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Eye on the Capitol: Week 2 Analysis and Review

By Rhonda McBride 10:19 AM February 3, 2014

Gas issues dominate the week

JUNEAU – A number of issues were up for debate in the Alaska Legislature last week, from arming Village Public Safety Officers to a Medicaid expansion bill introduced by Democrats and pay increases for the governor and top staffers, recommended by an independent state salary commission.

By and large, gas pipeline issues dominated committee hearings last week, with lawmakers and Alaskans getting a look at the risks and the rewards of state investment in a liquefied natural gas (LNG) project.

What’s in a name?

Just as Alaskans have seen many attempts to build a natural gas pipeline, we’ve also heard many names for them.

There was former Gov. Wally Hickel’s All-Alaskan Pipeline –- an LNG line from the North Slope to Valdez. Now it looks like we’ve gone back to the future in some ways.

More recently, there was the Denali Project, BP and Conoco Phillips’ attempt to compete with the Alaska Pipeline Project, a partnership between Exxon and TransCanada which sprang from former Gov. Sarah Palin’s gas line legislation. Both of these pipelines were to go from the North Slope to the Lower 48.

There’s also ASAP, the Alaska Stand Alone Pipeline, a small-diameter line that would go from the North Slope to Cook Inlet.

Alaska LNG Project

So much for the alphabet soup of acronyms and past pipe dreams.

Alaskans have a new name to get used to: the Alaska LNG Project, also called AKLNG for short.

So what’s in a name? In this case, it’s an attempt to rebrand a project that’s been put before Alaskans in many different forms. Will this be the one that finally gets off the ground?

Last week the Parnell administration rolled out the Alaska LNG Project in a series of legislative committee hearings. A veteran journalist in the Capitol Press Room observed that the administration had limited each hearing to a single topic — a good way to control the dialogue.

The hearing Jan. 27 focused on a document called the “Heads of Agreement,” called “Heads of” because it was signed by the “heads of” ExxonMobil, BP, ConocoPhillips and TransCanada — as well as the head of the State of Alaska, Gov. Sean Parnell.

Department of Natural Resources Commissioner Joe Balash explained the historic nature of this document. He told lawmakers that finally, all the parties key to building a pipeline are on the same team.

It’s different project than originally envisioned: Not the pipeline across Canada to the Midwest, but an 800-mile pipeline from the North Slope to Nikiski, where gas will be turned into liquid for export.

Deputy Commissioner of Revenue Mike Pawlowski tried to convey the enormity of what’s being proposed.

“This is a massive undertaking that creates massive opportunity for Alaskans,” he said.

The state would have a stake of 20 to 25 percent in a project that is more than a pipeline; it also includes a gas treatment plant (GTP) on the North Slope to remove impurities from the gas as well as a liquefaction plant at Nikiski to chill the gas and turn it into liquid so it can be shipped for export.

The Department of Revenue estimates there will be 15,000 jobs during peak construction and 1,000 workers needed to operate the project.

The cost for the project? Somewhere between $45 – $60 billion. The state’s share? Around $11.4 billion.

Later in the week, we learned about how a new partnership with TransCanada could help considerably reduce the amount of cash the state would have to put up for the project.

Whatever the dollar figure the state will pay to own part of the Alaska LNG Project, the state could be in big trouble if it has no one to sell the gas, too.

Last Tuesday, experts on the world gas market, hired by the state, gave a rosy picture of LNG prices. They told lawmakers that even though the Lower 48 is awash in natural gas, Asia is still a market where LNG can fetch a good price — and where Alaska’s proximity gives it a big advantage.

However, given the huge investment required, it’s still a gamble. The consultants said they had studied a variety of projects, and none of them had exactly the same outcome. In other words, there’s no path for Alaska to follow. The state must blaze its own trail.

“You can effectively negotiate whatever you would like to negotiate,” said Nikos Tsafos, a natural gas analyst. “Because the project is so big and complex, it also opens up a potential amount of win-win. You can say, ‘I don’t want to invest in this part. I’d like to invest here.’”

It appears the Parnell administration is embracing this a la carte approach.

On Wednesday, the natural resources commissioner reviewed another key document with lawmakers — something called the Memorandum of Understanding, which outlines a new relationship with TransCanada.

