FAIRBANKS -- As a prospective 20 percent to 25 percent owner of a gas pipeline project, the state faces a bill in the range of $70 million to $90 million this year for preliminary engineering and design work.
Gov. Sean Parnell said he will be asking the Legislature to provide the money and approve plans for a new relationship with the oil industry, authorizing him to conduct confidential negotiations for a gas pipeline contract.
It is similar to the approach employed by the administration of former Gov. Frank Murkowski eight years ago under the Stranded Gas Development Act. That law remains on the books, stranded by the political baggage of yesteryear, so Parnell is seeking new authorizing legislation.
One important difference in the Parnell approach is that he and the oil companies have agreed on broad goals before contract negotiations start. Their agreement states that by 2015, the administration will submit "any Alaska LNG project-enabling contracts" to the Legislature developed under the legislation Parnell plans to submit this year.
The agreement with the oil companies says the cost of the "pre-front end engineering and design" work is expected to total $400 million, though the governor said in his state of the state speech that it would be a half-billion dollars.
During that "pre-front end" stage, expected to last until late 2015, a subsidiary of the Alaska Gas Line Development Corp. and members of the administration would hold confidential negotiations to enter the "front end engineering and design" stage in 2017, which is expected to cost billions. A final decision on construction would follow.
The Parnell plan envisions a system under which the state would take possession of one-fifth or one-quarter of the gas and participate in the project as an owner, aligned with the big oil companies. The companies would pay their taxes in the form of natural gas. In addition, the portion of the gas that the state owns because the gas comes from state land, which is known as royalty gas, would also be delivered to the state.
The state would be responsible for transporting, liquefying, treating and selling the gas on world markets. Doing so would create commercial risks and rewards and lower the cost for the companies.
A consultant's study last year said that the Alaska project "appears to be out of the money within the global LNG supply curve under the status quo" and that changes such as those involving state ownership could make a project more competitive.
State control of the gas would lower the overall cost and improve the chances of getting a pipeline built, the Parnell administration says. The state might sell the gas back to the oil companies or pay a fee to have the oil companies market the gas for Alaska, the agreement says.
The Murkowski gas line contract never reached a ratification vote, in part because of a disagreement with the Legislature on oil taxes and whether they would be plugged into the deal for 30 years.
This time the only overt reference to oil taxes in the gas line agreement is the statement that a “healthy” oil business is essential to a gas pipeline. Otherwise, the topics are officially separate.
But with a repeal vote pending in August on the SB 21 tax cut, the issues are inseparable. The oil companies will argue that a repeal would make the industry deathly ill. Supporters of the repeal measure will be branded as opponents of gas pipeline progress. The repeal backers will argue that the Parnell administration gave up much of the state's leverage by acting on oil taxes last year without getting anything in return on a gas pipeline.
Of course the complicated political entanglement of mixing oil and gas taxes helped stall the Murkowski gas line contract, along with complaints about confidentiality.
In his State of the State speech Wednesday, Parnell referred again to a transparent agreement with the oil companies, which overstates the degree of clarity that exists today or will exist a year from now on this complex matter.
The agreement calls for legislation in 2014 that will “provide for a confidential process, subject to subsequent legislative ratification, to develop terms for project-enabling contracts.”
That’s clear enough, but nothing about this is transparent.
The phrase “relevant confidentiality protections” appears six times in the agreement. The tension is obvious between confidentiality, which is normal in a contract negotiation, and transparency, a word that is popular in politics. The desire for secrecy and the desire for public information about what the government is doing are competing interests. Calling a confidential process transparent does not make it so.
When I read in the agreement that state participation provides “transparency” to Alaska when it acts “in its proprietary capacity in regards to the state gas share and with relevant confidentiality protections,” I can tell that none of this will be in focus until a final contract is in hand.
A consultant told legislators in December, after reviewing potential benefits of having the state own a large chunk of the project, that the final details in the contracts would tell the tale.
“The joint venture agreement and the actual terms of the state’s participation will be critical in helping to ensure that the different benefits that are listed here are actually achieved,” she said.
The governor said recently that, “Unlike previous efforts to commercialize North Slope gas, the public and Legislature will have the basic ingredients of a deal in front of them as they consider legislation moving the project forward.”
The basic ingredients are relevant, but what really counts is how they are combined in the course of confidential negotiations.
The 2013 study put the cost of an LNG project at $39 billion to $54 billion, with a final decision on construction at least three or four years off. The increase in global demand for LNG, expected to rise by 50 percent by 2020 and double by 2030, would create a potential export market, the study said.