It is an honor to be asked to speak at the 28th annual RDC conference. The topic I was given was “Industry - Community Partnerships, Challenges and the Path Forward.” That is quite a mouthful and sounds like the title of some official government report.
The Kenai Peninsula Borough was incorporated on New Years Day in 1964 and has a population of about 53,000 residents and encompasses over 25,000 square miles. The resources on the Kenai Peninsula are many. While not a complete list, they include; fish and wildlife, timber, coal, oil, and gas to name a few. Many industries were created as a result of these magnificent resources including tourism, commercial and sport fisheries, oil and gas refining, exploration and production, and two major value added export industries for fertilizer and liquefied natural gas.
I often describe the Kenai Peninsula as a microcosm of the state of Alaska because we have tourism, commercial & sports fishing, and resource development all occurring in the same place. It is one of the reasons that the British Columbia Minister of Energy, Mines, and Natural Resources Richard Neufeld leads groups of Aboriginal and Coastal community leaders to the Cook Inlet. They are brought here to witness first hand how resource development, tourism, and various fishing industries co-exist in relatively close quarters without a lot of acrimony. That is not to say there aren’t some bumps along the way, but by and large they get along pretty well.
Having said all of that, the residents of the borough that I represent are facing major short and long term issues with regard to some of our natural resources. The issues that affect my constituents are going to visit most of you as well and sooner than you may think. Mayor Begich is keenly aware of the energy issues in south central and alluded to them earlier. The lights and heat in this very hotel come from natural gas resources, most of which originate on the Kenai Peninsula. As you all know, natural gas reserves in the Cook Inlet have been in decline and by some reports, reserves will not be able to meet demand after 2015. That scenario is alarming and downright scary to many of the residents of South Central Alaska. Some suggest that if you just close the industrial export facilities in Nikiski our supply and demand issue will be solved. That is true for the short run, but this will only delay the problem and severely impact the economy of the Kenai Peninsula as well as the rest of Alaska. It is short-sided and reactionary. Besides, these large industrial facilities help to pay the freight on all of our gas. I am no expert but it seems to me that if the big freight payers go away, I think our gas bills could actually increase to pay the tariffs.
As you all know, a little over six weeks ago, Agrium announced they were closing their nitrogen fertilizer plant in Nikiski. While many knew this day might come, it didn’t make the announcement any easier. Next month, Agrium will be terminating over 100+ employees in addition to those let go previously when production was downsized. That is a devastating blow for those families. In addition to the Agrium jobs, there will be many other indirect jobs lost as well. As I stated earlier, this closure will have a major impact on the overall economy of the Kenai Peninsula. You can’t wipe out 200+ high paying jobs in any Alaska community and not feel it. I am not as concerned from the government perspective of this closure, we will work through it. The real impact is to the potentially hundreds of employees, their families, and the local businesses who depended in large part on Agrium’s existence. Kenai Peninsula residents can’t take any more of these types of announcements. Equally just as important is that the energy issues that people have talked about for quite some time have now arrived.
Is there light at the end of the tunnel? I think so, hopefully it isn’t a train. Agrium has communicated to everyone that they are continuing to evaluate the economics of switching to coal gasification. If they choose to go forward, this switch will require an enormous capital investment as well as the beginning of a construction boon unequalled in Kenai Peninsula history. This will only happen IF, it all pencils out for Agrium and their equity partners. Of course there will be those who put up the fight about using coal as a fuel source. Let’s have that discussion and include the advances in clean burning coal and C02 sequestration technology. We need to examine all energy options.
Let’s talk for a minute about another major exporter on the Peninsula. The LNG plant in Nikiski is currently awaiting news that will lead to one of two announcements; the first could be that CononcoPhillips and Marathon Oil Company have been awarded an export license extension for the years 2009 through 2011 and will continue to export LNG. The other announcement could be, the application for the extension has been denied and the owners will be closing the LNG plant. If that license is not extended, the Kenai Peninsula will have lost two of the four industrial facilities on the peninsula. Of course the third and fourth plants I refer to are the Tesoro refinery and the BP Gas To Liquids plant.
