Alaska Gov. Bill Walker says his attempt to upsize the state's backup gas line project would cost $85 million in an early design phase, but it could be one of Alaska's smartest financial moves if the large oil producers back out of the bigger Alaska LNG project.
An expert on Alaska pipeline politics, however, questioned how the state would ultimately come up with full funding for a state-led project -- Alaska Stand Alone Pipeline -- that could cost many tens of billions of dollars. Even paying one-fourth of the costs for the farther-along AKLNG project -- estimated to cost at least $45 billion -- will be difficult, said Larry Persily, former federal pipeline coordinator.
"It's going to be hard enough coming up with 25 percent of an LNG project, much less 100 percent of the whole damn thing," said Persily. "I don't say that to trash the notion of state ownership or to disparage the governor or others who believe the state should build and own it, but just to pose the question: How are you going to pay for it?"
"It's only an option if you can write a check for it, if you can get financing for it," said Persily, now an oil and gas special assistant for Kenai Peninsula Borough Mayor Mike Navarre.
Persily said he wasn't pooh-poohing the governor's idea during a presentation to the Anchorage Chamber of Commerce on Monday. But he said it should be closely scrutinized.
The dispute over the dueling pipeline ideas has hogged much of the spotlight in Juneau this session, with top Republican lawmakers saying the state needs to give its full attention to AKLNG. They say Walker's ambitions to upsize the smaller ASAP pose a competitive threat that could cause the Alaska's partners -- BP, ConocoPhillips, ExxonMobil and pipeline builder TransCanada -- to abandon the project.
The newly elected Walker, who as a candidate expressed doubts about AKLNG and the North Slope producers' commitment to it, has said upsizing the smaller pipeline project would create a state-led, economically viable project in case AKLNG fizzles.
One potential advantage of state ownership is Alaska's lower required return on investment, Walker said in a pair of letters to lawmakers providing some of his reasoning for pursuing a large, state-run project – and attempting to prevent a veto override related to a measure that would thwart his plans.
"For example, the state of Alaska might be willing to accept an 8 percent return on the Gas Treatment Plant, pipeline and LNG plant instead of the 14 percent or higher that might be required by the producers," Walker wrote.
That difference could make the Alaska effort more economically viable in times of low gas prices while still providing the state with billions of dollars in new revenue, he wrote. Another advantage: The state project would also be exempt from federal income tax.
Legislative leaders shot back in their own letter to say a competing project is an "imprudent" use of state resources that would confuse potential buyers of the gas and deter possible investors.
Walker said that under AKLNG, all parties must agree to several potentially contentious issues before the project can proceed, including fiscal terms on gas royalties, production taxes and property taxes.
"If all parties do not reach agreement, progress on AKLNG will stop as the remaining parties work months or years to restructure agreements and formulate a replacement project," Walker wrote.
Walker said spending $85 million would get the project to a FEED decision, known as front-end engineering and design. Asian companies, such as Tokyo Gas, Korea Gas and others, have expressed an interest in not only buying gas but investing in the project, he said.
Persily said an expression of interest is just that. Buyers are playing projects off one another to get the best deal.
"Right now the market is interested in everything and anything," he said. "Until you bring them a firm estimate and a cost per thousand cubic feet and they sign a contract and start writing you checks, they are just window shopping. We just need to be careful."
During his presentation, Persily also said the producers need long-term fiscal stability. He noted that changes to the state's previous oil-production tax regimes starting in 2006 quadrupled tax rates on oil producers, creating uncertainty. He said it's not unusual for an LNG project to have long-term agreement on taxes.
"Alaskans seem to think fiscal stability means we get cheated, and until you overcome that, you can't really negotiate," he said. "We gotta sort of drop the animosity and distrust to come to an agreement for our own good."
Walker, in his second letter, said he won't approve a project that provides the state with little to no return. According to the state's Department of Law, he has the option of unilaterally pulling out of the project at any time.
"Without having ASAP as an economically viable backup option, if the fiscal terms deemed necessary by our AKLNG partners are not acceptable or constitutional, my only option will be to withdraw from the AKLNG project – an option I hope not to have to exercise," Walker wrote.
Grace Jang, Walker's press secretary, said Monday that "the decision to pull out would be made only after consulting with legislative leadership and a host of other people, and it would be, by far, a last resort."
Also, the state would owe money to TransCanada if that decision is made, though Jang did not specify how much.