Foreign Trade Effects of an Alaskan Natural Gas Pipeline

CRS Report for Congress
Foreign Trade Effects of an Alaskan Natural
Gas Pipeline
Robert Pirog
Analyst in Energy Economics and Policy
Resources, Science, and Industry
Summary
The Energy Information Administration (EIA), in the Annual Energy Outlook 2004
(AEO), projects increased demand for imported natural gas through 2025. The AEO
reference case forecast assumes a natural gas pipeline will begin delivering Alaskan
natural gas to the lower 48 state consuming markets in 2018. H.R. 6, the omnibus
energy bill, contains provisions to enhance the future supply of natural gas through
construction of a pipeline.
This report examines the effects of an Alaska natural gas pipeline on the U.S.
current account balance. The EIA finds that if the pipeline is not constructed, natural
gas prices will increase, markets will adjust, and imports of natural gas will increase.
However, due to price induced market adjustments, the increase in imports is projected
to be less than the gas volume lost from the lack of pipeline construction. As a result,
if no pipeline is constructed, the effect on the current account balance will be less than
the value of the amount of gas that was projected to be delivered through a pipeline.
This report will not be updated.
Background
This report examines the policy implications for the U.S. current account balance of
the construction of natural gas pipeline from Alaska to the lower 48 states. The 108^th
Congress has included in H.R. 6, the omnibus energy bill, provisions which provide
incentives for the construction of an Alaska natural gas pipeline. A pipeline would link
currently unavailable Alaskan gas supplies to the consuming market. This report analyzes
the possible expansion or contraction of natural gas imports as a result of constructing,
or not constructing, an Alaskan pipeline, within the framework of the National Energy
Modeling System (NEMS).¹ NEMS is used by the EIA as a tool to forecast future energy

¹ For a full description of the structure and use of NEMS, see: Energy Information
Administration, “The National Energy Modeling System: An Overview 2003.” March 2003.
pp.1-73.
Congressional Research Service ˜ The Library of Congress

trends as included in the AEO.² Recently, the EIA has published analyses of a variety of
restricted natural gas supply scenarios including the non-availability of an Alaska natural
gas pipeline.³
Market Forecast
The AEO reference case forecast is the EIA’s baseline estimate of the state of energy
markets in the out years to 2025.⁴ The reference case forecast projects natural gas prices
to be high enough after 2009 to begin construction of an Alaska natural gas pipeline.⁵ In
the forecast, natural gas deliveries come on stream from a pipeline in 2018 with full
capacity deliveries becoming available near the end of the forecast period, in 2024. If
policy based incentives to construct a pipeline become available, it is possible that a
pipeline might be constructed sooner than in the AEO reference case altering the results
presented in this report. As a result of the construction and delivery time line assumed
in the reference case, the forecasts with and without the construction of a pipeline are
virtually identical until 2018. This report will examine differences in the forecasts for the
years 2020 and 2025.⁶
To focus on the international trade effects of the pipeline, likely variations in the
current account balance in 2020 and 2025 will be calculated. The current account balance
is a basic measure of a nation’s foreign trade position and is defined as the nation’s
exports of goods and services minus the nation’s imports of goods and services. When
a nation’s exports exceed its imports, the country has a current account surplus. When
a nation’s imports exceed its exports, the nation has a current account deficit. The EIA
forecasts do not include estimates of the cost of constructing the pipeline, or any trade
effects that might come about as a result of sourcing decisions for the steel and other
goods and services used in the construction process. The current account balance effects
described in this report are limited to the natural gas that a pipeline would deliver to the
market.
Current Account Effects
In the AEO reference case, an Alaska natural gas pipeline is expected to deliver
approximately 2 trillion cubic feet (tcf), about 7% of yearly consumption, of gas per year

² Energy Information Administration, “Annual Energy Outlook 2004 With Projections to 2025.”
January 2004.
³ Energy Information Administration, “Analysis of Restricted Natural Gas Supply Cases.”
February, 2004.
⁴ The AEO forecast is not a prediction of what will happen in the future, rather, it is a projection
of what could happen if policies and trends in place today remained in effect and if no additional
policies or trends affected outcomes.
⁵ While the AEO reference case assumes that a natural gas pipeline will begin construction in
2009 and come on stream in 2018, this assumption is based solely on private sector economic
decisions. Because there is no policy in place as of January 2004 to provide incentives to
construct a pipeline the forecast does not include public incentives to construct a pipeline.
⁶ Gas volume data is expressed in trillion cubic feet (tcf) and prices are expressed in 2002 dollars
to control for estimated inflation.

