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Gas pipeline deal could cost Alaska $5.8 billion to $11.4 billion, state says

Dermot Cole

FAIRBANKS -- If the state takes a 25 percent interest in the trans-Alaska LNG project, it would have to commit up to $11.4 billion in cash and debt to cover its share of the costs, the Parnell administration said.

But if the state becomes a partner with the TransCanada pipeline company in the line and the North Slope gas treatment plant portions of the project, the state could reduce its cash and debt investment by more than $5.5 billion, two state commissioners told legislators Wednesday.

In that case, the potential state investment would be limited to the liquefaction plant and export terminal to be built in Southcentral Alaska, facilities that alone could cost $24 billion. The state share of that part of the project would be about $5.8 billion.

With a TransCanada partnership in the other parts of the project, the company would cover the state’s share of expenses in exchange for earning a 12 percent return on its equity, with gas flowing in about a decade, the administration said.

The state would be collecting almost $2 billion a year in gas sales to Asia as soon as the pipeline is done, according to current estimates, with enough energy already identified to run the system until the 2040s.

In sessions with both the House and Senate resources committees, Natural Resources Commissioner Joe Balash and Revenue Commissioner Angela Rodell gave an overview of the proposed deal with TransCanada, negotiated by the Parnell administration. The proposed deal -- the complexity of which rivals anything lawmakers have ever had to vote on -- was publicly revealed earlier this month and is now up for legislative review.

The Parnell plan is for the state to take an interest of roughly 25 percent in the overall project. It would do this through its share of royalties and taxes. The oil companies would pay their taxes in the form of gas. With that gas added to the gas the state owns by virtue of the resource being developed on state land, Alaska would have about 25 percent of the gas in the pipeline and be responsible for about 25 percent of the cost of building it.

To lower that cost, the state is suggesting that for the gas treatment plant and the pipeline to Southcentral, TransCanada would “step into the state’s shoes” as Balash put it, and provide the cash to pay for the state share of those portions of the project.

Under this idea, a state company, not connected with TransCanada, would own 25 percent of the liquefaction plant to be built in Southcentral. Of the state share for the facilities in Southcentral, about $4 billion would be in borrowed funds to be repaid with proceeds from the sale of gas, probably in Asia.

The commissioners faced repeated questions in both committees about why the administration chose to strike a proposed deal with TransCanada without going out to a competitive bid. In the early going at least, this may emerge as a prime point of contention.

Balash gave several reasons for striking a deal with TransCanada, including the company’s expertise, its knowledge of the project and a desire to avoid a potentially lengthy and costly legal fight with the state over the end of the AGIA contract. Some lawmakers suggested that they would like to see the question of AGIA liability separated from any future contract deal, saying that otherwise the state won't know if this was the best option.

Under the plan, the state would be able to buy back about 40 percent of the TransCanada interest in the gas treatment plant and the pipeline in the next two years. The cost of that would be in the  $2 billion range.

If the state chose that option, its capital investment in the overall project would go from $5.8 billion to $8.6 billion, the administration said.

Without TransCanada taking over the state’s 25 percent share of the pipeline, the state would have to start providing more than $1 billion a year by about 2018-19, when construction ramps up.

With TransCanada in the picture, the state won’t be paying out of pocket or borrowing money for anything but the liquefaction plant.

TransCanada “will be responsible for those cash calls and obligations all the way through the point of in-service. In other words, we don’t pay until gas flows,” Balash said.

Rodell said that if the state used its own resources, either cash or borrowed funds, to pay its share of the pipeline cost, it would not have those funds for other uses.

“If we take $11 billion and we put it off to the side and we said, this is for our equity investment into the pipeline,” she said, “it creates an inability in the state’s financial flexibility to meet its daily operations.”

“We have an opportunity here to let a partner come up with the financing and we have an agreement that when the pipe comes into use, we’ll start repaying those cash calls and repaying that debt, arguably.”

Contact Dermot Cole at dermot(at)alaskadispatch.com. Follow him on Twitter @dermotmcole.