Editors' note: The following piece was originally sent as a letter on Nov. 3 to Gov. Bill Walker, House Speaker Mike Chenault and Senate President Kevin Meyer. It has been adapted here into commentary form.
It is unreasonable to think that the state will get a return on an investment in the gas line project for 8-12 years. While waiting the state should do everything in its power to support the project, including taking its gas in kind and providing fiscal certainty on taxes.
However, there should be a discussion between the Walker administration and the Alaska Legislature about the risks the state will face after it buys out TransCanada. By owning 25 percent of the project the state will be required to pay 25 percent of the front-end, preconstruction costs prior to a decision by the producers whether or not to build the project. What happens to those funds if the producers decide not to build the project? This commentary proposes two alternative ways to avoid that risk.
The front-end preconstruction costs that the state must pay (even if the project is not built) are considerable. It has been estimated that Front End Engineering and Design (FEED) will cost approximately $2 billion, of which the state's share would be $500 million.
But the state's share could be more -- detailed engineering and design is normally 7-8 percent of a project's capital cost. Assuming that the capital cost is $55 billion, the state would owe over a billion by this measure. How much state money would actually be at risk is hard to know at this point because a spending schedule is not available.
The project risks are considerable. Alaskans will not have a more realistic estimate of the cost of construction ($45-65 billion or more) until FEED is completed. At present we have no permits, no construction schedule, no agreement on the size of the pipe (42-inch vs. 48-inch), no ramp-up schedule for LNG production (the market can only take so much LNG at the start of such a project without depressing demand, thereby reducing the price), and no real ability to estimate what the price of LNG will be 8-12 years from now.
However, the administration is proceeding on the assumptions that after buying out TransCanada, the state will own, and pay for, its 25 percent share of the project and that the producers will build the project 8-12 years from now. The first assumption is dangerous because the second assumption is unknowable.
For example, FEED is the next big project decision the producers need to make. If they decide to proceed to FEED, the state would be required to pay its 25 percent share ranging from $500 million to over a billion dollars. If the producers then decide for whatever reason not to build the gas line, a decision over which the state has no control, the state would lose its investment.
The state's record of losing its preconstruction investments on gas line projects demonstrates the risk of assuming that a project will be built 8-12 years in advance of first gas. For example, the expenditures made by the 1978 Legislature in its 27-year contract to Texas-based Alaska Petrochemical Company; by Gov. Hickel's privately funded Yukon-Pacific line; by Gov. Palin's state-licensed AGIA project, and be the Alaska Gasline Port Authority backed by Fairbanks, Valdez and the North Slope boroughs were all lost.
Each of those projects was advanced in good faith by Alaskans who had the best interests of the state at heart. The problem is that whether a project with an 8-12 year lead-time will actually ever be built is unknowable.
There are two ways to advance the project but prevent the state from losing preconstruction risk money if it is not built:
First alternative:
- The state would maintain the same level of project participation and oversight that it is now doing, except that the state would not advance preconstruction risk money;
- In cooperation with the producers the administration would determine what the preconstruction costs are and make that information available to the Legislature and the public;
- The producers have been clear that they require fiscal certainty on taxes and a state commitment to takes its gas in kind before spending billions on FEED. In exchange for the state agreeing now to fiscal certainty on taxes and taking its gas in kind, it is equitable for the state to require that the producers, not the state, advance the FEED and preconstruction risk money to develop the project;
- If the producers elect to construct the project the state would then pay its 25 percent share of the preconstruction costs as part of its financing of its 25 percent share of the construction costs; and
- If there is no project the state would not pay the preconstruction costs.
Second alternative:
- The state would provide fiscal certainty on taxes and commit its gas to the project as Royalty in Kind, but the state would not be an owner of the gas line or the liquefaction plant. This is the same arrangement we currently have with TAPS.
- The state would be responsible for selling its gas. It would pay a transportation tariff to the gas line owners.
- In advance of reaching such a decision the state would make an economic analysis of the financial impacts of ownership (including the risk of loss of preconstruction dollars and construction cost overruns) versus non-ownership. The analysis would also compare what would have been the economic consequences had the state owned a share of TAPS versus the funds the state has made without owning such a share. This information would be made available to the Legislature and the public and discussed.
In conclusion, it is equitable to have the producers take the risk of losing the preconstruction costs in exchange for fiscal certainty and the state taking its gas in kind because the producers control the decision of whether or not to construct the gas line. Moreover, these are risks the producers take on projects all over the world. Conversely, as the record above shows, the state has already lost significant amounts of money in taking these preconstruction risks.
Finally, prudence dictates that the state avoid significant financial risk at a time when it needs to conserve state funds because of low oil prices and falling production.
Frank Murkowski is a former Alaska governor and U.S. senator.
Jim Clark was chief of staff to Gov. Murkowski.
Harry Noah is a former Commissioner of DNR, senior manager of the Yukon-Pacific LNG project and former manager of AGDC's "bullet line" gas project.
John Reeves is president of Fairbanks Gold and former director of the Alaska Gasline Port Authority.
Perry Green owns Green Furriers.
Marc Langland is CEO of Northrim Bank.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary@alaskadispatch.com.