Pork Politics Fuel a $40-Billion Energy Boondoggle

Ready for lots and lots of pork? Congress stands on the precipice of granting a potential $40-billion subsidy to natural gas investors, a giveaway that would hurt energy producers, fleece taxpayers and do gratuitous harm to our most important trading partners.

The giveaway is in the form of a guaranteed “floor” price of $3.25 per million BTUs for natural gas coming from Alaska’s North Slope.

The subsidy, included with little fanfare in the Senate energy bill passed in April, is intended to virtually guarantee the profitability and therefore the production of sizable natural gas reserves that have been found in association with North Slope oil.

Even though the economics aren’t there to transport the gas reserves to the market, the necessary political ingredients clearly are. Many senators were interested in offsetting their opposition to Alaskan oil drilling with support for increased natural gas production. Unions support job creation, subsidized or not. Steel producers see a selling opportunity. And Senate Democrats, who hold on to power by one vote, want to help Alaska Gov. Tony Knowles, a Democrat, in his race for the Senate.

These political dynamics led the Senate to mandate that any natural gas pipeline built to carry North Slope gas must be built through Alaska, even though it’s cheaper to go through Canada.

The Senate thus made the economics of North Slope gas worse in two ways: The project is billions of dollars more expensive to build, and any leverage the producers had with the state of Alaska to create a more favorable royalty and tax package was eliminated.

Having legislated the more expensive route, the Senate then apparently felt that it had to make sure it would be built. Thus was born the guaranteed minimum price.

Forecasts of natural gas prices over the next 15 years are in the $2.25 range, $1 less than what these producers will get from taxpayers.

According to independent studies, the cost to American taxpayers of this direct subsidy to a handful of players could exceed $40billion.

The guaranteed profitability of this gas will distort the flow of capital and goods that otherwise would have run to other sectors of the natural gas-producing community, including the independent producers in the Rocky Mountains, the San Juan Basin of northwest New Mexico and the Gulf of Mexico. In effect, this $40-billion taxpayer gift to a few producers will reduce the economic incentives to produce natural gas in every other part of North America.

Not only should this subsidy concern our domestic producing industry, but it also will be troublesome to our North American Free Trade Agreement partners.

It comes at an awkward time in our trading relationship with Canada; the U.S. has just slapped a huge tariff on softwood lumber in response to allegations of subsidies north of the border. It probably will not be long before Canada retaliates, creating further dislocations in other sectors of our economy.

Moreover, this subsidy is directly contrary to U.S. efforts to liberalize and privatize major elements of Mexico’s energy industry sector.

What is wrong with this picture? Just about everything.

And what makes the Senate action even more egregious is the fact that the North Slope gas lies underneath state land, not federal land.

So Alaska, not the whole country, will earn billions of dollars in royalties on the production of this natural gas.

And yet all of us will pay for it.

The Bush administration, which has indicated that it opposes the subsidy, needs to make sure that the energy bill that emerges out of the upcoming conference committee does not contain this $40-billion taxpayer gift to a few at the expense of the rest of us.