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State of Alaska considers financial stake in LNG project

Alex DeMarban
In recent years, Alaskans have watched as the state has thrown hundreds of millions of dollars at two natural gas pipeline proposals, though it's unlikely both will be built.

With a massive tax break to oil companies freshly under its belt, Alaska Gov. Sean Parnell's administration is now trying to better understand the "fiscal and policy measures" needed to advance construction of a liquefied natural gas project, including whether the state should be an owner in the estimated $65 billion effort.

In a wide-ranging request for proposals issued Friday, the Alaska Department of Natural Resources is seeking a contractor to study aspects of the project and provide input on such things as "inducements" that might lead to development of the project by the North Slope oil and gas producers -- primarily Exxon Mobil Corp., BP and ConocoPhillips.

The state's vast North Slope gas fields are a sequestered treasure state leaders have unsuccessfully sought to unlock for decades. The idea of the state owning a portion of the 800-mile-pipeline and LNG plant harkens back to an unsuccessful 2006 proposal under former Gov. Frank Murkowski that sought to give the state equity in a gas pipeline.

The request for proposals is a fact-finding effort designed to inform the state how it can get the most benefit from the proposed project, said Joe Balash, DNR deputy commissioner.

The report could recommend such "inducements" as tax credits, he said. But most importantly, the department wants to determine how it should accept its royalty share of natural gas from the North Slope, one of the largest conventional gas fields in North America.

The state receives a royalty share of 12.5 percent from most hydrocarbon production. DNR wants to know whether it should accept that royalty in-kind, meaning in gas, or in value, meaning in cash. 

This is how the Murkowski administration proposed to structure such a deal in 2006: "...the state takes an equity position in the project and takes its royalty gas and production tax in-kind, assuming its own shipping and marketing risk. Through this structure, the state maximizes revenues while ensuring that the project moves forward."

The Legislature rejected the proposal at the time, with critics claiming Murkowski was going too far with trying to incentivize construction of a natural gas pipeline.

Reviewing such questions again could determine whether the state becomes an equity partner in the LNG-pipeline project, as well as if it can wed two seemingly competitive pipeline proposals -- both currently subsidized by the state.

Pipedreams galore

In recent years, Alaskans have watched as the state has thrown hundreds of millions of dollars at the two proposals, though it's unlikely both will be built. 

The smaller pipeline proposal recently received a $355 million legislative appropriation to move it along. It would cost an estimated $8 billion and transport North Slope gas to Alaskans in hopes of lowering staggering energy prices across the state.

Its bigger cousin, the large-diameter line to be considered in the DNR report, would ship North Slope gas some 800 miles to a plant near tidewater in Southcentral Alaska, such as Valdez along Prince William Sound, where the gas would be liquefied and exported on tanker vessels overseas.

The partners in that project -- Canadian pipeline builder TransCanada Corp and ConocoPhillips, BP and Exxon Mobil -- have said that line could cost up to $65 billion or more. The state has already agreed to spend up to $500 million in subsidies to support that effort under a measure passed six years ago by Parnell's predecessor, Sarah Palin. So far, the state has paid more than $200 million of that total to TransCanada and its oil company partners.

DNR plans to spend up to $800,000 for the report. Bids will be accepted until May 20 and the contract is slated to start June 12, running through Oct. 15.

Information sought includes such things as cost estimates for project facilities -- like the gas liquefaction plant -- as well as potential costs associated with the project's marine shipping segment, possible ownership arrangements in various phases of the project, and pricing trends and other information on LNG markets.

Among other things, the state also wants to know whether "end users," presumably buyers in Asia, could participate in the project, as well as fiscal terms offered by other countries that might compete with Alaska.

Alaska "needs to be prepared to offer additional inducements should they be warranted, including how it exercises its royalty ownership rights," the proposal states, in reference to the in-kind or in-value royalty question, according to Balash.

"The final form of this project and its ultimate success will depend on a myriad of favorable economic conditions not the least of which will be some kind of participation -- in the kind of fiscal terms it may devise -- from the State of Alaska," the proposal reads. "Alaska will need to examine its policies towards the fiscal terms that it controls and their impact on the project."

The department is not considering royalty relief, said Balash. That's essentially a tax break, used in the past to stimulate oil field production, that reduces the state's royalty take.

Should state become a 'partner'?

The big question is whether the state should collect its North Slope royalty gas in-kind, as gas, or in value, as money.

Currently, the state has the right every 90 days to change how it collects its royalty gas. That ability to change in the middle of a project could create uncertainty for producers and buyers that want to lock into a decades-long contract that promises consistent amounts of natural gas, Balash said. Such long-term commitments are common in the LNG industry, he added.   

"We need to explore whether there's a long-term decision to make here on in-kind and in-value," he said. "This has nothing to do with making a monetary concession, but it'd be a concession to potentially limit a right we currently have under the contract, the right to switch."

The producers are "looking for some measure of certainty on which way the state goes on this," he added. "Whatever way we go would need to be for a long time. So just from a practical perspective, state needs to know which way -- in value or in-kind -- are we better off."

The report may address questions such as tax credits or other tax incentives, but those are issues to be dealt with more closely, and at a later date, by the Alaska Department of Revenue, Balash said.

"We are really focusing this effort on decisions we need to make at DNR relative to our royalty gas," he said.

If the state agrees to receive gas in-kind over the long-term, it could allow the state to become a partner in the project.

How would that look? Some have suggested in the past that the level of state equity might be proportional to the state's royalty take. So, speaking in rough hypothetical terms, the state might have an $8 billion stake in a $65 billion project.

How the state would raise the money wasn't known Tuesday night. Would it borrow from the $16 billion stash it's amassed in recent years, tap the Alaska Permanent Fund, issue loans, or raise the capital in some other way?

Having an equity stake might boost the state's overall return, said Balash. It's possible, for example, that the state could borrow capital more inexpensively than the producers. And perhaps the state could find partners who offer a certain service -- such as marine shipping or other phases of the project -- at cheaper rates than the producers are offering,

"If we can do it cheaper, then we lower our cost of getting gas to market and we potentially improve our net-back of the wellhead value of the gas," he said.

But those are concepts to be scrutinized in the report.

A long-term arrangement that makes the state an equity partner could also allow Alaska to wed the two dueling pipeline proposals. The Alaska Gasline Development Corp. could then manage the single mega-line LNG project that addresses both export needs and in-state energy needs, he said.

"We want to pick our way carefully through these issues," Balash said. "Alaskans expect to see progress on a project, and we want to make sure we're removing obstacles that are real."

Contact Alex DeMarban at alex(at)alaskadispatch.com