Walker wants state in lead on gas line, but caution is in order

Gov. Bill Walker deserves praise for a courageous action to trim the Permanent Fund Dividend payout this year. In the face of a $3 billion-plus budget deficit, it was the only logical thing to do, and it salvages at least a bit of our state's financial credibility.

The governor is gutsy, and he's showing this again with his plan for a state-led gas pipeline, although caution is in order with this.

Our state's industry partners in the big Alaska LNG Project, BP, ConocoPhillips and ExxonMobil, are hesitating on the project given the lousy world energy market and uncertainty as to when things might turn upward.

Walker's plan is to have the state step in and take the lead, to keep the project moving and on the radar screen among LNG buyers. The partners in Alaska LNG, who are also the major North Slope gas producers, encouraged the governor to explore ways a state lead or ownership could bring financial benefits.

These could include exemption from federal taxes and certainly state and municipal taxes. Exemption from tax, particularly state and local property taxes, could have significant benefits for the overall economics and lower cost of supplying the LNG.

[Governor fends off criticism over Alaska LNG, says oil companies back a bigger state role.]

A word of caution is in order, of course. The governor is a longtime enthusiast for a gas line, but this is a huge commitment. Walker, and the Legislature, have a responsibility to read the fine print carefully on this.

On the plus side – for those who scoff – remember that building infrastructure is something governments do. Highways, bridges, dams and ports are typically owned and managed by governments, and in Alaska our railroad is state-owned. A pipeline is just infrastructure. It works like a railroad, with shippers (producers or buyers) paying a toll to ship gas through the pipeline.

Of course, this is more than just a pipeline. A big gas treatment plant is needed on the North Slope to remove carbon dioxide, among other things.  At the southern end a big liquefied natural gas, or LNG, plant is needed to convert the gas into a chilled liquid so it can be shipped in tankers.

Governments usually don't build complex gas plants. Third parties could possibly be enticed to build and own these, with possibly the gas producers owning the gas treatment plant and an LNG buyer, or another company, owning the LNG plant.

This seems workable, but the commercial arrangements aren't simple. Whoever builds and operates these plants would have to make a profit, which could cut into the economic benefits a state-led project might achieve. That's one example where scrutiny of the fine print is needed.

[PAUL JENKINS: Walker wants it his way on gas line, but there's much doubt, no deal.]

The governor could also build and have the state own the gas plants, too, but that adds an order of complexity to the whole project. The LNG plant alone is typically half the cost of the entire project.

Another set of fine print, which is crucial if the state were to lead this, has to do with the fees the producers would charge for handling and producing the state's share of the gas, which is one-eighth or one-fourth of the gas depending on whether the tax as well as royalty share is included. There are also costs for the underground injection of the carbon dioxide removed from raw gas.

We don't know what these charges will be and unless they are really nailed down in advance the state gas project could incur huge liabilities and risks. In fact, it's likely LNG buyers won't sign long-term purchasing contracts until these are known and agreed to by producers. The alternative is for the state to accept the liability for these costs, but that could be akin to betting the Permanent Fund.

The field costs are among a set of "upstream" commercial issues that have to be negotiated before there is a gas project. If field costs are important for the state, one that is important to the producing companies, are the fiscal terms, or a guarantee the state won't raise the tax bite. This will require a constitutional amendment to be approved by voters in a state general election. The next one is available in 2018.

Given Alaska's track record of frequent oil tax changes, the producing companies say they need this before agreeing to sell gas through any pipeline, even one like Alaska LNG they mostly own. Again, LNG buyers are unlikely to sign long-term, guaranteed purchase contracts until the fiscal terms are known. To them a tax is another cost.

Active negotiations were underway last year on these commercial issues but we haven't heard much about them lately. Since these go hand-in-hand with the governor's plan we need a status report. The Legislature should demand progress on these before appropriating funds for the governor's pipeline. They are that important.

There is some better news, however. On the hardware side, the state owns substantial assets it has paid for that can be put to work on the governor's pipeline. Final engineering for an 800-mile, 36-inch pipeline and gas treatment plant on the Slope is complete as part of the state's "backup" project, a smaller pipeline compared with Alaska LNG, which is 42 inches in diameter and has an LNG plant. A federal Environmental Impact Statement for the state backup project is nearly done, too.

The state owns a pipeline right-of-way and substantial geotechnical data, although some of this was purchased by Alaska LNG and would have to be bought back. In theory, the governor does have a project almost shovel-ready.

He still needs an LNG plant at the southern end, of course. It also needs to be financed. With Alaska LNG, the state had some of the world's biggest corporations as partners but the governor has spoken of bringing in LNG buyers as investors and partners, or financing the project with debt. It's too early to know whether those ideas are practical in the current environment of LNG oversupply and very low prices.

All this is hugely complicated, and I admire Walker for taking this on with everything else he has on his plate, mainly figuring out a way to pay for schools and other public services.

He is enthusiastic. That's good. But let's not forget the fine print. This thing could really bankrupt us if things go wrong.

Tim Bradner is co-publisher of Alaska Legislative Digest and the Alaska Economic Report.

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