|Protecting Your Rights: Serving Sand Lake, Spenard, and Turnagain|
|September 9, 2016
Dear Friends and Neighbors,
The Joint Senate and House Resources Committee heard an update on the Alaska LNG Project. The Walker administration introduced the Alaska Gasline Development Corporation’s (AGDC) new State-owned model that may reduce project cost and the three major North Slope oil producers offered their perspectives on the project.
History of the AK LNG Project
In 2007, former Governor Palin signed the Alaska Gasline Inducement Act (AGIA), which envisioned a pipeline that would move natural gas from the North Slope to the Lower 48. In 2008, the State accepted a proposal by TransCanada to build and operate the pipeline. Due to substantially lower prices for natural gas in the following years, however, the proposed pipeline through Canada became uneconomical. The three major North Slope producers (ExxonMobil, BP and ConocoPhillips) then proposed a pipeline that would export natural gas to Asia, which led to creation of the Alaska LNG project. At the same time, the State remained committed to its partnership with TransCanada. In 2014, under terms negotiated by former Governor Parnell, TransCanada made upfront investments and held a 25% stake in the proposed Alaska LNG project, with the North Slope producers holding the remaining 75%. The State had an option, as the project moved forward, to buy out TransCanada.
Last year, following discussions with TransCanada, Governor Walker announced that he wanted Alaska to buy out TransCanada and become a 25% owner of the Alaska LNG project. Governor Walker called the Legislature into a special session to hear Senate Bill 3001, which requested funds to continue the AK LNG Project. The bill requested an appropriation to reimburse and buy out TransCanada for their investment in the project. Governor Walker argued that buying out TransCanada would produce up to $400 million more a year in revenue for Alaska and give the state a greater stake and voice in the entire project. The legislature overwhelmingly approved the TransCanada buyout and, in November, the state completed the buyout of TransCanada’s interest in the AK LNG Project. The buyout gets Alaska the same stake in the $55 billion project as ExxonMobil, BP, and ConocoPhillips.
AK LNG Project Update
The State currently holds a 25% stake in the AK LNG Project, with three major producers (ExxonMobil, BP, and ConocoPhillips) sharing the rest of the ownership. In recent months, however, with the project nearing the finish of the preliminary phase, called the Pre-FEED (Front End Engineering Design), the major producers indicated that they might decline to proceed to the FEED phase because of the low price of oil and liquefied natural gas. The FEED phase is expected to cost $2 billion. In the Pre-FEED process, the State and the three major producers have spent more than $500 million on the project. At the recent Joint Committee hearings, the major producers announced that they would not proceed to the FEED phase, but they would be willing to sell North Slope gas to the State if it elected to proceed with the project.
The State moving forward with the Alaska LNG project would require a change in ownership of the project. The Alaska Gasline Development Corporation (AGDC), a state corporation that represents Alaska’s interest in the project, is working with the oil companies on a plan for the oil companies to withdraw from the project and the State to take over leadership. Without the participation of the major producers in the project, the State would need to obtain bond funding for the project, find new investors, or a combination of financing options. AGDC is also exploring ways to improve the project’s competiveness in the global LNG market. Finally, AGDC believes the State may be eligible for tax-exempt status from the federal government as a way to reduce the cost of bond funding.
At the Joint Committee hearing, lawmakers raised questions about the State’s ability to manage such a massive project. Questions included how much funding the Legislature would need to advance a State-led project and whether Alaska LNG would be eligible for tax-exempt status if it had partial private ownership.
During the AK LNG Project Update hearings, David Barrowman of Wood Mackenzie presented a new study commissioned by BP, ExxonMobil, and AGDC that discussed Alaska’s high break-even cost of supply. He explained that the competitiveness of the AK LNG Project ranks poorly when compared to competing projects to supply LNG to Asia. Wood Mackenzie testified that a new State-owned model might be more competitive if it can reduce the cost of supply through federal tax-exemptions. Tax specialists who testified at the hearings tentatively disagreed because securing those exemptions from the IRS may be difficult and cannot be guaranteed.
The Legislature’s consultant, Nikos Tsafos of Enalytica, reviewed the financing ideas and discussed the pros and cons of a State-led project. He emphasized that the State cannot expect to take on a leading role, including control of the AK LNG Project, without assuming more risk. In determining whether and how to move forward with the project, he asked several questions, including whether State ownership makes sense. According to Tsafos, if the primary benefits of the State taking over the project remain unproven, State ownership may not be the best option for the AK LNG Project and the development of North Slope gas.
To listen to the AK LNG Project Update or read the materials offered, click here.
The Alaska LNG Project requires careful scrutiny by the Legislature. As shown at the Joint Committee hearings, the estimated $55 billion project has potentially great benefits to Alaska, as well as great risks. The global market for LNG is very competitive, and the current prices for LNG are so low that three potential investors have declined to move forward with the project. Are the potential benefits worth the risks at the current time? We must proceed carefully, always keeping in mind the interests of future generations of Alaskans.
I will continue to keep you informed as the Legislature evaluates the AK LNG Project.
Community Events and Opportunities
Fish Creek Festival
Saturday, September 10th, 3pm-sunset. Festival begins at Kiwanis Fish Creek Park, 3907 E Turnagain Blvd.
Come celebrate two new inclusive playgrounds along the Fish Creek Trail (Barbara Street Park and Kiwanis Fish Creek Park) and the groundbreaking of the Fish Creek Trail resurfacing project (coming in Summer 2017). There will be dancers, jugglers, food trucks, and live music! Click here for more details.
As always, please let us know if you have any questions or concerns.
Rep. Matt Claman
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