Alaska becoming a major cement exporter? Millions of tons of coal being shipped from Healy to Cook Inlet? I thought these purported benefits from the Port MacKenzie railroad extension seemed more than a little optimistic so I dug deeper.

It turns out that the misleading economic analysis in support of the project relies on vast amounts of theoretical and unlikely future development in the rail corridor. It proposes that Port Mac will create billions of dollars worth of new industries (which would not otherwise be created). Most egregiously, it proposes that several major mines (one on the scale of the Pebble Prospect, and dwarfing all current mineral production in Alaska) will spring into existence with little regard to the underlying geology — in an area where mining companies are not even exploring for significant minerals. Not even discussed is the possible negative impact of winter ice on Port Mac which is not a problem for the major competing ports.

The Controversy

Proponents of this project say that building the extension would spur economic development throughout the Railbelt. Opponents worry that this development will never materialize and the project will be a boondoggle, or simply turn out to be a very expensive way to subsidize the export of Usibelli coal.

Put another way, do the benefits exceed the costs or vice versa? This quote, from a report attempting to answer this question provides a good starting place for a conversation:

“The primary analysis indicates that the net present value of rail freight savings
from the proposed rail link relative to the Ports of Whittier and Seward greatly exceeds
the capital cost of the proposed project. The net present value of the rail freight savings
for Port MacKenzie relative to the Port of Anchorage over a 30 year period equals 92%
of the capital cost of the project.“

Basically, the argument is that building the rail spur is worth it, because transporting things to Port MacKenzie will cost much less than transporting them to Whittier and Seward. But how realistic are those savings? To answer this question I spent some time reading a number of reports that attempt to quantify the benefits of building the extension. And I was quite struck by how fanciful some of these benefits appeared. Discussed here are two reports by Paul Metz (here and here).

What will be Shipped?

What exports are currently transported to Seward and Whittier that would be cheaper to send to Port Mac instead? Currently, Usibelli coal is the only example I’m aware of. Shipping this coal probably would be cheaper from Port Mackenzie, though not creating nearly enough value to justify the port’s construction on its own. The rest of the savings come from postulated future industries.

To begin, Metz describes a 120-mile corridor around the existing railroad and then estimates all of the development that could materialize in this corridor if the Port Mac extension were built. He rightly points out that the cost of sending things from Port Mac would be lower than Anchorage, Seward, or particularly Whittier. However, it’s very hard to justify the claim that these developments he describes would not have occurred without the Port Mac spur. But to be part of the cost-benefit analysis, that needs to be the case. Here are the assumptions made by Metz along with my thoughts.

Assumptions:

Annual production from natural resources along the existing railroad (attributable to the building of the extension). Savings are calculated relative to other AK ports.

2 million tons of mineral ore (20% of savings). This appears to be totally unrealistic, more detail below.

3.5 million tons of Portland cement for export (35% of savings). Right here I should state that I have no experience with this particular industry. However, everyone I have discussed this with feels that this seems wildly optimistic. It’s hard to imagine that with Alaskan logistics, labor costs, and transportation that making cement in Alaska could really be competitive with established global markets. Metz mentions exporting to the West Coast but presumably the Jones Act would make this an even more expensive option. The materials would come from a deposit north of Fairbanks (Globe Creek).

1 million tons of export coal (10% of savings): It seems totally reasonable to me that building the Port Mac spur would save Usibelli money. Though they would have to build an export terminal of some kind at Port Mac.

3.3 million additional tons of coal for gasification at Agrium (33% of savings): This is outdated, not only does Usibelli not have the capacity to produce this much coal without major capital improvements but Agrium is long-gone, and the gasification infrastructure was never built. Clearly these savings are not happening.

20,000 tons of timber (negligible savings): I have no idea if this is realistic or not, it’s too small to have much impact on the analysis either way.

200,000 tons of benzene (<2% of savings): This would come from Flint Hills, but assumes a petrochemical processing plant would be built at the port site. Since there’s no such plant, or plans for one that I’m aware of, this seems shaky.

