How to Profit From Energy? Invest in Alaska

Alaska is about to fund up to $5.9 billion of a $45 billion natural gas export project. It joins ConocoPhillips (NYSE: COP  ) , ExxonMobil (NYSE: XOM  ) , and TransCanada  (NYSE: TRP  ) as an equity partner.

The state would take a 25% stake in a $25 billion liquefaction plant located on the Kenai Peninsula and an 800-mile pipeline from the North Slope to Kenai. The expanded plant will be able to ship 18 million tons per year of liquefied natural gas, or LNG.

The politics of energy
The announcement on the LNG heads of agreement comes on the heals of the repeal of the Palin Tax. Since Sarah Palin signed the tax on oil output in 2007, Alaskan North Slope, or ANS, production has been declining against sharp rises in Texas and North Dakota crude production in the Eagle Ford and Bakken.

Over the past 15 years, drilling costs per well have risen in some cases to over $16 million per well over the past 15 years. ConocoPhillips alone has contributed $14 billion in taxes and fees to the State of Alaska since 2007. It is estimated that repeal of the Palin tax will reestablish ANS crude and LNG as significant U.S. energy sources. But well-head cost inflation and taxation are only part of the story.

The prize fight
The traditional destination for ANS crude and LNG is the West Coast of the U.S. Even with rail transport, Bakken light, tight oil, or LTO, is cheaper than ANS crude. The largest West Coast refiner, Tesoro (NYSE: TSO  ) , uses water-borne and ANS substitute crude by rail and barge. It is expecting over 900,000 barrels per day by 2015.

Tesoro and Savage Services are working with the State of Washington on a $100 million rail port project. Savage is a bulk logistics provider that can transload over 70,000 barrels of oil per week at rail car loading stations in Utah for rail shipment by Union Pacific to the Port of Washington at Anacortes. Savage fills the gap with a 50,000-barrel-per-week trucking capability.

So what will it be? Bakken is in one corner and ANS in the other. Railways and water-borne shipping are in the fray. The referee in the middle will be the crude export ban.

A Foolish play?
Conoco is the largest energy producer in Alaska, lifting over 204,000 barrels of crude and liquids per day and 55 million cubic feet of natural gas per day on 1.2 million acres of land leased from Alaska and the federal Bureau of Land Management.

Conoco plans on 3%-5% per year growth in volumes with 5% per year growth in margins over the next five years. Conoco's divestment of Nigerian and Russian assets gives it the extra cash it needs to grow its Alaskan stake.

ANS crude prices look like Brent, Mars crude: greater than $100 per barrel. Crude-by-rail pricing has been influenced not only by the volume of crude transported but also by rail fuel prices rising by over 18% during the past year. Bakken delivered prices on the East and West Coast also approach Brent pricing with nationwide all-in rail costs from $10 to $15 per barrel. Will Bakken approach Brent?

ANS and LNG delivered to West Coast refineries may soon become competitive with the extra cost of increased rail traffic and delays in pipeline projects. Lifting the export ban on crude and LNG would open ConocoPhillips and the State of Alaska to Japan and East Asian markets that could deliver a premium of 20% over the West Coast.

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