by the time it reaches full capacity operation in 2024. Although deliveries are forecast to
begin in 2018, they are expected to begin at approximately 0.8 tcf per year and grow to
full capacity.
By 2020 the reference case forecast projects a gap between total domestic
production, 23.89 tcf, and total demand, 30.36 tcf, requiring imports of 6.47 tcf. The
forecast projects that by 2020 pipeline natural gas imports from Canada will be in decline
compared to 2003 level. The U.S. imported 3.4 tcf of natural gas from Canada in 2003,
about 97% of import requirements. By 2020 Canadian imports are expected to decline
to 2.5 tcf, even though total U.S. import requirement will have nearly doubled over 2003
levels. The reference forecast projects that essentially all of the additional U.S. import
requirements will come from liquefied natural gas (LNG). The values cited in the forecast
are determined in conjunction with the forecast wellhead price of natural gas in 2020
which is expected to reach $4.28 per thousand cubic feet in real terms, which would be
over $8.00 per thousand cubic feet in nominal terms.⁷
By 2025, the reference case projects total domestic production to reach 24.09 tcf and
total demand to reach 31.33 tcf with a gap of 7.24 tcf to be filled by imports. In 2025,
Canadian pipeline imports are projected to be 2.56 tcf with LNG again filling most of the
remaining import gap. The reference case forecast projects LNG demand growing from
2.16 tcf in 2010 to 4.14 tcf in 2020 and 4.8 tcf in 2025. By 2025, the reference case
projects a wellhead natural gas price of $4.40 per thousand cubic feet in real terms,
translating to a nominal price of about $8.40.⁸
In contrast to the reference case forecast, the no pipeline case assumes that a natural
gas pipeline from Alaska is not constructed. As a result, Alaskan natural gas production,
which totaled about 0.51 tcf in 2003, is projected to rise to 0.72 tcf in 2020 and 0.51 tcf
in 2025, less than the 2.29 tcf and 2.71 tcf for the same years in the reference case.⁹ Since
imports are expected to fill the gap between U.S. domestic production and total demand,
a simple analysis might suggest that the no pipeline case would show an approximate 2
tcf increase in imports to compensate for no delivery of Alaskan gas. This is not the case,
however. The unavailability of Alaskan natural gas through the pipeline leads to price
increases in the natural gas market. These price increases reduce the total demand for
natural gas, as well as providing an incentive for producers both in the U.S. and Canada
to increase production. As a result of these adjustments, the gas not available because of
a lack of a pipeline from Alaska is not replaced by imports on a one to one basis in the
EIA analysis.
The increases in imports attributable to the lack of a natural gas pipeline from Alaska
are 0.72 tcf in 2020, and 0.63 tcf in 2025 as projected in the EIA no pipeline case. To
determine the effect of these projected increases in natural gas imports, these quantities

⁷ Energy Information Administration, “Analysis of Restricted Natural Gas Supply Cases.”
February 2004. pp. 35-37, Tables C2, C3.
⁸ Ibid.
⁹ Part of Alaskan natural gas supply is exported to Japan in the form of LNG. The 68 billion
cubic feet per year liquefaction terminal at Kenai, Alaska has been exporting to Japan for over
30 years. Source: The Energy Information Administration, “The Global Liquefied Natural Gas
Market: Status and Outlook.” December 2003. p.11.