Imaginary Mines – A deeper look at the mineral assumptions of Metz

While the minerals are only responsible for 20% of the cost savings relative to existing ports, they provide the lion’s share of the jobs discussed in a subsequent ISER analysis by Steve Colt. For this reason I looked in more detail at these assumptions.

From ISER 2010:

“Major new mines shipping concentrate via the rail extension would generate thousands of new jobs, and a significant fraction of these jobs would be held by Anchorage residents. Our detailed analysis of the potential employment from five specific mining projects indicates that more than 2,000 average annual jobs would be created in Anchorage or held by Anchorage residents once the mines are fully developed. Most of these jobs would be in mining and in professional sectors that pay good wages. Also, during initial mine development, many of the jobs would be in construction and fabrication.”

…

“Dr. Paul Metz, Professor of Geological Engineering and director of the Mining Industry
Research Lab at the University of Alaska Fairbanks, predicts that the rail extension will lower the cost of exporting mineral concentrate to the point that it will directly stimulate the development of three new mineral deposits within a 120-mile-wide corridor surrounding the existing railroad in Interior Alaska. Mat-Su Borough officials also assume that a cement and lime mining and production operation would be developed as a result of the railroad extension. We have used these five mining projects as a case study to calculate the resulting expected benefits to Anchorage from the rail extension.”

This is where the assumptions appear to most diverge from reality. Check out this chart from ISER 2010 (based on the Metz analyses):

The first three lines seem reasonable. The fourth line is where it starts to get funky. “Mine B” would produce 1.7 million tons of concentrate annually (all needing to be shipped by rail of course). Red Dog mine, currently the largest in Alaska and the largest zinc mine in the world, only ships ~1.4 million tons. Then the questions blossom with the metal values. “Mine B” would produce metal with a value of $5.1 billion per year. For reference the entire state of Alaska produced metals (all metals, placer and hardrock) worth $3 billion in 2010 (same year as the ISER report where I obtained this table) – less than half the amount that would supposedly be produced by these new mines Port Mac would create.

So basically for this to all pan out they need a mine bigger than Red Dog, as well as a couple of other mines, to commence operations as a direct result of the Port Mac spur… and be located near the railroad. There are two additional points worth noting here:

1) Mineral exploration in the state is occurring at an all-time high. It’s all over the state… wherever the geology is good, there are people drilling. Access to infrastructure is clearly important for the development of a mining prospect, but one could argue that since no one is even *looking* for a massive deposit near the railroad (see below) that the geology may not be as favorable as assumed.

2) Most of the currently active mineral exploration projects in the Fairbanks area and near the railroad are pursuing gold deposits. Gold mines do not typically ship significant quantities of ore, they ship out dore bars which would have a negligible impact on the railroad and are just as easily transported by truck or even air.

Therefore I took at look at mineral prospects being explored that are within the 120-mile corridor described by Metz. I ignored all the gold-only prospects, of which there are several including the large Livengood Prospect. There are only three possibilities (Golden Zone, Stone Boy, and Shorty Creek) and there certainly doesn’t appear to be anything like a “mine B” which is described as a “a Porphyry Cu- Mo-Au-Ag deposit of large size (ninetieth percentile [in the world] of tonnage and grade) located in the north flank of the Alaska Range.” The only mine prospect in the entire state that has enough ore to qualify as a “mine B” is probably Pebble (Porphyry Cu- Mo-Au-Ag), far from any connection to Port Mac.

Circular reasoning:

Just as an aside, there is some amusing circular logic in the ISER report as well. First, they argue that the rail extension would cause these five mines to spring into existence. Since they assure us that those operations would not otherwise have existed, they count all their benefits in the cost-benefit analysis for the extension. However, one of those benefits is the traffic avoidance if these facilities had to ship all that ore/cement by truck on existing roads.

Summary:

I have no doubt that building the Port Mac extension would benefit some industries. However, it’s hard to imagine Alaska becoming a giant cement exporter (35% of savings), it seems unlikely that a massive mineral deposit worth more than all current production will be developed near the railroad (~20% of savings), and clearly there will not be millions of tons of coal going to a never-built gasification plant to service a now-defunct facility (33% of savings). Remove these putative benefits and the cost-benefit analysis for the spur suddenly looks a lot less rosy.

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