Stalled gas line may need new injection of funding

Sean Cockerham | Tribune Media Services

The long-discussed project to build a natural gas pipeline from Alaska to the Lower 48 appears stalled, raising new debate about whether the state should give it a jump-start by putting some of its billions of surplus dollars toward the effort.

The state is already giving up to $500 million in reimbursements for TransCanada, along with partner Exxon, to work toward a project under the terms of the Alaska Gasline Inducement Act, or AGIA. But TransCanada's efforts to get the commitments from customers needed to finance the pipeline have so far failed to achieve any firm deals.

"It appears the AGIA subsidy, by itself, is insufficient to make the gas line a reality," said a new report from the office of the federal coordinator of the Alaska pipeline project, Larry Persily. "The project is high- centered, waiting for a push from the market and maybe the state to move it forward."

Alaska Sen. Mark Begich has urged the state to consider helping to finance the pipeline by adding to the federal loan guarantee for the project. State Rep. Les Gara, D-Anchorage, wants the Legislature to consider loan guarantees or even becoming a part owner of the pipeline to lower its tariff and make what's estimated to be a $32 billion to $41 billion project more economically attractive.

Leaders of the Alaska Legislature also talk about the state potentially financing and even owning a smaller $7.5 billion pipeline running from the North Slope to Southcentral Alaska, shipping gas for customers within the state.

Unlike many states crippled by the recession, Alaska government, fueled by taxes and royalties and oil and gas, is currently flush with money. The state has about $17 billion dollars in savings accounts. That's not to mention the $38 billion Alaska Permanent Fund, money from which potentially could be invested in a gas pipeline if there were political desire.

In the meantime the state is spending on pipelines, just not building anything. There's the $500 million being spent for AGIA and money going to work toward the smaller in-state gas line, which would require some $300 million in state money for development and design before the Legislature needed to make a decision on whether to actually build it.

House Speaker Mike Chenault is the prime advocate of the in-state line and he's hoping private investors will get on board. But Chenault holds little hope for the big gas pipeline to the Lower 48 and is skeptical of putting more state money toward it.

"I don't know if that's a wise investment if you look at the overall economics of the project, given the gas supply found in the Lower 48," said Chenault, a Republican from Nikiski.

Last spring, BP and Conoco Phillips abandoned their Alaska gas line effort, called the Denali project. The Denali president declared the markets didn't support it, primarily because of the development of shale gas resources outside Alaska.

Gov. Parnell is also cool to the idea, and until he or Republicans who wield power in the Legislature get behind the idea it won't go far. Gregg Erickson, an economist who has watched Alaska politics for decades, said public doubt about the chances for a Lower 48 gas line would make it harder for any lawmaker who wants the state to put money into helping make it happen.

"It seems stalled. And I don't think the citizens of Alaska are going to be particularly interested in putting much more money into the project unless they can be sure they're going to get a gas line," Erickson said.


The report from the federal Alaska gas line coordinator acknowledged that the abundance of Lower 48 shale gas and a buildup of new gas liquefaction projects are immediate problems for Alaska's efforts. "However, any number of plausible developments could quickly and substantially improve the economic prospects for a gas line project," it said.

The report said if the state is ready to finance a $7 billion in-state gas line, it could be better off putting that money instead into improving economics for the bigger pipeline serving out-of-state markets, with a spur to serve Alaska customers.

That would get cheaper gas to Alaskans than a stand-alone in-state line and have vastly more potential for tax and revenue benefits.

The report noted the state's wealth, and laid out risks and benefits for options ranging from direct state equity investment to deferring taxes on the project. "If Alaska truly wants a gas line to become a reality, it likely has the means to help make it so," it said.

A less risky option than direct investment could be for the state to add to the federal loan guarantees for a gas line to the Lower 48. Congress in 2004 authorized loan guarantees for the project of almost $21 billion, which essentially assures commercial lenders the government stands behind the project and lowers the cost of borrowing for developers.

But current estimates put the financing need closer to $30 billion, so the federal guarantee falls short. Alaska Sen. Begich wrote the governor last month saying, given federal budget-cutting efforts, Congress isn't likely to increase that guarantee.

"The state of Alaska's financial reserves make it the envy of the other 49 states and also give some members of Congress an argument against increased federal backing for the project," Begich wrote. "Those same financial reserves, however, also provide an opportunity for the state to step up and work with federal financing to make this project happen."


Begich said the markets will ultimately decide if the gas line happens, but that government leaders can help on the margins. The report from the federal gas line coordinator's office said it's not clear if the additional loan guarantee would make the needed difference, given the unfavorable gas market. "But it would further lessen the risk to investors and lower the pipeline tariff, making the project more attractive to shippers and the gas more valuable to the state."

Gov. Parnell, though, doesn't seem interested in state loan guarantees or equity investment in the project. State pipeline official Joe Balash noted the state is putting money into the AGIA effort for the big pipeline and to look at the smaller in-state line. "What we're looking for next is for shippers to align behind one of those projects," Balash said. "And we'll be ready to talk with them at that point in time about what it is going to take to get that project sanctioned and actually turning dirt."

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