What is the nexus in the Agrium announcement and the upcoming LNG announcement? Natural gas. The 2007 Division of Oil and Gas report shows Cook Inlet natural gas reserves at 1.68 trillion cubic feet. That is roughly an 8 to 9 year supply of natural gas at current demand rates. That number excludes Agrium based on their announcement. If you back out the LNG plant, you have roughly a 14 year supply of gas. I believe that number is high because some of the supply wells for the LNG plant will be shut in and may not deliver once reopened. This problem is screaming for a solution, not a Band-Aid. As you can see, closing the industrial plants solves nothing, it only delays the inevitable and more than likely will drive up our energy costs.
What is the solution? In the absence of getting some of the Trillions of cubic feet of proved-up natural gas from the North Slope, we need start punching exploratory gas wells in the Cook Inlet basin. I personally would love nothing more than to see a jack up rig being hauled up the Cook Inlet right now. A 2004 study prepared for the U.S. Department of Energy estimates between 13 and 17 trillion cubic feet of natural gas remains undiscovered in Cook Inlet. This could potentially be developed at a cost of 5 billion dollars. Keep in mind that number is based on 2004 estimates. We need to start moving that gas from the undiscovered column to the reserves column. How do we do that? I think it is a several step process.
We need to develop an energy policy. The State of Alaska does not have an energy policy and we can’t wait for them to develop one. Without a policy, we cannot achieve any goals or plan for our energy future. I can tell you there are a lot of people in this state right now hoping that there is a conforming proposal under AGIA. But what if there isn’t? As former Governor Knowles asked before you the other morning, what if there are questionable bids? Do we have the courage to reject them and start over? We need to have a policy, and it shouldn’t be with all of our eggs in the basket of the pipeline. Now I realize how important this pipeline is and it deserves an enormous amount of attention but if we don’t get a first rate application? South Central residents, a majority of the state’s population will still face the same problem of dwindling natural gas supplies with no replacement gas headed this way from Mayor Itta’s neck of the woods. This brings us back to an energy policy, we need it now and need to build in contingencies.
I am under the belief that the Cook Inlet is not getting the attention it deserves to encourage natural gas exploration. I hate to sound like a broken record but we need to promote more drilling in Cook Inlet. As Mayor Begich stated, we need incentives for deeper drilling, capital investment credits to upgrade existing platforms, and exploration credits. Again, I hope everyone realizes that the big industrial plants and refineries pay a significant portion of the freight on the consumer’s natural gas. If further exploration does not occur, we will lose another freight payer. We have already lost one and another one is on the block at the Department of Energy.
The State’s official position is they are opposed to ConocoPhillips LNG plant getting an export license. The state calls their position “conditional support.” We don’t have enough time to go into them but I believe the conditions the state is requiring are fatal to the whole application.
When I learned of the State’s position several months ago, I started working towards getting it changed. Since I am here talking to you about it now, you can guess how successful I have been. My staff and I have worked this issue for the last six months trying to affect a change in the States position. We have met with the Governor, written letters to the Governor, talked with Commissioners, talked to high level administrators all to no avail. The latest word that I have is that they are working on it. I sure hope the Governor has a plan in place if that LNG plant shuts down. Why do we need a plan? Who will fill the need on peak gas demand cold winter days like last January 9th when the LNG plant diverted gas to ENSTAR so we didn’t go into rolling brown outs? Who is going to drill the exploratory wells in Cook Inlet now that Agrium has closed and the LNG is about to close? Why would anybody drill these exploratory wells without a major market for new gas?
While I am talking about the two industrial export plants I want to clear the air on a couple of issues. I have taken some heat for supporting and working on getting the export license renewed while at the same time being asked what are you doing for the fertilizer plant?
