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Suddenly, Alaska politicians intrigued by plan for state to own part of proposed gas pipeline

Pat Forgey
The new look at Alaska ownership of a pipeline comes with the Monday release of a report commissioned from petroleum industry consulting firm of Black & Veatch at a cost of $424,000. istockphoto

Fresh off winning billions of dollars in oil tax cuts for the state's big producers, the Parnell administration is now looking at what it may take to finally get a pipeline to bring Alaska's huge natural gas reserves to world markets.

A new report commissioned by the state says natural gas tax cuts, to either royalties or production taxes, will be needed to make that pipeline happen, but Parnell's Department of Natural Resources is drawing attention to a third option: The state owning part of the pipeline, frequently called an "equity" stake.

"An equity alternative, at least from what we see here, would be better in our view ... than a reduction in royalty or a reduction in taxes," said Joe Balash, the department's newly appointed commissioner.

The new look at state ownership of a pipeline comes with the Monday release of a report commissioned from petroleum industry consulting firm of Black & Veatch at a cost of $424,000. The report said the pipeline project -- likely carrying 3 billion cubic feet of natural gas per day and costing about $45 billion -- could be economically viable, and in some scenarios highly profitable. But it would take state changes to make it work.

What's being called the AKLNG project is different from a smaller-volume pipeline proposed by the state's Alaska Natural Gas Development Corp. It would have an LNG export terminal in Nikiski, and provide low-cost gas to Southcentral customers.

"AKLNG project could be economically feasible with changes to the project's cost structure and the state's fiscal framework," the report said.

While the report looked at the possible elimination of royalty and production taxes, Balash said that was not a proposal. "We looked at them for comparison purposes. We're not advocating those steps at all. I think reducing our royalty is the very last thing we should consider," Balash said.

Owning part of a pipeline, maybe a fourth, would give Alaska and the producers a common interest, what Balash called "alignment." But owning part of the pipeline would also provide Alaska with important information, he said.

Some legislators from opposite sides of the oil-tax debate were briefed by Balash on the Black & Veatch report and said Monday they found it intriguing.

"We've been high-centered on natural gas for a long time, this is a real interesting proposal at first take," said Rep. Beth Kerttula, Democratic leader in the Alaska House of Representatives. Sen. Cathy Giessel, R-Anchorage, issued a press release Monday supporting the state owning part of the pipeline, saying it was a particularly useful strategy on such as capital intensive, complex multi-stakeholder investment.

"How a project is structured and how risk and reward are allocated can make or break a project," said Giessel, chair of the Senate Natural Resources Committee.

The Black & Veatch report highlights the benefits of state ownership, but also focuses on potential risks. Those include falling prices, and the chance that the producers might shift costs or revenues to benefit themselves. "These decisions could potentially be to the detriment of the state," the report said.

Under traditional royalties and taxes, state losses are unlikely, but with ownership it is an inherent risk. One of those risks could be in the unregulated LNG liquefaction plant at the pipeline's end. Alaska would also want to make sure its ownership gave it a role in making decisions such as whether to expand the plant if new explorers find more gas on the North Slope.

"If we are not going to be able to expand the facilities when we need to, we will start to question the benefits of equity participation," Balash said. That possibility of new information is why some Alaskans have been long advocating for state ownership, Kerttula said.

"Wally Hickel has been saying for a long time that if we are going to be an owner state perhaps it is time we owned part of it," she said.

Another benefit to state ownership Balash acknowledged: One of the aspects of state ownership is reducing the amount of taxes that go to the federal government, making it truly a win-win for the state and the producers.

"There's a federal tax effect here that plays a part," he said.

Balash said it was too soon to say whether the Parnell administration would propose new legislation next year to implement the report's recommendations.

Contact Pat Forgey at pat(at)alaskadispatch.com