Our readers know that over the last year we have investigated and commented on the large risks accompanying large equity investments of public money into large energy projects.

The two of which we are most concerned, are the AK-LNG gas monetization project and the Interior Energy Project.

Under the 'Search Our Site' box, top right, readers can review these earlier commentaries by entering desired 'key words'.

-dh

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Can Walker Find A Less Risky Way To Support Alaska's LNG Project?

Bill Walker, Governor, Alaska, LNG, equity ownership, Dave Harbour Photo

A former Alaska Department of Natural Resources Commissioner (DNR) and other Alaskans sent LNG Project risk reduction suggestions (i.e. below) to Governor Bill Walker (NGP Photo) on November 3, 2015.

Harry Noah, Commissioner Natural Resources, Alaska, LNG, Photo by Dave HarbourThe letter was signed by former DNR commissioner, Harry Noah (NGP Photo), and four other prominent Alaskans, including Frank Murkowski, Alaska Governor, LNG, U.S. Senator, Photo by Dave Harbourformer Governor Frank Murkowski (NGP Photo).  

In the letter, the writers expressed concern about the level of risk the state was about to undertake in 'buying out' TransCanada's interest in the Ak-LNG project, during the special session which was convened from October 23th to November 5th.

The letter provided more than risk concerns about the enormous, Alaska LNG project, currently in a pre-Front End Engineering and Design phase (Pre-FEED).  It also recommended the governor adopt certain priorities dealing not only with a reduction of risk that the state could lose hundreds of millions in public money.  

Other suggestions included a focus on issues that could support ultimate success of the project, including the Larry Persily, Pipeline Coordinator, Alaska, LNG, Kenai Borough, Anchorage Daily News, Photo by Dave Harbourprovision of fiscal security to the LNG Tim Bradner, LNG, Journal of Commerce, Alaska Legislative Digest, BP, Dave Harbour Photoproject's producer-investors and giving the public much more information.  -dh

Below is the full text of the letter, for our readers to review.  We also ​provide this relevant, historical recording of a 2014 forum sponsored by Commonwealth North. ​

Professor Emeritus Scott Goldsmith, University of Alaska, ISER, LNG, Smooth Landing, Fiscal Crisis, Photo by Dave Harbour

The forum included as moderator, the then Alaska Gas Pipeline Federal Coordinator, Mark Foster, Regulatory Commission of Alaska, LNG, utility rates, Photo by Dave Harbour, Anchodrage School DistrictLarry Persily (NGP Photo-above-R); Harry Noah; energy writer Tim Bradner (NGP Photo-above-l); University of Alaska Economics Professor Emeritus Scott Goldsmith (NGP Photo-below l); and, former Alaska Utility Commissioner (RCA) Mark Foster (NGP Photo-Below R).

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November 3, 2015 Letter to Governor Walker below.  

(Find original .pdf here)

 
The Honorable Bill Walker Governor of Alaska  PO Box 110001 Juneau, Alaska 99811-0001  
November 3, 2015  
A PROPOSAL TO REDUCE THE GASLINE RISK 
Dear Governor Walker; 
 
It is unreasonable to think that the State will get a return on an investment in the gasline 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 your Administration and the Legislature about the risks the State will face after it buys out TransCanada. By owning 25% of the project the State will be required to pay 25% of the front end, pre-construction 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 paper proposes two alternative ways to avoid that risk. 
 
The front end pre-construction 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 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% 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) until FEED is completed.
 
At present we have no permits, no construction schedule, no agreement on the size of the pipe (42” v. 48”), 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% 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 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% share ranging from $500 million to over a a billion dollars. If the Producers then decide for whatever reason not to build the gasline, a decision over which the State has no control, the State would lose its investment.  
 
The State’s record of losing its pre-construction investments on gasline projects demonstrates the risk of assuming that a project will be built 8 – 12 years in advance of first gas. For example: 
 
1. The 1978 Legislature awarded a 27-year contract to Texas based Alaska Petrochemical Company selling them nearly all of our Royalty Oil.  Three years later the company known as AlPetCo closed its doors, walked away owing the state nearly $60 million.  
 
2. Governor Hickel used private money to fund Yukon Pacific, but the line was not built and its investors lost money.   
 
3. The State made $500 million available to TransCanada to build the line under Governor Palin’s Alaska Gasline Inducement Act (AGIA) and is now spending another $150 million to buy out of the agreement.   
 
4. Had AGIA succeeded in constructing a gasline to the Lower 48, it would have lost the State money because of the advent of the new, shale gas technology.  
 
5. The Port Authority failed to build a gasline to Valdez and lost the pre-construction money invested by Fairbanks, Valdez, and the North Slope Borough in the process.    
 
Each of these 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 that has 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:  
 
1. The State would maintain the same level of project participation and oversight that it is now doing, except that the State would not advance pre-construction risk money;  
 
2. 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;   
 
3. 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, to advance the FEED and  preconstruction risk money to develop the project;  
 
4. If the Producers elect to construct the project the State would then pay its 25% share of the pre-construction costs as part of its financing of its 25% share of the construction costs; and   5. If there is no project the State would not pay the pre-construction costs.  
Second Alternative: 
 
1. 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 gasline or the liquefaction plant. This is the same arrangement we currently have with TAPS.  
 
2. The State would be responsible for selling its gas. It would pay a transportation tariff to the gasline owners.  
3. 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 pre-construction 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 pre-construction 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 gasline. 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 pre-construction 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.  
 
      Yours truly, 
                                       
______/s/______________  _____/s/_____ FRANK H. MURKOWSKI  JIM CLARK Former Governor of Alaska  Former Chief of Staff Former Alaska Senator   To Governor Frank H. Murkowski   
_____/s/______    ______/s/_______ HARRY NOAH    JOHN REEVES Former Commissioner of DNR  Fairbanks Businessman Former Bullet Line Manager    
_____/s/_______     PERRY GREEN     Green Furriers