen? Spoiler alert: Nope. Alaska's oil companies would love to get their gas to market. The problem? Every economic analysis of the Alaska LNG project has declared it "uneconomic." It has the highest delivery cost of any project in the world and would never pay for itself. That's why the companies already operating in Alaska haven't built it. And this is for exported gas. It's an even bigger loser for an in-state gas spur line because of the small customer base. The estimated cost to build the gas line was ~$43 billion in 2017, and is now between $50 and $60 billion. Like in my novel, Occupied Alaska, it is a debt Alaska would never be able to repay. Then what? South Korean officials have denied the Alaska project is a done deal. According to Alaska Public Media, they said, "Investments under the trade deal must be commercially viable, undergo legal and feasibility reviews..." This project is not likely to pass the sniff test. Unless another country is willing to hand over $55 billion to Alaska with no expectation of repayment, the deal as it stands isn't happening. The deal structure between Alaska and Glenfarne, the customer base, and the tax policies Glenfarne wants the state to implement are other issues/risks that would require several other posts. So what is likely to happen? Alaska needs to solve its internal energy crisis. Federal intervention will, regrettably, likely be necessary. Either the U.S. guarantees the loans if it can get some country brave enough to risk the big pipeline development (exports wouldn't come online for 5+ years). Or offer greatly reduced tariffs, discounts on military equipment, and other reductions in $ transfers to the U.S., so the savings pay for the investment cost. This still means the Federal government pays, and the investing country hasn't realized any savings; they've only moved money around. Or subsidize energy costs in AK in the short run while building an import terminal. The latter is likely the least expensive option.

The real gas pipeline deal (MOU) signed between Alaska and China in 2017 made me wonder whether Alaska's financial weakness could become a national-security vulnerability. 🧵1/3