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Senate committee weighs LNG investment pros and cons

By Rhonda McBride 6:31 AM February 26, 2014

Ownership in an LNG line: Is it a good deal for Alaska?

JUNEAU – To invest or not to invest: That is the question for state lawmakers on what would be the Alaskan megaproject of the century — a liquefied natural gas project that would bring North Slope gas to market.

Most lawmakers seem to agree, in concept, that it makes sense for the state to have some ownership in an LNG project — that if all goes well, the state treasury and Alaskans will reap the benefits.

The question is, how much ownership should the state have, and on what terms?

These are issues Senate Bill 138 attempts to work out.

The bill, introduced by Gov. Sean Parnell, went through several hours of hearings in the Senate Finance Committee on Tuesday. The hearings continue Wednesday morning with more testimony from oil company executives.

So far this session, the revenue and natural resources commissioners have made most of the sales pitches for SB 138.

They’ve also gone to great lengths to explain recent agreements with ExxonMobil, ConocoPhillips and BP — as well as TransCanada — to work together on the Alaska LNG Project.

AKLNG is actually three megaprojects rolled into one: a gas treatment plant on the North Slope, an 800-mile pipeline to Nikiski and an LNG plant to turn the gas into liquid for shipping. It has a price tag that could run as high as $65 billion.

“We are an owner state. We have to work like an owner state. We have to take risks like an owner state,” said Department of Natural Resources Commissioner Joe Balash. “Otherwise, we’re going to be left with the financial dealings and necessities of producers, as opposed to looking after our own interests.”

The challenge now for lawmakers is to strike the right balance between risks and rewards.

The early stages of the project are in some ways a gamble with no guaranteed return to the state, or any of the partners in the project.

By 2018, the state potentially could have invested about a half a billion dollars.

During the planning stages of the project, any of the parties can pull out, including the state, and if the project doesn’t come to fruition, the state will lose its money.

The bigger cash commitments, between $7-$13 billion, won’t come until 2019, when construction is scheduled to begin.

The Parnell administration recommends the state take a stake in the project between 20-25 percent.

Balash, in his presentations to lawmakers this session, has often brought up Gov. Bill Egan’s attempts to get the Legislature to buy ownership in the Trans-Alaska Pipeline.

Egan came close. The House passed a measure that would give the state a one-eighth stake in TAPS. The Senate balked, but not by much.

“And because he fell one vote short in the Senate, we wound up not owning a piece of TAPS,” Balash said. “And once it was under construction and once it was fully operational, and the tariffs started being deducted against our royalty, Alaska was very unhappy with the outcome.”

Balash argues that ownership in the AKLNG project would avoid these problems and bring the state more revenue.

Here’s why.

As part of its lease agreement with producers, the state gets a share of the oil they pull out of the ground, known as royalty.

But once the state’s royalty share is sent down the pipeline, the producers charge a tariff; a fee for the cost of transporting the oil.

Over the years, the state has fought numerous legal battles, claiming the oil companies have overcharged them for this service.

But as part owner in the AKLNG project, the state would save some money on tariffs, so the royalty gas it receives — as well as gas in lieu of taxes — will hold its value.

One of the major barriers to state ownership in TAPS was the fact the state was nearly broke.

“Today, Alaska’s situation financially is very, very different,” said Balash, who estimates the state has $85 billion in reserves to draw upon, including the Permanent Fund.

“The financial power that comes along with that kind of wealth is something Alaska is just learning to leverage and understand,” Balash said.

But just how much of that wealth is earmarked for future obligations is uncertain.

With a decline projected in oil production and billion-dollar budget deficits looming, there is concern about where the state will find the money to invest.

Sen. Lyman Hoffman, a longtime Finance Committee member, wonders if the state’s borrowing power will suffer.

“Anyone that’s going to be lending us any money, that’s going to be a key factor – if we can’t even balance our current checkbook for the next eight years,” Hoffman told Revenue Commissioner Angela Rodell.

“You are absolutely correct,” Rodell replied. “There are scenarios where the pressures of spending versus revenues creates a downgrade on the state’s ratings.”

A partnership with TransCanada, the largest pipeline builder in North America, is one option being considered to reduce the amount of cash the state will have to put up for its share in the LNG project, as well as lower the state’s risk.

The deal the Parnell administration brokered with TransCanada has a lot of moving pieces.

During Gov. Sarah Palin’s administration, TransCanada was awarded a license under the Alaska Gasline Inducement Act to build a natural gas pipeline to the Lower 48.

The project never came to fruition because of the explosion of the shale gas market.

Under a proposed agreement with TransCanada, the state would be out from under the financial obligations of AGIA, and as a partner in the LNG project, TransCanada would make capital investments on the state’s behalf.

The state would have an option to buy back a portion of that investment at some point in the future.

Consultants for the state have said this arrangement is basically a loan, with TransCanada acting as a lender.

The question is, would the state get a better deal borrowing that money on its own?

Or, would the state be better off having less of its savings tied up in the LNG project?

Under the proposed agreement with TransCanada, the state could always choose not to exercise its option to buy back a share of the pipeline company’s investment.

The Parnell administration also argues a partnership with TransCanada would give the state more leverage, because their interests are more closely aligned. Both would benefit from bringing new oil and gas producers into the fold, more so than the original companies in the project.

TransCanada would also be in a position to help the state develop gas for in-state use.

“How we participate is going to be so important,” Rodell said. “And the state going it alone is a very troublesome option.”

Rodell told Finance Committee members there are many costs associated with the LNG project, and those costs are hard to predict.

“How are we going to support 15,000 workers and their families? And what does that look like?” she asked. “How does that affect operations of state government?”

Sen. Anna Fairclough, vice chairwoman of finance, believes investment in the project is more of a calculated risk for the state than a gamble.

“We always hear the devil’s in the details,” Fairclough said. “This is a huge, huge undertaking, but it’s the first step in a journey that sounds like it’s so promising for Alaska.”

“We have the opportunity to set Alaska up for generations, if we get this right,” Balash said.

It’s a big “if.”

“No one has a crystal ball,” Hoffman said. “No one predicted we would see $114 barrel oil. And we don’t know what’s going to happen with gas.”

And what if LNG prices take a nosedive? What if there are project delays and huge cost overruns?

Some critics worry that the legislation is moving too quickly through the process and needs more public vetting outside Juneau.

Democrats have also asked to hire their own consultant so they can play a better watchdog role.

Up until now, the state has been in an adversarial role with oil and gas producers. Yet at a table before the Senate Finance Committee on Tuesday night, three oil producers were seated together, urging for passage of SB 138, which will legitimize their partnership with the state — a partnership they have already agreed upon in principle.

Bill McMahon, a senior advisor for ExxonMobil, told the committee the measure would allow his company to move ahead on what’s called the Pre-FEED stage of the project. Pre-FEED is an acronym for “Preliminary Front End Engineering and Design.”

“With state participation, the state will be right there and have the same information that we will have, whenever we make that next big decision, ” McMahon said.

“Entering Pre-FEED is a necessary step. It’s a critical step, and it’s a step we have never taken before on a gas commercialization project,” McMahon said.

Each step along the way is also a reminder that this is one of the most complicated projects the Legislature has ever had before it.

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