Alaska is Putting $5.75 Billion at Stake to Bet on Natural Gas

State is paying billions for equity stake in an LNG export project after handing industry billions in tax breaks.

Jan 18, 2014 at 1:37PM

Conocophillips Alaska

Photo Credit: ConocoPhillips

Alaskans have watched the state's oil production slowly decline year after year. Since hitting a peak of 2.1 million barrels of oil per day in 1998, production has slumped to just over 500,000 barrels of oil per day. Now the state is investing billions in tax breaks as well as looking to directly invest in energy projects to boost its sagging production.

Billion dollar bet
While known for its oil, Alaska is now also looking to make a major bet on natural gas by taking steps to take a direct equity stake in a natural gas export project. The $5.75 billion investment alongside ExxonMobil (NYSE:XOM), ConocoPhillips (NYSE:COP), BP (NYSE:BP) and TransCanada (NYSE:TRP) is the state's biggest move yet to revive its struggling energy industry. That investment has the state pitching in more than 10% of the cost of the $45 billion project in an effort to get it off the ground.

If approved, the agreement would see the five partners build a gas processing plant, an 800-mile pipeline from the North Slope and a liquefaction facility so that gas can be exported to Asia. The project is critical to harvesting the state's vast natural gas reserves, which are currently being reinjected back into the earth. Overall, the North Slope holds more than 35 trillion cubic feet of discovered gas, with that supply representing enough gas to meet the needs of 35 million American households for 15 years, though supplying America with energy is no longer the plan for this gas thanks to the shale gas boom. 

Further, one more part of this move is that in addition to its direct equity stake, the state would also lower the tariff TransCanada would pay to ship the gas. In exchange for that, which would represent another $5.5 billion in value, TransCanada would pay for the state's costs for building the pipeline and processing plant.

Aggressive moves
This latest proposal is just another step in the state's aggressive moves to increase its energy output. Alaska already agreed to a tax incentive plan in order to set the stage for a comeback. The early signs suggest that it's working as ConocoPhillips and BP both announced plans to add drilling rigs to the state.

ConocoPhillips specifically noted that it's adding drilling rigs to its fleet in Kuparuk in response to the new tax incentives. The company's first rig started last May and has been producing 1,600 barrels of oil per day. A second rig was added to the fleet this month.

Conocophillips Kuparuk

ConocoPhillips in Kuparuk, Alaska. Photo credit: ConocoPhillips

Meanwhile, BP announced a billion dollars in new investments in the state as it added two drilling rigs in response to the new tax plan. However, in addition to oil, BP has been pushing for the state's help in commercializing the vast natural gas resources also found in the North Slope. At the time of its billion dollar commitment the company's Alaska Region President Janet Weiss noted that it and its partners, "believe it is the right time to focus on how we can move this project forward." With the state now putting up some of the cash, as well as reducing tariffs, it appears that the project might actually see the light of day.

Investor takeaway
Most of the energy companies involved in Alaska are too big for its growth to really move the needle for investors. That said, the state is still an important piece of America's energy picture as we look to shake off OPEC. That's why it will be interesting to see if this project does end up being developed as it could really put the U.S. to become the natural gas exporting champion in the decade ahead.

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Fool contributor Matt DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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