The export license is either approved or denied by the Federal Government, specifically the Office of Fossil Energy at DOE. Because this decision is being made in the government arena and is a public process, it makes sense as a borough to weigh in on that decision. Just as many of you in this room have done by providing comments to the Dept. of Energy. If Agrium had an application or issue similar in nature I would be there for them as well. However, the Agrium issues are not in my control or purview. There is no place for government in the boardroom or at the contract table of private negotiating companies.
The day that Agrium announced the closure, I called the Governor’s office and asked them to assist Agrium in any way they could, including through the Department of Labor. I was asked if there anything else they could do? I said yes, the Governor could assemble a team of cabinet members and appropriate staff to meet with the Tri-Borough mayors to discuss south central natural gas issues. That idea was announced in the Governor’s press release, but we have yet to hear from anyone. I do what I can where I can. For nearly forty years I have supported all of the industrial facilities in the Cook Inlet and I will never pick one over the other. I apologize for getting off topic, but I felt a need to clearly state where I am on this issue.
Let’s talk about the Paths Forward part. In November of 2005, the Mayors of Anchorage, the Mat-Su Borough, and the Kenai Peninsula Borough formed what is known as the Tri-Borough Commission. Mayors Begich, Menard, and I have worked together on many issues that affect more than 60% of Alaska’s population. We are currently focused on the energy issues that Mayor Begich and I have talked about today. Together we have formed an energy policy task force of experts and tasked them with creating a South Central energy policy.
We have given them our thoughts and have sent them off to develop a policy that theoretically could be applied state wide. This will be a long term policy with established goals for us to meet along the way. The goals will include but are not limited to conservation, efficiency of use, renewable energy development in all forms, and continued use and development of non-renewables. There are many exciting things happening in the renewable energy sector. South Central is geologically and geographically situated to take advantage of many different renewable energy options which include wind, tidal, hydro, and geothermal applications. Some of these options are being explored by local utilities and large companies.
One goal that I hope to see in addition to those that I have mentioned is the establishment of a School of Energy at the University of Alaska. This arm of the University would focus on the education of our young engineers in the development of Alaska energy as well as an energy research wing, just as we did nearly 35 years ago as we did in the petroleum extension service for training our people to fill jobs in the oil industry. We can once again call upon the university to develop this energy school. An institute of energy resources if you will. Alaska is clearly an energy state and we have no focus on this particular sector at our university, yet we always seem to be dealing with energy issues. These issues are begging for local expertise and it is a field that our residents should be trained in. I must be honest with you, this is not an original idea of mine, it comes from the state of Wyoming. Wyoming is an energy state like Alaska with very similar issues and resources. The school in Wyoming was dedicated to energy related teaching and research, and the dissemination of scientific, engineering and economic information to support energy related activities with relevance to the state and the nation. I think this is long overdue for our state. The community partnership piece of this would be for the industries to help fund the establishment of such a school as was done in Wyoming. I am sure the industries would like to hire more experts trained right here in Alaska. This is a new idea for Alaska and hasn’t been fleshed out yet, so I have asked some of our energy task force members to look into this proposal further and hopefully make it one of the goals in the energy policy.
Finally, we as leaders should already be looking beyond oil and gas. While Alaska is blessed with rich deposits of oil, gas, and coal, we need to be looking further down the road. Unlike many other states, we have rich resources of renewable energy. After the oil and gas pipelines have delivered their last BTU of energy, we should have already built the infrastructure and began utilizing renewable energy sources. Our path forward must include handing off a complete set of engineered plans for our future leaders to build the new infrastructure beyond the gas pipeline that hasn’t even been built yet. As I said earlier I have been in the oil and gas business for 40 years in the Cook Inlet and more than 50 years throughout my life. I can see just as clearly what needs to be done for the next 50 years as I can see what was done with past 50 years. We need to move forcefully into this new millennium of energy development and use.
I encourage all of you as government and industry leaders to engage in the mapping of our path forward.
Thank you for your time.