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Alaska gas line revenues could hit $4 billion, but don't count the money just yet

Dermot Cole
OPINION: It's possible that a gas pipeline could generate $4 billion a year a decade from now. But if oil and gas prices tank while construction costs shoot up, the state could collect 10 percent of that amount. In thinking about a gas pipeline, Alaskans shouldn't think of the much-quoted $4 billion forecast as a given. Aaron Jansen illustration

JUNEAU -- As the Legislature moves toward approval of a complex gas pipeline bill, no one can answer two big questions: Will a pipeline be built? And if so, how much cash will the state collect?

They can't be answered because it is impossible to say right now how much natural gas will sell for in Asia over the long run or how much a pipeline across Alaska would cost. Much more work on engineering, financing and marketing remains before we'll know if a pipeline will become a reality.

Consultants appearing before the Legislature have said as much, but the urge to attach a specific revenue prediction -- without acknowledging that it may be way off -- remains a powerful one.

It happened again on Tuesday during a presentation before the House Finance Committee.

A slideshow prepared by the administration’s consultant, Black & Veatch, repeated what has become a refrain -- that the average annual cash flow from the gas pipeline will be close to $4 billion starting in 2024. One slide showed revenue staying in that $4 billion ballpark for 20 years.

If legislators leave Juneau convinced that they can take that number to the bank, they will be ignoring the downside risks. The chances of doing so are increased because the political focus is on the here and now, not on a decade hence, which is regarded as the distant future.

There is nothing wrong with assembling assumptions and showing how the hypothetical billions could become real, but the uncertainty about long-term gas prices, construction costs and the level of utilization of the LNG plant combine to create so much doubt that it is unreasonable to quote $4 billion as a reliable benchmark.

Yet that continues to happen. 

Last month, one of the Black & Veatch consultants addressed the weakness in the $4 billion estimate this way: “Is the revenue going to be $4 billion from this project? I’m not sure I would bet anything on that,” said Deepa Poduval. “There’s lots of uncertainties that are yet to be resolved about this project.”

Earlier during that same presentation, she said, “The Alaska LNG project is essentially forecast to potentially bring up to four, four-and-a-half billion dollars to the state.”

"Potentially" is the key word.

The Department of Revenue has issued slideshows of its own, demonstrating expected annual revenues of about $4 billion in 2024 and beyond based on assumptions that it characterizes as part of a "reasonable view."

The state assumed an oil price of $90 per barrel in 2013, rising by 2.5 percent a year and a pipeline construction cost of $55 billion, not adjusted for inflation.

Change the assumptions about price and construction costs, and the results will look a great deal different in the years ahead.

The legislative consultants say the best numbers available now are so preliminary that they are bound to be wrong.

“They should not by any means be taken as precise forecasts of what will happen because there isn’t even a project scoped out in any detail to understand and to analyze. These are very, very, very rough indications ... of what could happen,” Janak Mayer, a partner in the firm enalytica, said last month.

“Any numbers that anyone presents to you can only be a best guess that will almost certainly change as we discover more,” Mayer said.

Nikos Tsafos, also an enalytica partner, mentioned an LNG project in Norway in which the company did not have a full grasp of the total project costs until a year after it was running.

In too many instances in front of lawmakers and the public, the single-most positive revenue statistic gets highlighted. Given the number of unknowns, it’s more reasonable to deal with a range of future possibilities. There are too many variables that could disrupt a rosy forecast.

In an opinion published in the Anchorage Daily News Sunday, Rep. Dan Saddler, co-chair of the House Natural Resources Committee, wrote how the state "could earn up to $4 billion annually over a 25-year initial contract" if it invests in a gas pipeline.

He said “up to $4 billion,” which qualifies that prediction to include any lower number, but had he written that state could earn anywhere from $479 million a year to $4 billion a year, the declaration would have been a far less effective rallying cry.

In their “baseline scenarios,” the consultants to the Legislature said revenues would range from $2.9 billion to $4 billion. But if gas prices tank, construction costs rise by 25 percent and the LNG plant doesn’t produce as expected, state revenues could range from $479 million a year to $1.6 billion, the analysis by enalytica says.

“This underscores a crucial point: an adverse shock for an LNG project usually means that the project will not generate as much money as anticipated, and it can also perhaps prove to be an uneconomic investment,” the consultants said.

“But LNG projects rarely turn cash-negative, especially for extended periods of time. The risk is a sub-optimal return.”

The state should not enter into this venture without a clear understanding how far apart optimal and sub-optimal may be.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch, which welcomes a broad range of viewpoints.