Rewind the video: Back in the days of when Palin was governor, the state awarded TransCanada a license to build a pipeline to the Lower 48. Under the terms of the license, the state agreed to subsidize some of the costs, amounting to hundreds of millions of dollars.

Fast forward to the MOU: Commissioner Joe Balash told lawmakers to think of it as a way to avoid a messy divorce. It lets the state off the hook for any money owed to TransCanada under the old licensing agreement under the Alaska Gasline Inducement Act (AGIA)  — while at the same time it makes the Canadian pipeline company a partner in this latest effort to build an LNG project.

There are a lot of moving parts to this deal, and one of the interesting features is a plan for TransCanada to front some of the costs in exchange for a share of the state’s equity in the pipeline.

This would lower the state’s up-front cash commitment from $11.6 billion to about $5.8 billion, according to Black and Veatch, consultants for the state.

Lawmakers in the House Natural Resources Committee were nervous about this proposed second honeymoon with TransCanada the Parnell Administration would like to embark on.

Some wondered if it would be better to pay off TransCanada and put the project out to bid for a complete fresh start.

Balash told lawmakers TransCanada would likely be at the top of the list, as it should be. Any new pipeline company would have a big learning curve, he said, whereas TransCanada has been working with the state for more than five years, albeit on a different pipeline project, but still a project that has added to the company’s Alaska expertise.

TransCanada’s Tony Palmer was present at the hearings to make it clear that his company deserves a place at the table, not just because of the earlier licensing agreement, but because TransCanada has been involved in work on an Alaska pipeline for at least 40 years.

Thursday, the bubble of excitement generated over the LNG project was deflated by news that Shell was pulling out of the Arctic temporarily in 2014.

Although Shell’s leases are federal and would not have generated state taxes, oil produced offshore would have utilized infrastructure on Alaska land, including the TransAlaska Pipeline, which would have helped lower the cost of operating the pipeline and raised other revenues, such as property taxes.

Shell blamed a federal court ruling that sided with environmentalists. For lawmakers, it was a reminder that there’s a lot about these mega-projects that’s not under Alaska’s control.

The reworking of the TransCanada agreement is another example of how unforeseen circumstances can sink big projects.

Less than six years ago, when TransCanada was awarded its license to build a pipeline to the Midwest, consultants said the project would pencil out.

That was then. This is now. Natural gas prices in the Lower 48 have fallen to the floor because of the shale gas boom, making a pipeline to the Midwest economically unfeasible.

Palmer said today’s daily natural gas production in the Lower 48 is equivalent to five or six Alaska gas line projects.

Democrats have raised a number of questions about the governor’s gas line legislation, designed to be executed in phases. Each involves commitments of big chunks of money. The gas producers are free to back out at any time until the construction phase.

Just as with last year’s oil tax reform included in Senate Bill 21, Democrats claim the governor’s gas line legislation could give away the farm. There are fears the legislation, as proposed, would give too much negotiating power to the natural resources commissioner. They also say that if the state only has a 20 to 25 percent ownership of the pipeline, it could be outnumbered by producers.

Friday, lawmakers were to hear from Steve Butt, the overall manager for the Alaska LNG Project. Butt has worked as a project manager for ExxonMobil, involved in LNG mega-projects all over the world. Foggy weather kept Butt out of Juneau. His presentations have been rescheduled for this week.

For the Legislature, this will be something of a milestone. In the state’s long quest for a natural gas pipeline, there’s never been a project manager with the current line-up of partners – producers, a pipeline construction company and the state — all on the same team.

One other aspect of this partnership Alaskans will be hearing more about is the role of the Alaska Gasline Development Corporation.

Right now the AGDC’s main role is to develop the smaller diameter line, the fallback plan to make sure Alaskans have access to North Slope gas, in case the Alaska LNG Project falls through.

Under the governor’s legislation, AGDC would also have a role in the Alaska LNG project.

From here, many more questions arise. As a partner in the project, the state would be able to take gas instead of cash for taxes owed. Would the state then market its own gas — or have the gas producers market it for the state?

These are only the first of the questions to be decided by lawmakers. One thing is for sure: The list will get longer as the days go by.

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