Potential Peril – Risks

Cost overruns, plunging gas prices, earthquakes, shortage of workers – all kind of mishaps could damage this pipe dream.

But gas sold even at weak prices is much better than what’s going to happen all-too-soon – no gas sales at all. No gas at all.

One key factor is the question of new gas in the North Slope. Right now it has 35 trillion cubic feet of known, recoverable resources, and this is what the pipeline project is banking on. However, planners believe that the project will need at least 53 trillion cubic feet to succeed and keep going – everyone’s hoping the rest of the gas will be there eventually. Discovery and new gas development projects are a big part of the implementation of the new gas pipeline. People will be looking for more from the get-go, and crossing their fingers.

As one of the biggest construction projects the state could undertake, it is surely one of the most risky, as well. But the state of Alaska is ready to take the risk. According to Pedro van Meurs, an energy consultant on the gas project, the main obstacle is that the project is so big and thus carries such substantial risk. Ninety percent of the project’s investment must be made before it earns any revenue. And North America’s gas market is still the most volatile in the world. And, given the price uncertainties of steel, fuel and other materials, the big crunch of energy projects and work force shortages in Canada (Alberta), cost is very likely the biggest uncertainty – van Meurs believes there may be as much as a 20 or 30% chance the project won’t even come to pass. It’s up to the state to determine whether they want to jump in feet first, or toe the water. That’s the definition of risk. “At low energy prices,” says van Meurs, “this project is a dead duck, but at high prices it is the most profitable in the world.”

The two ways the state has been trying to find ways to reduce the risk is by granting tax and royalty breaks, and provide a way for the state to become a participant in ways that reduce risks for industry partners while preserving state revenues.

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Gas Pipeline Tax Issues