In Juneau this week, lawmakers are wrestling with the question of whether to take a larger stake in the Alaska LNG gas line project. Specifically, they must decide whether to buy out one of the state’s partners, TransCanada.
The decision would put the state on the hook for as much as $7-billion more in up-front construction costs if the project ends up going forward. But the governor and his team argue it’s worth it to get more control — and perhaps more revenue down the line.
Before we get into whether or not it’s a good idea to buy out TransCanada, let’s back up, and remember how we got here. Specifically, let’s head back to the era of Governor Sarah Palin.
Palin: And now it’s time for a new generation of energy for Alaska. It’s time for our gas line.
Palin signed the Alaska Gasline Inducement Act, or AGIA, to try to jump-start work on a pipeline. Basically, the state put up to $500 million on the table to help develop a natural gas line from the North Slope to the Lower 48. The company that won that contract, in 2008, was TransCanada.
Fast forward to 2012, and cheap shale gas had swamped the market down South.
“It was like betting on the Cubs for the World Series,” said Larry Persily, who has followed the state’s gas line efforts as a state and federal official, and now advises the Kenai Peninsula Borough. “It was just a loser.”
A pipeline through Canada no longer made sense. So the three major North Slope producers — ExxonMobil, BP and ConocoPhillips — proposed a different plan: a pipeline that would export the natural gas to Asia.
That was the birth of the Alaska LNG project.
But the state was still committed to its partnership with TransCanada. By then, of course, Gov. Sarah Palin was out, and Gov. Sean Parnell was in. His team struck a deal with TransCanada, bringing it in as a partner on the state’s 25 percent share of the new project — as a way to get out of the old project.
“It was the cost of getting a divorce,” Persily said. “And, also, I think the state saw TransCanada as an experienced pipeline partner with expertise, with knowledge, with history. And TransCanada was willing to put up its share of that upfront money, and the state has not exactly been rolling in cash the last few years.”
That’s the deal that now-Governor Bill Walker would like to exit. For Walker, it’s all about control.
“Alaska needs to lead this project,” he said in an interview just before this week’s special session. “We should be the head of the team. We should be driving this effort.”
Right now, the state shares its 25 percent vote on project decisions with TransCanada. Walker said that’s simply not enough. He sees the gas line as the economic future of the state.
“It’s a must-have for us,” he said. “It used to be something on someone’s wish list in the past. But now it’s an absolute must-have, because of what it would do for Alaska. So no one is more motivated than we are to make sure this happens.”
The Walker administration also makes a second point: they say buying out TransCanada just makes economic sense.
Right now, TransCanada is essentially acting as the state’s banker. It’s paying the upfront costs for all of the work on the project. But under the current deal, the state must reimburse those costs. If the project falls through, the state will pay back anything TransCanada has spent — plus 7 percent interest. If the project succeeds, the state will essentially pay those costs as part of its deal to ship gas down the pipeline.
Walker and his team think the state could finance the project more cheaply itself, and without a partner, make more money once the gas starts flowing.
Many lawmakers agree. But some, especially in the legislature’s Republican leadership, still have questions.
“It does sound good that we would be at the table 100 percent,” said Anchorage Republican Cathy Giessel, speaking on Tuesday’s Talk of Alaska. “But this is a $45 billion — minimum $45 billion — project.”
Giessel chairs the Senate Natural Resources Committee. Without TransCanada, she said, the state will have to come up with a lot more money in the near term.
“We need to make sure that the state can afford this, and what the financing would look like,” she said. “And so that’s what we’re digging into right now.”
The Administration is asking for $158 million to buy out TransCanada’s share, cover agency costs, and finish the project’s early planning phase (called “pre-FEED” or pre-front end engineering and design).
But the real costs come down the line. If the state buys out TransCanada and the project goes forward, the state’s share of construction costs would be an estimated $14 to $16 billion — double what it is if TransCanada stays. Giessel says it might make more sense to let TransCanada face the challenge of coming up with that money, even if it cuts into the state’s revenue down the line.
“We have healthcare. We have public safety to deal with. There’s education,” she said. “All of these are calls on the cash that the state has. We have a broader responsibility than just building a gas pipeline.”
Anna MacKinnon is co-chair of the Senate Finance Committee. She brought up another issue: expertise. Without TransCanada at the table, do state agencies like the Alaska Gasline Development Corporation and the Department of Natural Resources have the expertise to manage the state’s share of the project?
“There may be the technical expertise at the state,” she said. “We need to understand that to make the decision.”
Despite these reservations, lawmakers — including MacKinnon — seem to be leaning toward the buy-out. MacKinnon said for her, it comes down to a new way of doing business. When the Trans Alaska Pipeline was built, the state didn’t own any of it. (The state gets its revenue through royalties, and production and property taxes.) This time, the state wants to own a piece of the pie, with all the risk — and reward — that entails.