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Consultant says state risks $600 million if gas line stalls

Dermot Cole

FAIRBANKS -- Oil and gas consultant Roger Marks has identified at least a half-dozen critical issues in the proposed gas pipeline agreement that could cost Alaska dearly in the long run if not addressed.

In its haste to start the 2014 version of the “We Are Getting a Gas Line” campaign, the Senate did not bother with the inconvenient questions raised by Marks’ report, nor did it ask him to testify at any of the 23 hearings it conducted on the bill. The House Resources Committee, to its credit, took the time to hear his critique, which challenges key statements made by Parnell administration witnesses in recent weeks and raises issues that no one has checked out.

Marks said he was not arguing for delay but for “the option of working some things out that may take some time, may generate long-term benefits to the state.” That sounds reasonable enough.

Here are highlights of his presentation Thursday:

Risks to the state

Backers of the pipeline may spend up to $2 billion before deciding whether to build a pipeline. On a project of this size, that advance effort is needed to narrow down the ultimate construction cost of the estimated $45 to $65 billion project. 

“Under this proposal, the state will be liable for about 25 percent,” he said, ranging from $500 million to $600 million over the next five years or so. “It’s possible you could spend that money for naught,” he said.

“In other countries that I’m aware of where governments take on this risk (there) are usually national oil companies where you’re talking about much higher government takes than what we’re talking about in this project,” he said.

The three North Slope producers have a market capital of $750 billion and “may be better equipped to take on that risk than the state.”

He said there could be a tipping point where state investment makes the difference in a project, but the people who know where that tipping point is will not broadcast it to lawmakers.

“The more interested the producers are in this project, the less they need your money. And the less interested they are, the more you probably don’t want to get into this kind of risk,” he said.

The state has to consider whether its investment puts the project near the tipping point, as well as the probability of the project succeeding, the potential payoff to the state and “how material losing $600 million would be.”

An alternative approach would be to have the companies pay for the advance engineering work and allow the state to buy into the project once it is sanctioned, paying them back for a share of those costs.

“That would give them the long-term alignment they really need,” he said. “And you would have more time to figure out how you want to proceed on this project.”

Role of AGIA

Marks said he believes TransCanada received a material part in the gas line plan to avoid triggering a battle over the treble damages clause in the Alaska Gasline Inducement Act agreement. The potential cost of those damages could be between $600 million and $1.65 billion, but “no one knows exactly what the state’s exposure is.”

He said the state could assess its legal liability, engage TransCanada in talks, renegotiate, settle or go to court, the least preferable option. Marks said legislators should ask if better terms could be negotiated with TransCanada or a different partner -- or no partner. Higher gas revenues and lower gas bills to consumers could be the result.

If the state had a different partner or if it could renegotiate with TransCanada, it could seek a way to share the risk of paying all the company’s bills if the pipeline does not get built.

If the project is not sanctioned, the state would have to pay TransCanada up to $270 million in the coming years. The agreement with TransCanada “puts all of the risk of a failed project onto the state.”

Fiscal stability

He said the “government take” on the project is about 58 percent, which is similar to analysis by other consultants.

Marks said that the oil companies have long said that they want predictable tax rates for the long term, but that the agreement under Senate Bill 138 does not provide that assurance. He said a future legislature could say that in addition to taking a fixed percentage of the gas in tax, an additional levy could be applied, say a certain cost per thousand cubic feet.

What the state doesn’t want is to embark on agreements and spend up to $600 million only to have the oil companies say, “OK, we’re ready to go, you just have to change your constitution now.”

There has been a long-running political and legal argument about whether there is a way to provide a tax freeze for decades without amending the Alaska Constitution.

“What you really need to do is to scope them out to find out what’s enough and whether you’re willing to go there,” he said.

Financing

The state may have the ability to get 100 percent debt financing on its share of the project, which would reduce the need to put up cash before the pipeline begins operation. Revenue bonds and tax-exempt bonds through the Alaska Railroad, under a special provision in federal law, are a possibility. IRS approval would be needed to take advantage of the tax-exempt railroad financing, a legal process that might cost more than $100,000.

“The benefits, if you could get it, would be terrific,” he said. “Tax-exempt debt is about 25 percent lower than taxable debt.”

Improved financing terms could save consumers hundreds of dollars a year, he said, a long-term benefit for future generations.

Marketing

The state would take on a new long-term liability and assist the oil companies in the process if it assumes responsibility for shipping its share of the gas, as proposed.

He said there is a compelling reason to do so as this arrangement has the effect of lowering the cost of the pipeline to the companies by 25 percent.

In exchange, the Legislature should consider adding a provision to the bill requiring the oil companies to market the state’s gas at the same price that they receive for their gas.

“Certainly anything you put in statute is going to give you more clout than anything you negotiate,” he said.

Partnership

The Parnell administration has said it is proposing a partnership with TransCanada for two main reasons -- technical expertise and financial wherewithal.

Marks challenged both assumptions.

With the oil companies controlling 75 percent of the project, they will be guiding the process, he said. The state can hire technical expertise without having to be a partner.

On the second issue, the administration has said that the state would be unable to meet other public needs and finance a pipeline on its own because of limits on state debt capacity.

Marks said the state plans to take on a long-term commitment to pay to ship gas, which is also a debt. That commitment would be used as collateral for pipeline financing.

He said if the limits on the state debt capacity prevent the state from financing its share of the pipeline, “this would also preclude the state from taking its taxes and royalties in kind.”

“There’s no question that the firm transportation commitment is debt,” Marks said.