must be multiplied by appropriate prices. The EIA publishes import prices as part of the
AEO reference case, but not for the no pipeline case. As an approximation of the import
price in the no pipeline case, CRS has computed prices based on the EIA reference case
prices.¹⁰ For 2020, the estimated import price is $4.81 per thousand cubic feet, and for
2025 it is $4.90 per thousand cubic feet. Based on these values for price and quantity of
imported natural gas, estimated increases in the value of natural gas imports as a result
of lack of construction of a pipeline would be approximately $3.46 billion in 2020 and
$3.09 billion in 2025.¹¹ To put these projected increases in imports in perspective, they
are less than 1% of the current account deficit in 2002, the year to which the price of
natural gas is set in the EIA forecasts.
Although these values represent potential increases in the current account deficits in
2020 and 2025 (or reductions in the surpluses), they might well be either increased or
decreased by other related effects in the economy that might result from higher projected
natural gas prices. For example, industrial demand for natural gas is projected to
decrease. This could mean that the U.S. production of chemicals, especially those that
have natural gas as a large cost component, might be reduced. This might mean greater
imports of fertilizers and other chemicals bringing additional pressure on the current
account balance. On the other hand, if the higher natural gas prices resulted in general
reductions in income and employment in the United States, that might imply lower
imports of consumer goods and services, improving the current account balance. The EIA
analysis, which focuses on energy issues, does not provide a detailed picture of all the
secondary economic effects of higher natural gas prices as they alter relationships in the
economy as a whole.
Analysis
An Alaska natural gas pipeline is projected to account for about 2 tcf of delivered gas
in 2025 when operating at full capacity, but imports increase by only 0.63 tcf in that year
as a result of the lack of pipeline construction. In 2020, a pipeline is projected to deliver
about 1.6 tcf, reflecting the build-up of delivered gas as operation begins in 2018, but
imports increase by only 0.72 tcf in the forecasts if no pipeline is constructed. It might
appear that 1.37 tcf of gas in 2025, and almost 1 tcf in 2020, has disappeared. The lost
volumes can be accounted for by examining the effects of the higher projected prices of
natural gas in 2025 and 2020 on aggregate demand and supply.
As a likely result of higher prices, projected natural gas demand is lower in the no
pipeline case, both in 2025 and in 2020. Aggregate demand is 0.71 tcf lower in 2025 and
0.62 tcf lower in 2020 compared to the reference case. In a 2025 comparison of demand
patterns in the reference case and the no Alaska pipeline case, all sectors reduce their

¹⁰ Over the six year period, 2020 to 2025, the average projected price premium for imported
prices over lower 48 state wellhead prices was 6% in the reference case. I applied a 6% premium
to lower 48 state wellhead prices to obtain approximate import prices in the no pipeline case.
The estimated prices may be somewhat downward biased, because the increased volume of
imports in the no pipeline case might raise the market price of imported gas over the historic
premium.
¹¹ Energy Information Administration, “Analysis of Restricted Natural Gas Supply Cases.”
February 2004. pp. 35-37, 40-42. Tables C2,C3,C5,C6.

consumption, but the largest declines are in the industrial and electric generators at 0.11
tcf (1%) and 0.31 tcf (3.7%), respectively. In comparison, the residential and commercial
sectors reduced their consumption by only 0.06 tcf (0.5%) in total. Fuel switching and
reduced demand due to curtailed production are likely explanations for the relatively
larger reductions in the industrial and electric generator sectors.
The pattern of reduced consumption is similar in 2020. Residential and commercial
consumption each decline about 1%, while industrial demand declines by about 2% and
demand from electric generators falls by 2.7%.
On the production side of the market, because of the incentive of higher prices,
domestic onshore and offshore production of natural gas in the lower 48 states increases,
by 0.23 tcf in 2020 and 0.67 tcf in 2025. For 2025, if the reduced demand of 0.71 tcf is
added to the increased lower 48 states production of 0.67 tcf the total is 1.38 tcf. If 1.38
tcf is added to the extra imports of 0.63 tcf the total is approximately equal to the 2 tcf
that is not delivered through an Alaskan pipeline. For 2020, the reduction in demand is
0.72 tcf and the added production projected from onshore and offshore production in the
lower 48 states is 0.28 tcf which, when added, equals 1 tcf. Imports are projected to
increase by 0.72 tcf in 2020 which when added to the 1 tcf demand reduction and lower
48 state increased production equals 1.72 tcf which again is approximately equal to the
amount of gas not delivered as a result of no construction of an Alaska pipeline.¹²
Conclusion
In the AEO reference case, an Alaska natural gas pipeline is projected to begin
deliveries in 2018 and achieve full capacity delivery of about 2 tcf of gas per year to
market when it achieves full capacity operation in 2025. This quantity of natural gas,
subtracted from the market in the no pipeline case, is sufficient to alter projected market
prices. In the no pipeline case, increases in the price of natural gas cause changes in
consumption and production of gas, as well as the composition of gas sources. These
price changes and resultant changes suggest that, in the forecast, energy markets
compensate for the lack of Alaskan gas supplies in a variety of ways. As a result, the
forecast increase in gas imports is not as great as the loss in deliveries from the pipeline
if it is not constructed.

¹² Ibid.