Let's start with a basic fact. For various purposes, government agencies, securities analysts and oil and gas producers often measure oil and natural production and reserves on a common basis -- barrels of oil equivalent (BOE). Based on energy content, 5.8 Mcf's (thousand cubic feet) of gas equals one barrel of oil. As it turns out, that is a critical statistic to understanding Alaska's future.

First, that statistic helps to provide some sense of the relationship between volumes of oil and gas. Currently, Alaska is producing roughly an average of 600,000 barrels/day of North Slope oil subject to state production tax. On a BOE basis, 3.5 Bcf (billion cubic feet)/day of gas equates to about the same amount of oil. Coincidentally, that is roughly the same amount of gas which some suggest would be moved to the Lower 48 through an Alaska pipeline. Thus, if focused only on volume, an observer could argue that Alaska will not be harmed if gas supplanted oil as the primary source of revenue for Alaska.

A second, and more important, application of the statistic proves that conclusion false, however.

The statistic also may be used to compare the value of oil to gas. As reported on the Department of Revenue (DOR) website, the current market value of Alaska North Slope crude oil is $75/bbl. For a variety of reasons, gas trades at a discount to oil. The Henry Hub price for gas (also reported on the DOR website) recently has hovered around $5.00/MMbtu. Multiplying that price by 5.8 to compare it to an equivalent quantity of oil results in a value for natural gas of roughly $30/BOE.

Consequently, while the effect of substituting gas for oil might seem roughly equivalent from a volume perspective, the value outcomes are significantly different.

At current prices, 600,000 barrels of oil equates to $45 million in gross market value (600,000 x $75/barrel). An equivalent quantity of gas only produces $17.5 million in gross market value (3.5 Bcf x $5.00/MMBtu). Even at a higher volume of 4.0 Bcf/day, which some project a pipeline could handle but is not sustainable, the gross value of gas is only $20 million, still less than half the value of oil. At 2.5 Bcf/day, the level projected by some for the Valdez LNG project, the gross value is only $12.5 million, less than 30 percent of the value of current oil production. The fact that North Slope gas also contains liquids such as propane and ethane helps offset that differential some, but not much.

Moreover, even these numbers don't tell the full story. Gas costs significantly more to transport than oil, leading to a lower realized net for gas than oil. For example, according to the Spring 2010 DOR Forecast, ANS oil costs $6 per barrel to transport to market. Using the nominal estimate made by TransCanada for transporting North Slope gas, however, transportation costs for gas are $3.50/MMbtu or a near staggering $20-plus/BOE (again, compared with a current market value for gas of only $30/BOE).

Moreover, those transportation costs only move the gas from the North Slope to Canada. Gas available in Canada historically has traded at a significant discount to the Henry Hub price. Factoring in the long-term historic differential between the two locations reduces the value of Alaska gas by another 15 percent.

As a consequence, the net advantage of oil over gas is even greater than the $75 v. $30/BOE difference suggested by current market prices. Using these nominal transport costs and historic location differentials, the net value of current oil production is in the range of $41.5 million per day, compared with a net value for an equivalent volume of gas of $4.4 million. Even at a production rate of 4 Bcf/day, the net value of gas is less than 15 percent of the value of oil.

Why are these statistics important?

Simple. Some have suggested that a gas pipeline, or an LNG project, is sufficient to sustain the Alaska economy going forward, and essentially ignore the State's long term oil policy. Bill Walker, for example, suggests that the state is "running out of oil," but that will be offset by the Valdez LNG project.