Last week, Gov. Sean Parnell approved the bill authorizing state financial participation in the proposed large North Slope gas pipeline and liquefied natural gas project. The first contracts with our soon-to-be partners, the North Slope gas producers and TransCanada, a pipeline company, will be signed in June.
This is a really big deal. As much as we want a gas pipeline, and we're told state participation is critical, I must admit to trepidations. We'll have to foot our share of the bill on a project that could cost more than $60 billion, and there are many risks.
Parnell's signature on Senate Bill 138 could put us on a road to a golden tomorrow, assuring the continuation of our North Slope oil and gas industry for decades. Or we could be on a slippery slope to something else.
There are real risks of cost overruns, new competition in the market (who foresaw shale gas in the Lower 48?) and complications from our own political interference in the project, unless we can restrain ourselves.
But let's not lose sight of the prize. If this works, we could have a new stream of revenue from sales of the state's share of gas, as LNG, that could bring in $2 billion or more a year in new revenue.
Add that to revenue from continued oil production at the North Slope fields, which the gas project would help ensure, and we can foresee a steady flow of $4 billion to $5 billion a year, about our current oil revenues, into the foreseeable future.
A gas pipeline helps ensure a continued oil industry in two ways. In the Prudhoe Bay field, oil and gas come out of the same wells and are supported by the same field infrastructure.
Those wells and production facilities are aging. The oil, which is worth more than gas, must help pay maintenance costs. Gas can't afford to carry the maintenance alone because the margins on gas are slimmer.
Also, once there's a gas pipeline, explorers will start looking for more gas, and there's a lot of gas to be found on the North Slope. When gas is found, there's often oil, too.
One caveat is that we must ensure there will still be a healthy oil flow of oil and the decisions Alaskans make in the August primary election on the repeal Senate Bill 21, the oil tax reform bill, could affect that.
Assuring the continued flow of oil, and ultimately gas, is important. If oil production continues to decline and there's no gas to sell, our state will be broke by 2024, according to University of Alaska studies. Still, if our stars align, there could be a bright future of stable revenues and vibrant industry, and I'm an optimist.
We still need to be wary of risks, but there are some protections built into the deal.
The main protection is that we have good partners. All are large, sophisticated and experienced companies that know what they're doing. They want the state as a partner and I don't believe companies of this caliber are going to let the state get into something and be disadvantaged.
Readers may hoot about that, but I know, and the companies know, that if something bad happens, the state will exact revenge.
I'm impressed that ExxonMobil, one of the world's largest companies and an Alaska oil producer for half a century, appears to be leading the industry on this. Over all the years we've watched gas pipeline discussions, the street talk was that when Exxon makes up its mind, the project will go.
It appears now that ExxonMobil has made up its mind, at least that this project is now worth a serious try. Having that company be so visible in its leadership is hugely important.
Having good industry partners is also a safeguard because if the project doesn't pencil after further engineering and cost studies, these firms won't waste money. They won't be swayed by the political popularity of the project among Alaskans, which is the hazard if there's a state-led gas project.
BP, ConocoPhillips and ExxonMobil will protect us by protecting themselves. You can count on that.
There are other risks, however. One that bothers me is whether we can really afford this deal. By the time the cash-calls start coming in 2019 our state's financial resources will be diminished.
We'll spend $43 million as our share of engineering and cost studies this year and next, and if the numbers look good, we'll continue into final engineering. Our share of that will be $180-$360 million.
For our share of construction costs, paid between 2019 and 2023, we'll have to pony up $7 billion to $9.5 billion. Even if oil tax reform stimulates new North Slope oil production, which it appears to be doing, our overall state financial situation may not be that great. Can we pay these bills without harming revenues that support traditional public services?
Revenue Commissioner Angela Rodell worries a lot about this. During legislative hearings this spring she said this will be challenging, but there are ways it can be handled. For example, at least some of the LNG to be produced would be pre-sold to buyers, most likely in Asia, when the big-buck commitments are made in 2019.
These advance sales contracts, which I'm told are common in the LNG trade, will become the collateral for any debt the state incurs for the gas project. That being the case, there should be relatively little impact on the state's bond ratings, or on general government revenues.
Expenditures for the state's share up until 2019, when the deal is formally signed, could affect the state's general revenues, however. Rodell said there may be ways to cover even these requirements through various financing schemes, but it's a matter to pay close attention to.
Another option, she said, is that new partners can be brought into our share of the project. It's quite common for customers, in this case Asian LNG buyers, to become investors.
All that said, while I'm an optimist about this, I still worry. I know longtime Alaskans who are cautious pragmatists, without political axes to grind, who acknowledge the benefits of this deal but are unconvinced the risks are worth it.
The state's involvement only makes sense if it can really be shown that the project would not move forward without the state being a partner. The companies have said this and I've heard the reasons, but they are complex and need to be fully explained.
I hope to attempt this in future columns but I think the governor and the companies owe a more thorough explanation of this to the public. Legislators spent weeks on this during their 2014 session, and I give them credit. But I'm not sure even they were able to fully grasp the complexities.
I believe the project looks like something worth doing, and I can see the benefits. But let's keep the risks in mind and not get all starry-eyed. Reality has a way of interrupting, sometimes rudely.
Tim Bradner is an Alaska business writer who lives in Anchorage.
By TIM BRADNER